Introducing PSR: Protected Staking Rewards

The Marinade DAO has been running for more than 2 years, executing its ultimate promise:  to make Solana safer and more decentralized.

It started in 2021 by introducing liquid staking powered by an algorithmic delegation strategy. Ever since then, Marinade has been committed to delivering an unparalleled staking experience for the best staking yield and the highest security standards to users.

That’s why, in 2023, Marinade extended its algorithmic delegation strategy from liquid staking to  native staking, expanding its scope to continue working on its mission to make the Solana network more robust and secure.

In 2024, Marinade is taking the next step by introducing Protected Staking Rewards.

The Solana staking incentives are broken

The current Solana staking incentives alignment and user experience are sub-optimal.

First comes the confusion. Out of 2,000  validators, you must pick one — which is the right one?

Second, comes anxiety. Once you’ve chosen a validator, it’s important to monitor their performance. Downtime or a sudden change of commission can reduce or lead to no staking rewards.

The third is centralization. Because of the above, the market is driven to stake with the recognized brands of the biggest validators, concentrating the stake with too few.

Consider Coinbase and Figment, two of the giants in crypto, whose Solana validators are currently delegated a combined ~35M SOL. The Nakamoto Coefficient of Solana, a popular metric of network decentralization that calculates the number of validators needed to take a network offline, has recently declined from 33 to 21.

The biggest institutions staking their SOL require the node operators to sign service-level agreement contracts to protect their staking rewards in case of downtime or other reasons for taking a hit on their staking yield.

But what about everyone else? Marinade’s core contributors have been considering how to hold validators accountable to the same highest performance standards using a fully transparent, on-chain program rather than deals made in the backroom.

And democratize this system so that any Solana staker can easily participate and enjoy the same level of protection as the VIP institutional delegators.

Validators, put your skin in the game

Since launching in 2021, Marinade has supported hundreds of independent validators by delegating SOL to help them be sustainable.

For Marinade to maintain and eventually expand its permissionless delegation to even more validators, there must be a backstop system to ensure smooth operations and high performance to protect users. The Marinade DAO researchers have explored the topic and concluded that to align incentives with all parties, validators should have some skin in the game to receive stake from Marinade.

Protected Staking Rewards for users 🛡️

Stakers will be able to stake SOL through Marinade with the confidence that any unexpected performance problem will not impact their rewards.

For each validator to be eligible to receive the Marinade stake, they will need to set up a protection bond. Based on historical data, the validators receiving stake delegation from Marinade are expected to perform well and, as such, deliver staking rewards. If the node operator’s performance has been poor, the bond deposit will used to cover up for the staking rewards losses incurred by the pool.

Analysis of the performance over previous epochs shows that the losses of staking rewards from downtime are usually low, less than 1 SOL for the entire pool. But sometimes, there are flare-ups when validators have downtime and results in greater losses of rewards.

Marinade’s delegation strategy to 100+ validators minimizes these events, but PSR takes the protection further. For example, in epoch 540 Marinade received 3,932 SOL rewards, but saw a noticeable loss of over 30 SOL due to downtime within the validator set. With PSR active on Marinade, these lost SOL rewards would be claimed and distributed back to stakers to fulfill the expected APY of the set.

Validator performance has a greater impact than MEV rewards on Solana at this time.

Fueling better staking rewards and a larger, healthier validator set

The Marinade DAO has long argued that the staking system incentives powering the network are only complete when both the carrot (incentive) and the stick (punishment) are in place.

While  slashing  is on the Solana roadmap, there is no timetable to implement it. At this time, the worst case for Solana stakers is losing out on potential staking rewards due to poor validator performance or changed commission. A validator’s worst scenario is for its delegators to withdraw their stake. But delegators only unstake once they notice a change in performance, which can be difficult to know. Marinade’s PSR will provide an additional layer of protection for stakers and accountability for validators.

Stake from Marinade, which is approaching 11 million SOL, is often critical for bootstrapped and independent validators to achieve profitability. Integrating PSR will allow Marinade to greatly expand the validator set to many more performant validators without the risk of performance on stakers. The more validators who are sustainable on Solana, the healthier the network will be long-term.

Validators will be provided information and onboarded to PSR in the next few weeks. Keep an eye out for the rollout and get ready for even more performant Marinade staking.

In the meantime,  optimize your SOL staking with Marinade.