Jupiter Lend in the Broader Jupiter Ecosystem

Jupiter Lend is the onchain lending arm of Jupiter, a Solana-based DeFi platform that has rapidly expanded from a simple DEX aggregator into a full-fledged “superapp.” Jupiter initially gained notoriety by routing swaps across Solana’s fragmented liquidity venues, capturing over 90% of Solana DEX aggregator volumes by December 2025. Over the past few years, the team leveraged this dominance to vertically expand, rolling out a suite of products from a perps DEX and token launchpad to a mobile app and portfolio tracker. However, lending was the missing piece. With Jupiter Lend which launched in August 2025, Jupiter can now keep users within its ecosystem for borrowing and lending needs, rather than ceding that activity to external protocols. In essence, Jupiter Lend transforms Jupiter into a vertically integrated DeFi platform, enhancing user stickiness and creating new revenue streams that flow back to JUP token holders. This strategic integration of lending could solidify Jupiter’s role as a one-stop DeFi hub on Solana, a critical step in its grand vision.

Thematic Drivers of Jupiter Lend’s Growth

Several thematic trends underpin Jupiter Lend’s early growth and differentiate its model within Solana’s lending sector:

• Deep Composability & Integrations: Jupiter Lend isn’t a stand-alone money market; it is built in collaboration with Fluid’s liquidity engine to integrate more closely with Jupiter’s trading venues. Rather than leaving collateral and liquidity in individual markets, the design allows liquidity to be shared across the system, supporting more efficient use of capital within Jupiter’s ecosystem. This approach can improve utilization relative to fully isolated lending models and aligns with a broader shift toward more integrated DeFi products, where swapping, borrowing, and trading increasingly coexist within a single interface.

• Optimal Capital Efficiency: Jupiter Lend’s integration with Fluid enables capital efficiency primarily through a shared liquidity and risk framework rather than higher leverage alone. Assets supplied via Jupiter Lend, including through vault-based products, ultimately route into the same underlying liquidity layer, allowing borrowing demand across products to draw from a unified pool of capital. This design improves utilization by reducing liquidity fragmentation and ensuring that deposits are accessible to borrowing demand across Jupiter’s ecosystem. Together, this architecture allows Jupiter Lend to deploy capital more efficiently without relying on complex collateral reuse mechanisms. It is also important that despite operating through several periods of market volatility, Fluid has not recorded any bad debt to date.

• Stablecoin Synergy (JupUSD Strategy): Jupiter is following a growing DeFi trend, launching a native stablecoin, to anchor liquidity and revenue within its own ecosystem. In late 2025, Jupiter unveiled JupUSD, a Solana-native stablecoin developed with Ethena Labs. JupUSD is designed as a core liquidity and collateral asset across Jupiter’s products like perpetuals, lending, and swaps. It will initially be 100% backed by USDtb, which is essentially a wrapped version of BlackRock’s tokenized money market fund, BUIDL, with the later option of Ethena’s yield-bearing USDe. This effectively internalizes yield for JupUSD holders. The motive is clear: by issuing its own stablecoin, Jupiter can maintain value internally rather than outsourcing to USDC/USDT. This stablecoin strategy also strengthens Jupiter Lend’s appeal, as users will be able to borrow JupUSD against collateral at favorable terms, then deploy that stablecoin directly within Jupiter’s trading venues. It creates a self-reinforcing liquidity loop flywheel, where activity in one Jupiter product feeds others.

Early 2026 Growth Trajectory: Signs of Momentum

Jupiter Lend’s initial traction has been striking. In its first 8 days of public-beta, the protocol amassed over $1bn in deposits, a testament to Jupiter’s existing user base and brand trust. By early December 2025, Jupiter Lend’s TVL surpassed $1.5 billion for the first time, roughly 35% of Solana’s entire lending market. It now stands as the second-largest Solana lender, trailing only the long-dominant Kamino Finance. This growth from zero to $1bn+ in just 8 days underscores how quickly Jupiter leveraged its network effects to capture market share. Solana’s lending sector overall swelled to ~$4.6bn by late 2025, up 30%+ YoY, and Jupiter Lend has been a key contributor to that expansion.

Looking ahead into early 2026, Jupiter Lend’s trajectory appears upward, though the pace will depend on both market conditions and Jupiter’s execution of upcoming catalysts. If crypto markets remain constructive and Solana’s activity continues climbing, lending demand could grow further. Solana’s lending usage has mostly decoupled from price turbulence, driven by steady stablecoin inflows and new collateral types. In this context, Jupiter Lend is well-positioned to keep gaining share. It offers one of the most feature-rich and integrated borrowing experiences, which could attract additional liquidity from users seeking higher yield or better UX than rivals. It’s plausible that by Q2 - Q3 2026, Jupiter Lend could challenge Kamino more directly; Kamino’s deposits have actually been declining from ~$3.37bn in October to ~$1.67bn by early Feburary amid competition. Jupiter Lend could approach the #1 spot if its momentum persists, especially as new features like JupUSD prove fruitful. In absolute terms, crossing $2 billion TVL in the coming months is not out of the question if Solana’s DeFi lending sector continues its growth trend and Jupiter successfully onboards more collateral and users.

Catalysts on the Horizon for Jupiter Lend

Several upcoming developments could significantly influence Jupiter Lend’s growth and adoption in early 2026:

• JupUSD Implementation Across the Stack: The full launch and integration of Jupiter’s native stablecoin is a major catalyst. With JupUSD live as of January 5th, 2026, Jupiter Lend has begun accepting JupUSD as collateral and offering JupUSD borrowing. This has multiple benefits:
  
  1. It anchors liquidity: users borrowing JupUSD are likely to keep funds cycling within Jupiter’s ecosystem, increasing total platform TVL.
  
  2. It can improve fee capture: JupUSD generates internal yield via Ethena’s model and saves users from relying on external stables, which means interest paid on JupUSD loans largely goes back to Jupiter/its users.
  
  3. It bolsters composability: for instance, a trader could borrow JupUSD on Jupiter Lend and immediately deploy it on Jupiter’s perps exchange or the swap router without leaving the app.

Looking ahead, JupUSD also introduces a new, scalable revenue vector for Jupiter Lend.

Our one year projections evaluate JupUSD across bear, base, and bull scenarios by varying two core inputs: total supplied JupUSD and utilization. Even under conservative assumptions, JupUSD begins to contribute incremental revenue as supply grows. In the bull case, where JupUSD reaches $1bn in supply and utilization converges toward levels observed in established stablecoins like USDC, JupUSD alone supports a multi million dollar annualized revenue run rate. While not intended to be a standalone profit engine, JupUSD materially strengthens Jupiter Lend’s unit economics and reinforces a self reinforcing liquidity flywheel across lending, swaps, and perps.

• New Collateral Support via RainFi (Jupiter Orderbook): Jupiter isn’t stopping at mainstream assets, it recently acquired RainFi, a lending tech platform, to launch “Jupiter Orderbook,” a peer-to-peer lending product in Q1 2026. This expansion will enable lending against more long-tail and off-chain assets that aren’t suited for pooled lending markets. In other words, Jupiter could support collateral like tokenized stocks, longertail altcoins, or other bespoke assets by matching lenders and borrowers directly, orderbook style, rather than relying on a shared liquidity pool. Kamino has already moved in this direction, as it was first to accept tokenized equities as collateral, Jupiter clearly wants to one-up competitors by offering a broader menu of collateral options. If executed well, this can attract niche lending demand and institutional players who want to borrow against non-traditional assets on Solana. The RainFi-powered product also suggests Jupiter is addressing the limitations of its Fluid-based model, which currently focuses on a set of whitelisted vault assets, by adding a flexible P2P layer. New collateral support, combined with Jupiter’s large user base, could significantly boost Jupiter Lend’s market share and increase the total addressable market of borrowers in early 2026.

• Cross-Margin and Unified Accounts: A likely next step for Jupiter’s “superapp” will be offering cross-margining across its various trading and lending products. Today, users have separate collateral pools for different activities such as isolated perps margin, lending collateral, etc, but Jupiter has hinted at unifying these. The Fluid engine already blurs lines between DEX liquidity and lending, and it’s plausible Jupiter will extend this to unify spot, perps, and lending positions under one margin account. Such cross-margin features would let a user leverage their entire portfolio on Jupiter, essentially using LP tokens or even borrowed assets as margin for trades, boosting capital efficiency one step further. While not officially launched yet, we know Jupiter opened its Lend codebase and launched a developer platform in late 2025, which often precedes sophisticated features like cross-margin. If cross-margin goes live in 2026, it will be a major attraction for advanced traders, essentially positioning Jupiter Lend, and Jupiter exchange, as a decentralized equivalent of a prime brokerage account. This could drive volume and borrowing demand, as users consolidate activity on Jupiter for convenience and efficiency.

• Incentive Programs and Rewards: Jupiter has been unafraid to use incentives to bootstrap growth. A $1 million rewards program accompanied Jupiter Lend’s beta launch, and another $1M in rewards was announced for Jupiter’s ecosystem in late 2025 via the “Jupiter Rewards Hub”. Additionally, January 2026 will feature the final “Jupuary” airdrop of JUP tokens to active users, including lenders/borrowers. While one-time airdrops can lead to post-event pullbacks, Jupiter’s broader incentive strategy of ongoing JUP buybacks funded by fees will continue to play a role. Catalysts on this front include new potential liquidity mining campaigns for JupUSD adoption or for specific vaults if Jupiter wants to accelerate growth in certain assets.

In the near term, incentive-driven surges can boost metrics like TVL, active users, etc, but the more important thing to watch is whether Jupiter can retain those users once rewards taper. A well-designed program could convert mercenary capital into loyal users if coupled with Jupiter’s strong product offering.

Key Structural Risks and Constraints

Despite its rapid ascent, Jupiter Lend like any protocol has risks that should be considered:

• Cross-Vault Rehypothecation Risk: Jupiter Lend is built on Fluid’s unified liquidity architecture, meaning deposits and borrowing activity across Jupiter Lend products source liquidity from the same underlying pool rather than fully isolated vaults. In practice, this functions as a constrained form of rehypothecation, where liquidity supplied to one vault can support borrowing in its paired vault, improving utilization by reducing fragmentation. However, this reuse is not unlimited: it is bounded by how vaults are constructed (i.e. through specific asset “pairs” via vaults), conservative risk parameters, and strict asset listing standards that prioritize high-quality, liquid collateral.
  
  The primary risk is therefore less about hidden leverage and more about complexity and user expectation management. A shared liquidity layer is less intuitive than siloed pools, and users may assume “vault isolation” that does not exist. Jupiter and Fluid mitigate this through conservative collateral selection, dynamic risk limits, and a liquidation system designed to unwind risk via swap-based, incremental liquidations, helping contain stress even when liquidity is shared across products.

• Reliance on Incentives and Yield Sustainability: Much of Jupiter Lend’s early growth has been fueled by above-market yields, sweetened by token incentives and aggressive parameter tuning. While effective for bootstrapping, this strategy can be a double-edged sword. Continuously paying high APYs, either via token rewards or foregoing protocol fees to boost lender rates, is not sustainable indefinitely. It’s important to note the platform has never done the latter. Already, we see Jupiter is splitting interest revenues with Fluid and taking only a portion as platform income, which may limit its ability to keep subsidizing rates long-term. However, given both teams split revenue and incentives, this provides mutual skin in the game, providing an equal incentive structure for both teams. If market conditions shift, say borrowing demand falls or a competitor like Kamino ramps up their rates, Jupiter Lend may need to dial back yields. A potential stress point is when the initial reward programs conclude: will liquidity stick around for the product’s merits, or chase the next incentive elsewhere? Jupiter will need to carefully transition from incentive-led growth to organic growth. The encouraging sign is that Jupiter Lend generates real revenue, with over $10M cumulative interest paid by borrowers as of year-end 2025, so the platform could taper rewards if it maintains competitive features and UX. Still, investors should monitor yield levels on Jupiter Lend; a steep drop in APY could lead to outflows if not managed, and conversely, maintaining unsustainably high APYs could strain the system.

• Competitive and Market Share Pressures: Jupiter Lend has stepped into a highly competitive arena. Kamino Finance, the incumbent, still controls about 54% of Solana’s lending TVL and has shown it will fight to defend its lead, but its also important to note Kamino’s market share was even higher previous to Jupiter entering the arena. The recent saga where Kamino censoredJupiter’s refinance tool which prevented easy loan transfers is a case in point. Such tactics indicate that rival platforms may not play nice. Beyond Kamino, smaller players like MarginFi, Maple, Loopscale and others are also vying for niches. Jupiter must continue innovating to avoid a plateau in user growth once the initial novelty wears off. There’s also the threat that competitors will copy Jupiter’s features: for example, if Kamino, or another Solana protocol, partners to offer a similar stablecoin or fluid-like integration, Jupiter’s edge could narrow. However, forking code is of course not equivalent to forking TVL. Market share defense may require Jupiter to spend on continued incentives or pursue more acquisitions, similar to how it bought RainFi. Moreover, as Jupiter expands cross-chain via JupNet in the future, it may find new competition on other chains. In short, maintaining its growth “moat” will be an ongoing challenge. Jupiter’s multi-pronged approach as an aggregator + perps + lend + stablecoin is ambitious, but also means it’s competing on many fronts at once. The positive is Jupiter’s strong brand and user base on Solana, which give it a network-effect advantage if it keeps users satisfied under one roof.

• Operational and Structural Complexity: As Jupiter evolves into an all-in-one DeFi platform, the complexity of its system grows. Integrating many services such as spot, perps, lending, stablecoin, P2P loans, etc, introduces operational risks, from smart contract bugs to liquidity fragmentation if not managed properly. Jupiter Lend’s dependency on Fluid’s smart contracts means any issue on Fluid’s side, whether on Solana or even Ethereum, where Fluid originates, could spill over. The partnership splits fees 50/50 between Jupiter and Fluid, which is great for collaboration but could create incentive misalignment or coordination challenges in emergencies. Additionally, rapid growth often attracts regulatory attention. A platform offering high-leverage lending and its own stablecoin will certainly be on the radar if any user losses or failures occur. Jupiter’s decision to pause its DAO governance until 2026 due to concerns over team voting power also raises questions about centralization and how decisions are made in critical moments. While these issues haven’t manifested in a crisis yet, they form the backdrop of risk that should be kept in mind. Jupiter is attempting to build a financial behemoth on Solana, but that means it must execute flawlessly across multiple complex products, which is a high bar to meet.

Jupiter’s DeFi Stack and the Solana Superapp Thesis

Jupiter’s endgame is to be Solana’s DeFi superapp, and Jupiter Lend is a cornerstone of that strategy. By offering lending alongside trading, staking, and stablecoin minting, Jupiter is crafting an ecosystem where users can do virtually everything financially in a single, cohesive application. This aligns with a broader industry thesis: the next wave of crypto adoption may be driven by platforms that simplify UX and aggregate services, much like superapps in Web2 like WeChat or PayPal did for payments and social media. Solana’s high throughput and low latency make it an ideal backdrop for such an integrated experience, and Jupiter is capitalizing on that; from its mobile app that replicates a centralized exchange feel, to JupNet’s vision of abstracting away multi-chain complexity. Within this big picture, lending is crucial. It deepens user engagement as users who borrow or lend tend to stay and also trade, increases platform revenue as interest fees contribute alongside trading fees, and enhances Jupiter’s value proposition as a full-stack financial operating system.

Our forward-looking view is that Jupiter Lend will help Jupiter evolve from a leading Solana app into a foundational layer for all of DeFi. If Jupiter can continue to harmonize its services such as using JupUSD and cross-margin to tie together perps and lending, as discussed, it strengthens the flywheel effect driving JUP token value and Jupiter’s network effects. The project’s decision to allocate 50% of platform fees to JUP buybacks means that success in Jupiter Lend directly accrues value to stakeholders, reinforcing the incentive for the community to support growth across the stack. Solana’s DeFi landscape in early 2026 is maturing as total DeFi TVL is near $6.35bn, and Jupiter is positioning itself as the integrated “super app”. Its lending product doesn’t exist in isolation; it’s part of a holistic DeFi suite that could increasingly resemble a TradFi prime brokerage, but in decentralized form.

Overall, Jupiter Lend’s rise exemplifies how strategic partnerships can drive its growth. Its story is not just about TVL numbers, but about Jupiter’s strategic play to capture the full spectrum of user needs. Going into 2026, people should watch how Jupiter balances innovation with risk management. If the platform can successfully launch new features like JupUSD and JupNet while avoiding complications from its complex lending design, it will strengthen the thesis that a Solana superapp can exist. In that scenario, Jupiter, and JUP, could enjoy outsized network effects, making Jupiter Lend not just a one-off product but a key pillar of Solana’s financial infrastructure. However, if cracks appear, such as a liquidity event testing Jupiter Lend’s resilience or users balking at reduced yields, it would test the resilience of the superapp model. Thus far, Jupiter has shown an impressive ability to execute and adapt, but cautious optimism is warranted. Jupiter Lend’s early success is encouraging, but its true impact will be measured by how it propels Jupiter’s ecosystem forward and whether it can maintain momentum amid competition and risk. Overall, Jupiter Lend has set the stage for Jupiter’s next act; now the focus turns to delivering on the promise of an integrated, capital-efficient and user-centric DeFi experience that can carry Solana’s DeFi into its next growth phase.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Staking has long been a core part of securing Solana, but the way stake is managed and accessed has remained largely static. For validators and stakers alike, this has meant limited flexibility around staking terms, liquidity, and access to DeFi.

That’s why Kairos Research is working with Pye as part of the early formation of programmable staking markets on Solana, bringing our validator perspective into how these markets are designed before they scale.

What drew us to Pye is the framework they’re building that allows stake accounts to become programmable and, over time, tradable. Instead of forcing stakers to choose between security and flexibility, programmable staking introduces new ways to manage duration and differentiate staking economics, without breaking the validator relationship.

As part of this collaboration, we’re participating in Pye’s early beta to help shape how stake trading and reward markets should work before they scale.

How Programmable Staking Works:

Traditional staking treats stake as a single, illiquid position. Pye introduces a model where staking lockups can be expressed more flexibly.

Under this framework, a staking position can be separated into two components:

• Principal Token (PT), representing the underlying staked SOL and its lockup

• Reward Token (RT), representing future staking rewards generated over time

This separation creates the foundation for new use cases, including the ability to manage future rewards more intentionally and layer additional economic components without breaking the validator relationship.Importantly, these mechanics are designed to operate within the validator ecosystem, not outside of it.

Why We’re Participating Early

Our participation at this stage is not about short-term volume or liquidity. It’s about helping shape how staking markets should function responsibly.

We’re interested in:

• Helping define the future of Solana protocol economics

• Running pilots and playing an active role in the design of stake trading microstructure

• Exploring new, aligned revenue models for validators

As staking matures, we believe markets built deliberately will outperform those rushed into existence.

What Comes Next

Pye is still in beta, with markets forming deliberately before trading functionality is introduced. Trading functionality will come later, once foundations are in place.

We’re excited to contribute feedback, participate in early markets, and help define what the next phase of staking on Solana looks like.

About Pye

Pye is building a Solana-native platform centered on programmable stake accounts (PSAs), a new staking primitive designed to support stake trading and more flexible staking structures over time. This approach allows stake accounts to move beyond static delegation and become composable across the Solana ecosystem as markets form.

Disclaimer:

Kairos Research is an investor in Pye. The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

We’re excited to join the network as a day-one validator and contribute to the performance, reliability, and long-term decentralization of the Monad ecosystem.

Monad brings a new execution environment to crypto: a high-performance, EVM-compatible L1 designed for parallel execution, touting 400ms blocks across a globally distributed validator set. As researchers and node operators, we believe Monad’s architecture offers one of the clearest paths to scaling Ethereum-style applications without sacrificing developer experience.

Our validator has been active since mainnet went live, operating in collaboration with our leading infrastructure partners, Firstset, and closely monitored using our internal validator-ops stack. We’ll be running ongoing performance analysis, uptime monitoring, and research on MEV, block production, and validator + protocol economics as the network evolves.

You can stake your MON with us through Monad Vision. Be sure to select the Kairos Research x Firstset Validator.

Alternatively, you can use Gmonads staking interface as well. Follow the “Staking” page, connect your wallet of choice, and be sure to select the Kairos Research x Firstset Validator.

If you are looking to be active around DeFi and prefer a liquid staking solution, we highly suggest using FastLane’s shMON. Their LST is the largest on Monad today, and we anticipate them to continue leading in both TVL and productive onchain utilization. We plan to do a full report on FastLane once the remaining parts of their MEV stack are in production.

shMON is already 2.4x larger than all other LSTs on Monad combined, and when MEV rewards begin flowing and other mechanisms are launched, their moat deepens and the gap likely widens.

Disclaimer:

Kairos Research is an investor in FastLane. The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Introduction

One of the lazier narratives in crypto is that tokens trade only on speculation because there’s no underlying cash flow to measure. Jito has been quietly disproving that idea. In under three years, the protocol has scaled to nearly $30 million in annualized revenue, putting it in the top tier of earners not just on Solana, but across the entire industry.

What makes Jito compelling is the breadth and depth of its business model, which is deeply ingrained in Solana. It doesn’t rely on a single revenue source, but captures value at multiple layers of Solana’s stack, from transaction flow via TipRouter, to liquid staking with JitoSOL, to its more recent push into BAM (block assembly marketplace). That diversification, combined with real institutional interest like VanEck’s proposed JitoSOL ETF, points to a protocol that we believe has staying power.

In this piece, we break down Jito’s revenue drivers, why TipRouter and Jito’s positioning around block building in particular sets it apart from other protocols, and how institutional adoption of SOL could harden Jito’s moat as Solana’s financial rails continue to mature.

What are Jito’s Revenue Streams Today?

TipRouter

Out of Jito’s various revenue streams, one piece stands out above the rest: TipRouter.

TipRouter is a distributed network of node operators (“Node Consensus and vaults (stakers) that decentralize Jito tip and block reward distributions on Solana. To understand TipRouter, you first have to understand what “Tips” are. Tips are akin to an in-house priority fee paid to validators, by users or applications, to prioritize their bundle of transactions (often 1-5 txns) in the block-building process. These tips incentivize validators to include specific transactions ahead of others within the same block. Timing and atomicity is everything, especially in markets, thus TipRouter is able to help Jito capitalize on the value created by its client software that allows priority access to the state of Solana. The protocol capitalizes on this via a 6% protocol take rate on all tips, paid in SOL.

JitoSOL

JitoSOL is Jito’s flagship retail facing product, it is the largest and most liquid LST (liquid staking token) on Solana. LSTs like JitoSOL provide users the ability to receive staking rewards they would otherwise forfeit, while mitigating a multi-day unstaking period and retaining the optionality of using their capital productively throughout DeFi venues like Kamino/MarginFi (lending), or on Drift as trading collateral. Jito has a modest take rate of 4% on staking rewards, as well as a 0.1% take rate for users who unwrap their JitoSOL, rather than trade it on the open market.

Interceptor

Interceptor is a mechanism designed to protect the JitoSOL stake pool from toxic-flow arbitrage-driven exploits by imposing a 10-hour cooldown on newly minted JitoSOL after SOL is deposited. This prevents actors from depositing SOL just before staking rewards (rebase) are applied, minting JitoSOL at the old exchange rate, and then instantly redeeming or swapping it at the new, higher value to capture unearned rewards. During this period, users cannot transfer or trade their JitoSOL unless they pay a dynamic fee, starting around ~1% and then linearly decreasing to zero over 10 hours for immediate access. This fee is intended to disincentivize opportunistic behaviors like depositing just before rebase events to unfairly capture staking rewards, and all fees collected go directly to Jito’s treasury, turning potential exploitative activity into protocol revenue.

Spotlight on TipRouter

While JitoSOL has long provided a steady stream of income to the protocol, TipRouter has quickly become the dominant revenue driver, accounting for more than 50% of revenue across 21 of the last 32 consecutive weeks. So how does TipRouter capture all this value? The Jito DAO has a 6% take rate on all tips processed via TipRouter. These are then split in the following manner: 5.7% to the DAO treasury, 0.15% to restakers of JitoSOL, and 0.15% to restakers of JTO. Using the current 30-day moving average for Tips, results in $24.39m going to the DAO treasury annually, and $1.2m in additional real-yield distributed to restakers.

As seen in the chart below, Tips have become an increasingly important piece of Solana’s transaction flow. The more economic activity that takes place on the network, the more important timing and transaction ordering becomes for market participants - especially those looking for arbitrage across multiple venues.

However, while it is important to understand TipRouter and its history to get a better grasp on Jito’s overall path dependency as a protocol, understanding the importance of Jito’s newly announced Block Assembly Marketplace (BAM) paints a picture of the future of transaction execution on Solana.

Jito’s Evolution: Understanding Jito’s Block Assembly Marketplace (BAM)

As the Solana network currently exists, only the validator that has been chosen for producing a block (the leader) is capable of determining transaction ordering within a block. The Block Assembly marketplace instead allows applications to flexibly customize their transaction sequencing with transparent ordering logic, which we believe is Jito’s most meaningful improvement for Solana to date. Why is it important for users? According to Helius, this alongside BAM’s “privacy-preserving architecture” aims to significantly reduce, if not eliminate, many of the most extractive forms of MEV, providing users with stronger execution guarantees and better pricing. Validators gain the ability to offer higher-quality execution, while developers and searchers can build directly on top of a new programmable layer of blockspace.”

In short, BAM is a high-performance block-building architecture that brings verifiability, privacy, and programmability to Solana’s transaction pipeline, paving the way for a new era of network adoption. The privacy preserving marketplace enables applications to monetize their user’s activity through giving them privileged access to backrunning arbitrage which can then be redistributed to the trader that placed the trade, liquidity providers or the DEX’s token holders.

An important issue to note is that a non-zero portion (mid single digits %) of Jito Tips stem from transactions that involve extractive MEV (Frontrunning, Sandwich attacks) - which has a real impact on validator profitability. In order to fully introduce BAM, validators will have to be convinced that it can lead to more consistent profitability. In the short term, adopting BAM and getting rid of extractive MEV + competitive internalized arbitrage should lead to lower upside volatility (during price insensitive periods like the memecoin craze) for both validators and the Jito DAO. All of this being said, we believe that it legitimizes the Solana network in such a meaningful way that the pie should grow enough to compensate for the lost revenue in the near future. Better and more transparent execution is a gigantic step towards bringing more real assets onchain, increased volume from sophisticated financial institutions and more activity for existing and future applications, which in any meaningful capacity should offset the fees currently earned from negative, harmful MEV. And lastly while we can not currently model out BAM fees, it is something we will do when there is real data to work with, as we anticipate that enabling additional functionalities for protocols via plugins helps apps keep more of their own value they generate, while reinforcing Jito’s positioning as a bet on Solana’s onchain activity.

Institutional Adoption

The VanEck JitoSOL ETF application is one of the clearest examples of institutional DeFi adoption. Crypto ETFs have proven to be successful products, with ~6% of the entire BTC and ETH supplies, a combined $183B, being owned through exchange traded products. Solana likely follows the same trend over time, signaling that SOL ETFs are around at least a $7B market in the near term. One of the largest economic downsides of owning the ETFs for assets like ETH and SOL, is forgoing staking rewards of 3 to 7%, respectively. The VanEck JitoSOL ETF would allow buyers to: 1.) Earn staking rewards around 7% and 2.) Avoid some of the complex tax repercussions that come with staking rewards.

JitoSOL is such an integral part of any potential SOL staking ETF because it allows stakers to earn yield & avoid the ~3 day unbonding period of the network. Given an SEC requirement that 85% of net assets must be in highly liquid investments, vanilla staking would not be allowed. Other LSTs on the network would of course also be eligible, but JitoSOL is the largest (~40% of the LST supply) and most liquid ($200-600m in daily volume), both of which can be seen in the charts below. Additionally, JitoSOL has key integrations with exchanges and custodians like Coinbase, Kraken, Anchorage, Fireblocks, and Copper.

If JitoSOL market depth scales accordingly, at very reasonable estimates, staking ETFs could add $1-2B (30-60%) to Jito’s TVL. All else equal, every 10% increase in Jito’s TVL represents another $1.1M in annualized protocol revenue. Over time, we expect the liquid staking rate to increase and the ETFs to act as liquidity blackholes - so our estimates are very possibly on the low end.

Jito Outlook

As noted above, JitoSOL is the largest LST on Solana at 3.6% of the network stake & 2.7% of the circulating SOL supply. When you look at comparables like Lido on Ethereum (25.8% of staked ETH & 7.4% of the circulating supply), we can see that there is significant room for upside in market share. Additionally, Jito’s net income is already 55% greater than that of Lido’s when using Q3 data. A longer term goal for Jito’s saturation would be closer to ~15% of the network stake, which at current SOL prices would lead to another $30M+ in annualized DAO earnings.

Below is a fork of Multicoin Capital’s JTO valuation model, in which we extrapolated upon the idea that JTO’s price is a function of Jito’s existing revenue lines, their potential adoption & differing growth multiples. We held the price of SOL constant and estimated 3 possible revenue scenarios for Jito, applying lofty earnings multiples to each scenario - based on the protocol’s rapid growth. This being said, we have seen Jito improve and expand their product offerings on several different occasions which should drive significant future value to the DAO.

Token Value Accrual

The token is an often overlooked part of the project. Many see it as an incentive mechanism to attract early users, but there are very few examples of projects properly accruing value back to the token itself. This is in part due to some nuances around protocols which have revenue going to the “Labs” entity, or an entity responsible for development of the protocol. This is largely understandable, but also takes away from fees that could ultimately flow to the protocol DAO itself. Jito recently changed this with the passing of JIP-24 which is now directing all of the block engine fees and any future BAM fees to the DAO treasury. This proposal also importantly notes that all funds will be earmarked to the crypto-economic subDAO which is tasked with transitioning the DAO towards a “multi-mechanism” approach to governing its token economy and connecting the economic bandwidth captured by the DAO to the JTO token. The desired outcomes are as follows:

• An approach to ‘smart buy backs’

• JTO or JitoSOL auction mechanisms

• Mechanisms or approaches for enhancing JTO and / or JitoSOL liquidity

• A DAO-to-DAO approach that enhances the network effects of JTO and / or JitoSOL

• A Jito economy data and analytics system / oracle design

• A JitoSOL / JTO yield augmentation mechanism

• A fee switch vault mechanism

The DAO has already made progress here, having completed an initial token buy-back program worth $1m and has begun developing the Vault, JTO Auction, and Intelligent Buybacks, launched supporting analytics, and now plans larger buybacks, mid-term mechanism integration, and independent researcher coordination. The initial findings during the $1m buy-back indicated that JTO out traded SOL and outperformed market beta. Additionally, there was no evidence of frontrunning or adversarial market actors.

Conclusion

In conclusion, Jito stands out as the best possible way to express a directional view of Solana’s onchain activity and economic prowess, driven by TipRouter, BAM, and JitoSOL. Institutional adoption, highlighted by the VanEck JitoSOL ETF application, 8 spot SOL ETFs, and several $1bn+ digital asset treasury companies being announced, Solana is poised for its first large scale institutional wave, and Jito sits at the heart of it all. The CSD’s work to connect protocol revenues directly to JTO through buybacks and novel mechanisms signals meaningful progress toward tokenholder alignment. Taken together, Jito’s combination of product innovation, institutional credibility, and thoughtful tokenomics positions it incredibly strong in the current environment, with many positive tailwinds coming together, we are expecting it to outperform SOL across the next 6-12 months.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Could TIA Become Deflationary?

Executive Summary

Celestia’s native token TIA has a dynamic supply outlook that could potentially turn net-deflationary under the right conditions. In essence, if data availability (DA) fee revenue and other fees on Celestia grows large enough to outpace new token issuance, TIA’s net supply could stop rising and even begin to shrink. At present, TIA’s monetary policy is inflationary at around 5% annualized, but this rate is programmed to decrease over time and can be further adjusted through governance. In fact, an upcoming network upgrade will halve the inflation rate from 5% to 2.5%, cutting roughly 29 million TIA of yearly issuance. Additionally, an even more radical framework known as “Proof-of-Governance” (PoG) has been discussed, which could lower inflation to just 0.25%. Our break-even analysis shows that at the current 5% inflation, Celestia would need an extremely high level of DA usage, on the order of terabytes of data posted per day at today’s fee rates, for TIA to become deflationary.

However, if inflation is reduced and network adoption is strong, the gap between fee revenue and issuance narrows quickly. In optimistic scenarios, net TIA issuance could approach zero or turn negative, meaning network fees generated by rollups and applications using Celestia for DA would offset or exceed the newly minted TIA. We modeled different scenarios under varying assumptions to evaluate how rollup adoption, application demand, and fee levels influence net issuance. This trend is already taking shape; in July 2025 the network saw a 33% cut to TIA’s inflation, and further measures are being pursued to improve token economics. Overall, while TIA remains inflationary today, the combination of growing DA and other fee revenue coupled with proactive monetary governance could transform TIA into a deflationary or near-zero-inflation asset. This would enhance its value proposition for long-term investors and participants in the Celestia ecosystem by aligning token supply with actual network usage.

Introduction

This report examines the conditions under which TIA could transition from an inflationary token to a deflationary asset. The core hypothesis is that if Celestia’s data availability fees, aka the payments for posting blobs of rollup data, eventually surpass new token issuance, then net TIA supply growth will halt or reverse if fees are burnt. This analysis is grounded in Celestia’s role as a provider of scalable data availability to rollups and app-chains. Like many layer-1 networks, Celestia currently uses token inflation to reward validators for securing the network. However, high inflation without commensurate network usage is unsustainable because it dilutes token holders and puts downward pressure on TIA’s price through validators and stakers selling. Celestia’s long-term vision should therefore be to transition away from staking, validator rewards, inflation and instead aim toward overhauling issuance to a minimum viable amount , and burn fees generated by actual network usage, all of which are being considered under PoG.

To explore TIA’s deflationary potential, we will cover the following points:

1. Current Inflation Model and Break-Even Fees: Reviewing TIA’s inflation schedule and estimating the fee revenue required to offset various inflation rates.
   

2. Data Demand Scenarios: Modeling data availability demand and fee revenue under different adoption scenarios - from low usage to aggressive rollup growth.
   

3. Issuance Dynamics: Examining how token issuance incentivizes validators today and how growing protocol revenue could reduce reliance on inflationary rewards.
   

4. Governance Flexibility: Assessing Celestia’s on-chain governance and its ability to adjust monetary policy (e.g. lowering inflation, introducing fee burns or new frameworks like PoG).

Ultimately, this report provides our perspective on how TIA’s monetary profile could evolve if Celestia’s ecosystem growth and governance initiatives succeed.

Primer on Proof-of-Governance

One of the core scenarios examined within this report is “Proof of Governance” which within the paper is abbreviated as PoG. PoG was first introduced via a governance forum post from John Adler, one of the co-founders of Celestia, which pragmatically examines proof of stake economics in their current form. The idea, if accepted by the community in its current form, would get rid of staking all together, cut inflation to just 0.25%, and have the remaining issuance be distributed directly to the validators, and burn all real economic value (REV). We personally believe PoG positions Celestia for success. As Celestia blocks continue their march towards 1gb size, the design parameters for users widen, and at that block size, even modest consistent block space utilization would make TIA net deflationary.

Primer on the Matcha Upgrade

The Matcha upgrade scales block size up 16x to 128MB with a new high-throughput propagation mechanism, halves inflation to 2.5% while raising validator commissions to 10%, and removes token restrictions to make Celestia a routing layer for any asset. It also shortens the unbonding time by 7 days (approximately 33%) and trusting periods by half, and introduces pruning changes that drastically cut node storage costs. Together, we believe these changes strengthen scalability, cross-chain utility, and TIA’s monetary properties while preparing the network for a potential PoG centric future.

Break-Even Analysis: TIA Inflation vs. DA Revenue

TIA’s Current Inflation Model: Celestia’s monetary policy began with a relatively high inflation rate to bootstrap the network. At launch in late 2023, TIA inflation was set around 8% annually on a 1 billion initial supply. This rate was programmed to decay each year by roughly 10% of the rate per year until it reached a terminal rate of approximately 1.5%. In July of this year, Celestia implemented CIP-29 as part of the Lotus upgrade, which accelerated this process by cutting the inflation rate by one-third. Inflation dropped from about 7.2% to 5.0%, and the decay schedule was adjusted to reduce the rate by 6.7% each year going forward. As of today, TIA inflates at roughly 5% per year and will gradually decline to 1.5% over time absent further changes.

In concrete terms, with a circulating supply in the 1.1-1.2 billion range, about 55 million new TIA are currently issued annually. Lowering the base inflation rate dramatically reduces the amount of new TIA entering circulation each year. For example, at 5% inflation Celestia mints around 55 million TIA per year; halving inflation to 2.5% would create only roughly 28 million TIA per year, and at the future baseline of 1.5% the issuance would be roughly 16-17 million TIA.

In an extreme scenario of 0.25% inflation under a PoG model, annual issuance would drop to under 3 million TIA, essentially a negligible increase relative to the total supply. These figures illustrate how sensitive TIA’s supply growth is to the inflation parameter.

Break-Even Fee Requirements: For TIA to become net deflationary, the fees collected from data availability and other transactions must offset the annual token issuance. Because Celestia’s block space has a fixed maximum capacity, there is an upper limit to how much data, and thus fee revenue, can be posted per day unless block parameters are expanded. Under current parameters, Celestia’s block size is 8 MiB approximately every 6 seconds, which translates to a maximum of roughly 115,000 MiB per day, or about 112.5 GiB/day of data posting. Using present fee levels, we can estimate how much daily usage would be needed to cover different inflation rates:

• 5% inflation: Not attainable barring unrealistically high usage (it would require on the order of 2.5 TB of data posted per day at current fee rates).
  

• 2.5% inflation: Similarly unattainable under current conditions (would need roughly 1.25 TB of data per day, far above today’s demand).
  

• 0.25% inflation: Potentially achievable, but only if the network is near full capacity. In practice this means hundreds of gigabytes of data daily (and likely higher fees per byte) to offset even this low inflation rate.

For perspective, roughly 2.5 TB/day of data posting would generate roughly $90 million in fees per year, enough to cover 5% inflation, and about half that (1.25 TB/day) would cover a 2.5% inflation, illustrating how extreme usage must be to fully offset current issuance. Clearly, with today’s parameters Celestia would need an almost unrealistically high throughput to achieve net deflation from burning DA fees alone. For further context, 2.5 TB/day of data is roughly equivalent to 10-12 million typical Ethereum transactions worth of data each day, an extremely ambitious load for any blockchain.

There are reasons to believe this gap can narrow over time. First, Celestia’s inflation is not static; as we already mentioned, governance is actively exploring a reduced dependence on inflation and shift towards burning fees as the main source of network value accrual. Second, demand for blob space can rise if more rollups and data-intensive applications launch on Celestia - a trend that we should likely bet on if we believe that crypto will be successful in the long term. Celestia offers significantly lower data costs for rollups compared to using monolithic chains.

Third, as block space demand increases, market forces could drive fees per byte higher from today’s ultra-low levels, similar to how Ethereum’s gas fees rose when demand spiked during DeFi and NFT booms. Celestia’s design allows throughput to scale by adding more nodes via data-availability sampling, but there are still practical bandwidth and storage limits. If those limits are approached, the price per unit of data would almost certainly rise, and given how much cheaper DA currently is than on Ethereum, Celestia should have significant pricing power. In summary, the break-even analysis indicates that TIA becoming deflationary is challenging with current usage and parameters. However, the gap between fee revenue and issuance will shrink if inflation is lowered and if Celestia captures even a fraction of the adoption its low fees are aiming to attract.

DA Demand & Revenue Modeling

To better understand how usage translates into fee revenue, we modeled several data demand scenarios for Celestia and their impact on TIA’s net issuance. For these estimates, we assume a baseline fee rate and consider both static fees and a case where fees increase as blocks fill up, reflecting some price elasticity.

Currently, fees are extremely low, roughly 0.022 TIA per MiB, about $0.10 per MB. Given that daily usage is presently low on the order of only a few gigabytes per day, fees per byte are minimal. With the 8 MiB block size limit, daily DA capacity is about 112.5 GB/day. That is the maximum volume unless block sizes are increased in the future. In other words, beyond a certain point, additional demand will push fees up rather than increase the number of bytes posted.

Usage Scenarios

We model daily data usage relative to a current baseline of 2,300 MiB/day (2.3 GB/day), equivalent to 2% utilization of the 8 MiB block limit. From this baseline, we scale usage in multiples and test under different inflation and elasticity assumptions.

Current (Baseline):

At 2.3 GB/day, annual fee burn is negligible, <0.1M TIA, compared with approximately 57M TIA of yearly issuance at 5%. Even under the lowest modeled inflation of 0.25%, usage at baseline falls far short of offsetting issuance assuming fees are burnt.

Moderate Adoption (10-20x baseline):

At 23-46 GB/day, annual fee burn rises into the low single-digit millions of TIA, still covering less than 10% of 5% issuance. However, at 0.25% inflation, elasticity (represented as ε) begins to matter. With ε = 0.5, net-zero issuance could be achieved around the upper end of this range.

High Adoption (50x baseline):

At 115 GB/day, the system is effectively at the 8 MiB block cap. At flat fees, this generates roughly 900k TIA annually, far below what is needed even at 0.25% inflation. With elasticity, fees rise as blocks fill: under ε = 0.3, break-even against 0.25% inflation occurs almost exactly at this point (113k MiB/day). With ε = 0.5, break-even arrives sooner (65k MiB/day, 28x baseline), meaning net zero issuance is possible before max capacity if demand drives prices higher.

Aggressive (Beyond 8 MiB Blocks):

When block sizes increase to 128 MiB in the upcoming network upgrade, daily capacity would scale from 115,000 MiB to 1.84m MiB, raising the ceiling by approximately 16 times. The baseline remains fixed at roughly 2,300 MiB/day, so the break-even multiples in “x baseline” terms do not change: net-zero issuance under 0.25% inflation is still achieved at 28-49x baseline depending on elasticity. The difference is that with 128 MiB blocks, this break-even point now sits well below capacity. Put differently, instead of brushing against the ceiling, Celestia could sustain net-zero issuance at much higher absolute volumes without congestion. Under 2.5% or 5% inflation, however, break-even remains unattainable even at expanded capacity.

Takeaways:

• At 5% and 2.5% inflation, net-zero issuance is unattainable under realistic, short term conditions, even with fee elasticity.

• At 0.25% inflation, net-zero issuance is feasible if demand rises by 30-50x current levels and elasticity drives higher effective fees per MiB.

• The binding constraint at 8 MiB blocks is bytes, not demand; expanding block size to 128 MiB relieves this ceiling but does not change the break-even multiples required.

Drivers of Demand: The obvious primary way to increase DA fee revenue is by growing the number of rollups and chains using Celestia. In particular, data-heavy applications with frequent state updates such as high-frequency trading apps could generate substantial data. Additionally, entirely new classes of applications could emerge precisely because Celestia makes posting large amounts of data economically viable; decentralized apps that were impractical on expensive monolithic chains might flourish when data costs are drastically lower - however, this is yet to be proven.

Staking and DeFi Implications: If TIA’s inflation is reduced, or if staking is completely removed in a PoG scenario, many tokens would circulate in the broader ecosystem rather than being locked up purely for staking rewards. The elimination of staking rewards could serve as a forcing function to increase TIA’s utility in DeFi and generally boost demand for the token. Over time, rollups may also adopt TIA for gas fee payments.

Lazy bridging has the potential to make TIA the common settlement asset across Celestia’s rollup ecosystem. By enabling seamless rollup-to-rollup transfers, it drives frequent movement of TIA for trading, liquidity, and collateral purposes, embedding the token into various applications. This activity may also boost blob posting on Celestia as proofs and messages are relayed, directly increasing DA fee burn.

The dynamic can potentially become reflexive as well: as DA fees rise with utilization and burn offsets issuance, TIA accrues greater value, strengthening its utility in DeFi. In turn, wider adoption of TIA across rollups amplifies inter-rollup flows, leading to more blob demand and higher fees on the Celestia main chain. Under low-inflation regimes, this loop materially accelerates the path to net-neutral or deflationary issuance, potentially making lazy bridging a structural driver of both TIA’s utility and monetary tightening.

Issuance Dynamics & Token Economics

Turning to the supply side, we analyze how TIA’s issuance works today and how it might change as Celestia’s fee revenue grows.

Role of Inflation Today: Celestia is a proof-of-stake network built with the Cosmos SDK, so it uses inflationary token issuance to reward validators and delegators. New TIA tokens are minted with each block and distributed as staking rewards, with a small portion allocated to a community pool for ecosystem funding. This model is typical for emerging PoS chains: high inflation in the early years helps bootstrap “security” by providing strong incentives for token holders to stake and validators to operate infrastructure.

In Celestia’s case, the initial 8% inflation was programmed to decay to 1.5% over time and was intended to gradually reduce dilution. Governance can adjust these parameters, as demonstrated by CIP-29’s reduction of both the base inflation and its decay rate. As of mid-2025, roughly half of all TIA was staked, yielding an annual percentage rate (APR) for stakers in the low double digits. This generous yield helps “secure” the network but comes at the cost of diluting non-staking holders and creates constant sell pressure, since many validators must sell a portion of rewards to cover costs or take profit. These factors are a key reason that many layer-1 communities seek to lower inflation. Unjustifiably high inflation and dilution in early stage protocols can discourage key stakeholders (core team & investors). We believe that cutting TIA dilution as rapidly as possible lengthens the runway required to attract significant demand & build a sustainable ecosystem.

Network upgrades can cut inflation directly (already reduced once, with a further upcoming cut to 2.5% imminent), lowering new supply. Fee burns could further offset issuance by permanently removing TIA as DA usage grows. Proof-of-Governance (PoG) combines these levers, replacing staking rewards with minimal inflation of 0.25%.

Taken together, these measures show a clear trajectory: TIA’s net issuance is set to decline as adoption rises. If usage grows meaningfully, Celestia could approach a near-fixed or even deflationary supply, strengthening TIA’s long-term value proposition.

Governance and Monetary Flexibility

Celestia’s ability to realize these tokenomic improvements hinges on its governance system and the flexibility built into its protocol rules. Here we consider how Celestia’s governance works, what tools it has to adjust economic parameters, and how its approach compares to other blockchain ecosystems.

Celestia’s economic policy can be adjusted via its on-chain governance, which is modeled after other Cosmos-based networks. TIA holders, through their staked tokens or delegations, are able to vote on proposals that modify network parameters or upgrade the protocol. This system gives the community the tools to fine-tune monetary variables such as the inflation rate, min or max validator commission, etc. Indeed, we have already seen it in action: as mentioned previously, with the Lotus upgrade (CIP-29) passing in July, inflation was cut from 7% to 5%, and there is an active proposal to halve it again to 2.5%. These changes indicate that stakeholders are engaged and willing to support adjustments to improve TIA’s value accrual. In general, any measure, from lowering inflation to introducing fee burns to even restructuring the validator incentive model, as with the PoG proposal, can be implemented if it gains sufficient support. This flexibility, built into the protocol, means Celestia can respond to economic conditions and community priorities relatively quickly versus other networks.

Compared to some other blockchains, Celestia’s approach to tokenomics has been proactive. Ethereum, for instance, took multiple years and major updates (the EIP-1559 fee burn & the Merge’s issuance cut) to achieve a low-inflation, periodically deflationary status for ETH. Newer chains like NEAR are only now considering reducing their inflation because usage has lagged, and chains such as Solana have been more static with their emissions so far. On the other hand, networks like Tron and BNB Chain have aggressively used fee burns or token buybacks to curb supply growth, though those mechanisms are often centrally coordinated.

Celestia stands out for exploring significant economic reforms within its still nascent existence; we especially think the PoG exploration is noteworthy. This mindset demonstrates a strong commitment by the team and community to make TIA economically sustainable. Of course, any bold change must be balanced with maintaining awareness of respective tradeoffs. The debate around the 2.5% inflation cut, for example, included comments cautioning falling validator profitability. Overall, Celestia’s governance has shown both the will and the means to steer TIA’s monetary policy toward greater scarcity. As long as the community remains aligned on the long-term vision, this governance agility should help Celestia optimize its token economics without compromising its core security and decentralization.

Conclusion

Our analysis shows that TIA can potentially transition from an inflationary token to a deflationary, or near zero-inflation asset under the right conditions. Achieving this would require a combination of strong network usage, primarily via DA usage, and strategic monetary policy adjustments. At the current levels, around 5% inflation and relatively low usage, TIA’s supply continues to grow each year, though the programmed decay will gradually lower that inflation rate. Simply put, fees from today’s activity are nowhere near enough to offset issuance.

However, if Celestia’s adoption increases substantially, for example if many rollups and applications use it such that hundreds of gigabytes of data are posted daily, and if inflation is concurrently reduced to 2.5% or even lower, then the balance shifts. Under those optimistic conditions, the fees generated by the network could equal or exceed new token issuance, flattening TIA’s net supply growth. Celestia’s governance is actively moving in this direction: it has already cut the inflation rate by one-third and is considering further cuts to 2.5%, with even more drastic options like PoG’s 0.25% inflation and a fee burn mechanism on the table. These measures, along with growing usage, provide a realistic path for TIA’s net issuance to approach zero or turn negative in the coming years.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

This continued volume and TVL growth presents an enormous opportunity for the budding Hyperliquid DeFi ecosystem. Alongside organic activity, the protocol’s dual virtual machine is built for DeFi with Hypercore being the backbone of the protocol’s onchain orderbook and vault primitives & the HyperEVM allowing for developers to create general purpose applications at an arms length away.

The Hyperliquidity Provider (HLP)

asxn broke down Hyperliquid’s vault structure in a recent article, stating the protocol “initially built vaults as a core primitive of their L1, encoded into the chain so that they could run the vaults created by the team.” Hyperliquid used this idea to make improvements on a concept seen with GMX’s GLP vault, which was a multi-asset vault (Stables, BTC, ETH, etc) that was a counterparty for the perpetual futures traders on the GMX exchange. Since Hyperliquid utilizes an onchain, central limit orderbook, they do not have to rely on user deposits to act as the counterparty for all trades taking place on the exchange. Instead, professional market makers / high frequency trading firms are able to provide liquidity on the platform.

So why is HLP needed? The Hyperliquidity Provider (HLP) vault is the liquidity provider of last resort - allowing traders to open up positions, at a price close to the market, even when there is insufficient liquidity on the Hyperliquid orderbook. This concept is key for allowing the protocol to list longer-tail assets, yet still letting traders open up larger positions without seeing dangerous slippage. Further, HLP can act as a massive UX improvement during periods of low liquidity for majors (BTC, ETH, SOL) on the exchange. This strategy of being the liquidity provider of last resort is made possible through referencing market prices and liquidity (tick data) across other major exchanges & then opening up a counter position with the HLP vault at a fair market price.

HLP democratized this area of market making, allowing vault depositors to be the liquidity provider and liquidator of last resort for positions on Hyperliquid. HLP is, on average, a profitable vault for several reasons:

1. It constantly adjusts its bids and asks allowing the vault to occasionally earn a spread, alongside trading fees when a taker opens and fills a position

2. It aims to be fairly neutral, to net short such that it earns funding payments from traders

3. It is able to capture a small amount of account margin during backstop liquidations, which is programmatically enough that it can offset the losses from accounts that become undercollateralized

4. Since it is the liquidity provider of last resort, the vault likely gets a fairly good execution price relative to the market outside of Hyperliquid

All of the above gives HLP a very attractive return profile for crypto investors. Given traders are often skewed net long, and that HLP benefits from funding rates and liquidations, the vault has a negative correlation with the crypto market. Beyond that, the vault has been profitable in 24 of 26 months since it was launched - with very minimal drawdowns. Below is a month by month breakdown of HLP’s returns:

Key Takeaways:

1. HLP had a maximum monthly drawdown of -0.79%

2. HLP (15%) has lower annualized, monthly return volatility than BTC (49%) or QQQ (15.7%)

3. HLP’s volatility adjusted returns are higher than that of BTC

4. Since inception, HLP has a higher Sharpe (2.72) than BTC (2.28) or QQQ (1.61) have in the same time period

5. A Medium Post from Geronimo explores the volatility matched returns of HLP, as well as its role in a crypto portfolio

6. HLP’s TVL growth has muted its returns, but also its volatility. Such that, the risk adjusted return profile continues to look better

So what is hwHLP?

The HLP vault has a 4 day lock up period, creating a level of user friction. Hyperwave launched a tokenized representation of the HLP vault, hwHLP, which provides 2 important improvements, like seen with other LSTs:

1. Instantaneous Liquidity: Users can sell their HLP deposits on the open market or redeem them for their underlying vault shares

2. Liquid Wrapper / Composibility: hwHLP can be utilized throughout the HyperEVM and Ethereum DeFi ecosystems

• 2a) As of 8/3/25, hwHLP is integrated in the below protocols, across both Ethereum and the HyperEVM:

Avoiding the 4 day lock up provides a clear benefit to existing HLP depositors, but composibility is becoming increasingly important in the Hyperliquid ecosystem with the recent addition of the HyperEVM. Barring any exploits or black swan events, HLP could be an effective form of collateral to use in lending protocols or to use as a pair asset for tokens launched in the Hyperliquid ecosystem. Given HLP’s historically low volatility (outside of the JellyJelly exploit) & its outperformance over stablecoin borrow rates, some active / risk taking traders may use hwHLP for a looping strategy. At scale, this looping strategy could generate more TVL for both HLP and hwHLP and further mute the volatility of the underlying vault – all while adding market depth to Hyperliquid.

Outlook for Hyperwave

As of August 7, 2025, hwHLP currently sits at over $27.8M in market size. Yielding 12% per annum, hwHLP holders should accrue $3.3+ million in yield over a 12 month period. Given, the underlying HLP vault has roughly $400m in deposits - we could easily see the liquid representation (hwHLP) take a much more meaningful market share.

Beyond, hwHLP, we believe Hyperwave has two core market segments to capture:

1. HYPE LST Market: As of August 3rd, Hyperwave launched the hwHYPE liquid staking vault. This vault deploys the underlying HYPE deposits through the DeFi ecosystem to maximize depositors yield. This is a much larger target market, with kHYPE approaching $860M in TVL and stHYPE having another $330M+ in deposits

2. Third Party Vault LSTs: Hyperliquid has a generalized vault structure that allows anyone to manage a vault, with third party deposits. The vault managers are able to take on any type of trading strategy, but to maintain alignment they must have at least 5% of the vault’s AUM at any given time. The vault manager receives a 10% performance fee on the vault’s PnL.

There is clear demand for 3rd party vaults, given they have accrued $20m+ in deposits as of today. As more assets (tokenized equities, commodities, yield bearing stables) become available on Hyperliquid, vault managers will be able to deploy a number of trading strategies that may attract capital and could be worthy of liquid derivatives, like hwHLP.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

We’re excited to announce we’ve entered Celestia’s validator set. We believe Celestia is entering its second act - one that will be defined by thoughtful, yet bold changes to its token-economics and how value can accrue back to the network, and ultimately its token holders and users.

We’ve previously shared some thoughts on their forum of why we think Proof of Governance is a pragmatic approach to mending the current economic headwinds the network faces, and expressed our interest in supporting this exciting initiative.

The network has already begun moving in the right direction with the Lotus upgrade reducing inflation by 33%, but there is a lot of room for improvement still in our opinion and we are supportive of the current CIP to half inflation from 5% to 2.5%.

However, even then we still believe it should be pushed radically lower, with the network transitioning fully to Proof of Governance where the terminal inflation rate would be just 25 basis points.

We believe a reduction to 0.25% terminal inflation with all network REV being burnt, coupled with other product avenues not yet explored create a real opportunity for net-negative issuance. We look forward to sharing more research coverage on Celestia and this specific mission to revamp and bolster the network’s token-economic value accrual.

If you are aligned with this mission, stake with us as we push towards a better future for the network and its token holders!

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Be sure to read til the end for additional analysis on Plasma’s recent deposit campaigns!

The Rise of Stablecoins and the Need for Specialized Infrastructure

Stablecoins have exploded from a niche use cases into the most notable innovation within crypto markets, and a promising new medium for global payments. In 2024, dollar-pegged tokens like Tether’s USD₮ facilitated $15.6 trillion in transactions, 119% of Visa’s payment volume within the same period. Additionally, based on recent data, USD₮ has roughly 400 million users in emerging markets. This surge signals a “stablecoin singularity,” a reality where digital dollars circulate as freely as information, transforming how money moves.

We believe that the integration of stablecoins throughout all facets of the global payment system (P2P, B2B and P2B) has the potential to significantly improve our daily lives. At their best, blockchains are able to reduce the time required for payments to settle and sidestep the need for highly extractive middlemen that take several percentage points of money transfers, while having the ability to take control of your money at any given time. However, today’s dominant blockchains are not built with stablecoins in mind, leading to high fees on networks like Ethereum and prompting users to flock to more centralized alternatives like Tron for minimally cheaper transfers.

Enter Plasma, a blockchain purpose-built for stablecoins. Plasma is designed to do one thing extremely well: moving stablecoins like USD₮ quickly and freely. Unlike general purpose L1 chains juggling a variety of applications and use cases, Plasma is laser-focused on stablecoin payments. This emphasis unlocks technical and economic advantages which could make Plasma the canonical payment layer for digital dollars worldwide. By limiting its scope to stablecoins, Plasma can maximize throughput, and minimize latency, while eliminating transaction fees for USD₮ users. The end goal is to achieve a seamless experience where transferring money, to peers or for purchases, is as effortless as sending a text, but we also believe there could be substantial second and third order effects.

Zero-Fee USD₮ Transfers as a Liquidity Magnet

Despite being the largest platform by stablecoin issuance, Ethereum’s architecture has made stablecoin transactions relatively expensive, often costing several dollars in fees per transfer, driving many users to Tron’s lower-cost network. Tron successfully pushed its once low-cost transactions across emerging markets, which has seen continued staying power, as it processed an estimated $5.46 trillion in USD₮ volume across 750 million transfers in 2024 using data from Artemis. If low fees fueled Tron’s rise, Plasma’s no-fee model takes it a step further, allowing applications to forgo the concern of paying gas fees and potentially catalyzing an even larger wave of adoption.

For users, zero fees are not just about savings, they unlock new use cases. Microtransactions become viable when sending $5 doesn’t require a $1 fee. Remittances can reach families abroad in full, instead of losing a hefty cut to intermediaries. Merchants could accept stablecoin payments without surrendering 2-3% to invoicing & bill pay software + credit card networks. In short, Plasma’s free transfers remove the frictions that have kept stablecoins largely in the trading realm, and paves the way for everyday commerce. As Plasma is backed by Tether’s ecosystem, the incentives align to help continually spread USD₮ far and wide. Liquidity begets liquidity, and once users know they can move value freely on Plasma, it could attract a critical mass of stablecoin flow from across the crypto universe, reinforcing its utility as the primary rail for dollar value. Additionally, the onslaught of USD₮ deposits and native minting make Plasma a prime ecosystem and expansion target for existing DeFi protocols. We are already seeing some traction here with leading stablecoin focused protocols like Curve and Ethena announcing plans to deploy on Plasma’s EVM compatible environment. Aave, the largest lending protocol in all of crypto, also announced it will be expanding to Plasma. It’s also important to note that one of USD₮’s core network effects as the leading stablecoin has driven its adoption as the primary denominator for spot BTC pairs across leading exchanges. For example, the BTCUSD₮ pair on Binance alone has done $4.9 trillion dollars in volume since August 2017. As Bitcoin bridges improve as trust assumptions are minimized, we believe there is also a good chance that more nimble BTC finds its way on to the network, complimented well by its already familiar USD₮ pairing, which could be a catalyst for trading activity as more sophisticated users look to arbitrage away any price difference between BTC spot price on CEXs and BTC’s onchain price in any liquidity pools that may arise.

Outpacing Ethereum, Tron, and Traditional Payment Rails

How does Plasma stack up against existing networks and Fintech incumbents? In many ways, it is designed to outperform both current crypto and traditional payment rails.

• Ethereum: Ethereum hosts a diverse DeFi ecosystem, but that unfortunately comes at the cost of congested blockspace and high gas fees for simple USD₮/USDC transfers. Stablecoins thrived on Ethereum early on and today they account for a huge portion of Ethereum’s activity, with approximately 35-50% of all on-chain usage, but this is typically large trading related transactions that often price out smaller transactions. Layer-2 rollup solutions help with costs, but Plasma’s approach is more radical, a separate chain just for stablecoins, optimized from the ground up for cost-efficiency and speed. By not trying to “fit every use case under the sun,” Plasma can dedicate its full capacity to stablecoin transactions, sidestepping the congestion seen on general-purpose chains.

• Tron: Tron has become a stablecoin heavyweight, carrying a large portion of Tether’s daily volume thanks to low fees and faster confirmation times. Tron’s TRC-20 USD₮ transactions reached 22 billion since launch, dwarfing Ethereum’s ERC-20 USD₮ count of 2.6 billion. This highlights how a better user experience, most notably driven by low-costs and quick transfers, helped win stablecoin market share. Plasma’s edge is to push the UX envelope further. Where Tron still charges fees upwards of $2-3 or requires staking TRX for free, or discounted transactions, Plasma charges nothing at all for USD₮ transfers. Additionally, Tron’s DPoS architecture has been critiqued for centralization, as they have 27 pseudo-permissioned validators, and the network relies on its own native token for fees and “governance”. Plasma, by contrast, is anchored to Bitcoin for security and even allows fees, when needed, to be paid in the stablecoin itself, an arguably more user-friendly model. If Tron is currently the de facto “stablecoin chain,” Plasma is positioning to leapfrog it with both superior UX and economics.

• PayPal and TradFi Rails: Traditional payment processors and fintech platforms are also eyeing stablecoins. PayPal launched PYUSD, its own USD-backed stablecoin, in 2024 and plans to integrate it across 20+ million merchants by 2025, showing the demand for better digital dollar rails. However, PayPal’s network, and similar systems like Visa or ACH, still charge fees, enforce transfer limits, experience delays, and have geographic restrictions. On PayPal, merchants can pay up to 5.4% + $0.30 per transaction in the current system, and cross-border payments incur FX spreads and waiting times. While PayPal’s stablecoin will reduce currency conversion friction, it remains to be seen if PayPal will significantly cut fees for merchants. Plasma approaches the problem from a crypto-native angle: open infrastructure, no middlemen, and no tolls for moving money. Anyone with a crypto wallet could access stablecoin payments on Plasma as easily as using email, without needing a bank or payment app in the middle. This openness and neutrality could attract fintech platforms and even traditional institutions to build on Plasma for settlement, much like how internet TCP/IP rails became the standard for data transmission.

Massive Market Opportunity for Stablecoin Payments

The timing for Plasma’s launch looks ideal, as the total addressable market for stablecoin-based payments is not only immense, but rapidly expanding. Today, stablecoins have a combined supply of over $230 billion, making up approximately 1.27% of the U.S. M1, and 1.08% of U.S. M2. That may seem small, but stablecoins grew by 14% in a single month in January of this year, and have seen sustained a 38% annual growth rate since 2018, meaning they could rival the money supply of some G20 countries within a few years if trends hold. More tellingly, in 2024 stablecoin transfer volumes eclipsed those of major card networks, falling short only of the Fed ACH transfer system, pointing to a reality where a significant share of global value transfer, albeit highly speculative, happens on crypto infrastructure rather than traditional payment rails.

While the current dominant use case for stablecoins is trading and DeFi, the next frontier is traditional commerce and general payments. This spans everything from remittances (a ~$700B per year market) to e-commerce payments (several trillions per year globally) to B2B cross-border trade ($30+ trillion). We can already see signs of stablecoins moving into retail and business payments. For example, PayPal spent time highlighting stablecoin utility at their 2025 Investor Day. The company is aiming to enable businesses to pay overseas suppliers via PYUSD to eliminate the need for actual money transfers, instead relying on ledger-to-ledger updates. While saving merchants processing time and fees, PayPal is able to keep them in their own network. This is very important considering 80% of merchant payments leave the PayPal ecosystem into their own bank account as soon as they are received.

Consider merchant payments. As mentioned, businesses often lose 2-3% per sale to fees. Stablecoins on a feeless network can virtually eliminate that hindrance on commerce. Assuming that a merchant is willing to accept US Dollars or could convert to their native currency via a crypto exchange, a business in Nigeria selling to a customer in Germany could settle in a USD stablecoin instantly on Plasma, rather than dealing with card fees or waiting for an international bank wire. In fact, Tether recently facilitated a $45M crude oil deal in the middle east, showcasing to the counterparties the effectiveness of stablecoin settlement.

Global trade is a $30T+ market and the dollar is fully integrated, being involved in 80-90% of all transactions. The pie is enormous, and if Plasma even captures a small slice, it could host value transfer on the order of billions of dollars per day, accruing network effects that make it increasingly indispensable.

Value Accrual Without Fees: Rethinking Crypto Economics

Given Plasma’s core offering of zero fee USD₮ transfers, one obvious question arises: how does value accrue to the network? This speaks to a novel economic model that prioritizes growth and utility first, and defers monetization to indirect channels, much like how Robinhood was able to attract an abundance of users and trading activity through their zero-commission trade offering.

On incumbent smart contract chains, value accrues via usage through gas fees (e.g. Ethereum’s billions in annual fees which drive ETH value via burn and staking rewards, or Tron’s $1.36 billion in fees over 6 months). Plasma flips this model by forgoing fees on USD₮ transfers to bootstrap adoption. In doing so, it banks on the idea that a network powering massive volumes of dollar denominated economic activity will find secondary and tertiary ways to capture value that won’t burden users per transaction. This is also analogous to Web2 platforms that scaled to billions of users with free services, then monetized via ancillary means. For example, Venmo charges no transfer fees, but makes money on credit transactions, instant withdrawals and now crypto purchases. And as a friendly reminder for crypto users too deep in the rabbit-hole, the marginal cost of using Web2’s most popular tools is often zero.

In Plasma’s case, multiple value accrual mechanisms are possible, but these are the two primary ones we foresee:

• Issuance and Issuer Support: Stablecoin issuers will be incentivized to mint and redeem on the blockchain with the most activity, which could be an advantage for Plasma. The further stablecoins are integrated into trade and commerce, the more minting and redemption we may see. Millions of these transactions a day, even at just a penny in transaction fees will quickly add up and make the network sustainable. Additionally, with the recent advent of USD₮0, an omnichain solution that unifies USD₮ liquidity across chains via LayerZero​​, we may see Plasma become the canonical issuance layer for USD₮.

• DeFi + MEV: If DeFi apps are attracted to the large inflow of BTC and stablecoins, the broader ecosystem could flourish on Plasma. Standard DEXs, lending platforms & futures trading all require high demand assets and quality collateral. As seen over the last several months with Solana’s REV (real economic value) data, token minting, trading, arbitrage and liquidations could produce enough activity to sustain the network’s free USD₮ transfers. The target network participants would also likely bring more validity to the crypto ecosystem and would likely be interested in a variety of other currency denominated stablecoins. We believe that the industry may be a year or so away from seeing an inflow of tokenized assets like commodities and securities (public and private) which makes Plasma an interesting network simply because of its institutional interest. Additionally, many investors believe MEV will be a primary value driver to networks over the long run, as it is a core piece of permissionless finance. In short, MEV can be thought of as the price people are willing to pay for priority access to state changes. With the top 5 largest non-stablecoin crypto assets (BTC, ETH, SOL, XRP, BNB) all having their largest volume pairs be denominated in USD₮, there is reason to believe that the chain which aggregates the majority of the primary denomination (USD₮), will attract non-native assets to its own chain. This is far from a reality today, but given the network effects surrounding money like USD₮, we don’t believe it’s too far-fetched, especially for BTC, as mentioned earlier in the report. Continuing on the BTC example, this could lead to more sustained network usage, driving more fees to stakers and validators on the network, in a manner that is far less cyclical than memecoin trading. For example, during Solana’s best ever month of total DEX trading (Jan 25’), volumes reached $379bn. During the same period of time the Binance spot BTCUSD₮ pair did $144bn. With DEX trading fees being determined by current network congestion, and pool specific fees, barriers are lowered, and swaps are often cheaper than on centralized venues where there are maker/taker fees at around 10 bips on average. Albeit these are through different mechanisms, the overall trend of DEX volume eating up CEX volume is unstoppable, and permissionless venues will ultimately capture the majority of trading in the future, where MEV will play a vital role.

Crucially, by not charging end-users, Plasma amplifies its network effects. The history of successful networks tells us that usage often comes as a precursor to monetization. In crypto, the value of a blockchain’s native asset is often a proxy for the community and activity on that chain. If Plasma becomes the epicenter of stablecoin transactions, the value will likely be reflected in its ecosystem even if USD₮ transfers remain free. It’s a long-term play, capture the market first, then explore monetization. And because Plasma is effectively enhancing the utility of the U.S. digital dollar, it’s aligned with large, well-capitalized players who have a stake in the dollar’s global ubiquity.

Alignment with U.S. Policy and the GENIUS Act

As US crypto adoption matures, regulatory alignment is increasingly important and now is as good of a time as any to move with upcoming positive regulation. Notably, Plasma’s emergence dovetails with a push by U.S. lawmakers to bring stablecoins within the regulatory arena. This week, the U.S. Senate advanced the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), a bipartisan bill to create a comprehensive federal framework for stablecoins. This legislation, if enacted, would define how USD-backed stablecoins can be issued and managed under U.S. law, treating them as a legitimate part of the financial system rather than an unregulated gray area. While friendlier guidance from the regulatory agencies under the Trump administration has been net positive for the industry, positive crypto legislation provides innovators with much needed, longer term clarity. It’s a long-awaited point of clarity that major financial institutions have been waiting for before fully embracing stablecoins.

Plasma is naturally aligned with this regulatory trajectory. By focusing exclusively on fiat-backed stablecoins, as opposed to more controversial, and complex, algorithmic stablecoins, Plasma positions itself as a prime beneficiary of this specific piece of legislation, if it passes. Should the GENIUS Act, and parallel House proposals like the STABLE Act, become law, we can expect a surge in demand for incumbents like Tether’s USD₮ that meet the new standards.

It’s also worth noting that U.S. policymakers concerned with preserving dollar dominance might view networks like Plasma in a positive light. By making dollar stablecoins more useful and accessible, Plasma effectively extends USD’s reach globally in a transparent way. Contrast this with, say, foreign or domestic CBDCs, and Plasma’s approach of combining USD₮ liquidity with Bitcoin security could be seen as strengthening the position of U.S. currency in digital form. Already, over 98% of all stablecoin value is USD-backed, a trend likely to continue. The GENIUS Act would require stablecoin issuers to implement rigorous measures such as reserve requirements, audits, and redemption policies, to protect consumers.

Further, continued stablecoin growth could provide an important source of demand for short term Treasury Bills in a period where other countries like China are using their holdings as a threat. While it’s tricky to measure stablecoin’s direct impact on market yield, Tether and Circle have amassed $120B+ in short term USTs (~3 months to maturity), which has now proven to be consistent buying on the short end of the yield curve.

Future Outlook: Plasma’s Role in Core Financial Infrastructure

Plasma’s vision to become core financial infrastructure for the digital age, in the same way that TCP/IP became core infrastructure for information, is ambitious, and rightfully so. It’s not about creating a new currency, but about upgrading the way USD₮, the existing dominant digital dollar, flows around the world, reinforcing dollar hegemony.

However, the journey is just beginning. Plasma will need to prove its security and reliability at scale, attract a broad set of validators, and onboard not just existing crypto users but net-new participants, whether they be individuals, fintechs, or institutions. It will also face competition from incumbents like Tron, Solana, and Ethereum L2s, as well as any new purpose-built payment blockchains. However, the market opportunity is vast, and clearly more than one network can thrive given the global scale of payments. In an industry that often chases the next general-purpose L1 or the next memecoin craze, Plasma’s focus on stablecoins feels refreshingly pragmatic.

In conclusion, Plasma isn’t trying to reinvent the wheel. It’s taking USD₮, the largest and most liquid dollar stablecoin, and empowering its distribution and ubiquity throughout the world via zero-fee transfers. It’s not controversial to say that stablecoins have proven to be one of crypto’s core killer use cases. We believe that the aggregation and proliferation of USD₮ on Plasma will lead to not only improved distribution of USD₮, but important secondary and tertiary effects that will drive further innovation and economic activity to the chain. For all these reasons and more, we believe that Plasma is in a prime position to capitalize on this multi-trillion dollar opportunity.

Disclaimer:

Kairos Research is an investor in Plasma. The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Plasma Deposit Campaign Analysis (Bonus Content)

Over the past week Plasma began its deposit campaign. Across three cap raises, they were able to go from $0-$1bn, in an aggregate time of less than one hour. The initial cap was $250m, which was reached in approximately 10 blocks. The cap was then lifted an additional $250m to $500m max cap. This filled again very quickly, in roughly the same amount of time.

The deposits included a wide range of participants, and while the max cap on a per wallet basis was $50m, this was only hit once.

You can see the full stats for Phase 1 in the table below.

While Phase 1 occured on Monday, June 9th, Phase 2 then occured on Wednesday June 11th at 9:00pm EST. The key difference here, is that while Phase 1 was well telegraphed with several days notice, Phase 2 was announced on only a 1 hour notice from the official Plasma twitter account. Despite this, the $500m cap raise was filled within 151 blocks, heavily front loaded which revealed the pent-up demand for allocation to the vaults.

Phase two brought about many smaller deposits, which enhanced the distribution across more parties, which is ultimately a more egalitarian outcome. The full stats for Phase 2 can be seen below.

To easily compare the difference between the two phases, we’ve included a table which allows you to see the difference between each on a per bucket basis.

Overall, these two initial deposit phases showed just how much appetite there is for exposure to Plasma - which is a downstream of people seeking exposure to stablecoins as a sector. We strongly believe that Plasma’s focus on zero-fee USDT transfers will continue to attract more USDT to the chain itself, enhancing the second and third order outcomes which we anticipate in the article above.

Disclaimer:

Kairos Research is an investor in Plasma. The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Introduction

Bitcoin is a truly unique asset - it’s the only crypto asset which has crossed the chasm of adoption by nation-states, large corporations, ETF issuers, high net worth individuals, you name it. Bitcoin has nothing left to “prove” to people anymore, the asset reigns as the king of crypto. The tide has now turned, and while most crypto assets and their respective communities are trying to “prove” their token worthy of adoption, it is now builders trying to prove their products worthy of attracting BTC, and Babylon has done exactly that. Babylon is unlocking Bitcoin’s untapped potential as a yield bearing asset through staking, and so far it has attracted over 48k BTC (~$4bn). As Bitcoin continues to grow its presence as an essential global macro asset, the desire for yield on it will grow in tandem. We believe crypto’s transparency will allow for superior yield-bearing products to thrive, and SatLayer is set to be a categorical leader here. In this report we’ll dive into what exactly they are, how they function, and the demand drivers we think will accelerate their adoption. Restaking took the industry by storm during 2024. Even though it was (and still is) fairly misunderstood, the new crypto primitive was able to swallow $30B in TVL by December of last year, with nominal numbers now back down to roughly $16.2B – due to the recent retrace in risk assets across the board. Given the first wave of restaking platforms were built on Ethereum, the vast majority of deposits were made in ETH, as long term holders and yield farmers looked to make their assets productive.

A similar trend is now playing out across a variety of crypto assets as new restaking platforms launch and accept a broad range of collateral, including BTC, SOL, Stablecoins, and more. In the below report, we will focus on:

• Defining Staking & Restaking

• Break down how SatLayer unlocks liquidity and shared security for protocols and BTC holders

• Explore what makes an asset fit to be used as cryptoeconomic security

Key themes unpacked will be: Liquidity, Stability, Decentralization and Yield Generation for BTC holders.

As seen in the visuals below, native BTC is one of the strongest matches for the above properties. BTC is the most liquid asset in crypto, fully censorship resistant, has a $1.7T market capitalization, has shown significant relative stability and has a user base that is very interested in making their asset productive. Unlocking its use as restaked collateral should provide not only strong cryptoeconomic security, but will also drive down security costs for any platform outsourcing their validator set, while boosting ecosystem liquidity.

The Universal Yield Layer - Securing Dapps with Bitcoin (Demand Side)

Using Eigenlayer’s words, Restaking fosters innovation by enabling early stage protocols to benefit from the security guarantees of more mature networks without the need to replicate the costly process of securing their own network - both in the sense of bootstrapping assets and building out a strong and nimble, yet decentralized validator set. Therefore, restaking can be thought of as a Proof of Stake as a Service platform, with the key difference being:

• Staking: Utilizing a token(s) to secure your network’s validator set

• Restaking: Utilizing an outside token to secure multiple networks through a security platform like Satlayer / EigenLayer’s operator set

With all of the experimentation taking place within staking and restaking, these lines have been blurred. For example, the name restaking came about as EigenLayer enabled ETH that was already securing Ethereum to then be extended as security to other blockchain networks hence the term “Re”staking. EigenLayer shortly after added other assets like stablecoins, which hadn't been staked in the first place, but were technically restaked as they were now capable of securing multiple networks. The reason we are broaching these technicalities is because Babylon will allow BTC to be staked to networks with preexisting validator sets that need additional, cheap security (Cosmos Hub). SatLayer, like EigenLayer, will extend these capabilities and allow Babylon depositors to opt into securing additional networks with the help of their own Operator Set. Given the current conversations around security budgets within the Solana, Ethereum and Cosmos ecosystems, we believe that both of these primitives will become increasingly important as chains optimize for long term sustainability.

At Kairos Research we believe that restaking will play three pivotal roles within the crypto ecosystem:

1. Commoditizing Crypto-economic Security: This will undoubtedly drive innovation in the space. Allowing someone to build a highly specialized product, without needing to fully build their own chain

2. Preventing Centralization Risk: Enabling existing protocols to decentralize pieces of their stack, that would've either remained under the control of their core team or required launching their own chain to solve.

3. Achieving Efficient Liquidity Through Shared Security: Unlike traditional staking that isolates capital in single-protocol silos, restaking enables the same collateral to simultaneously secure multiple protocols across the ecosystem. This creates a multiplier effect on capital efficiency without requiring additional liquidity injection.

a.) By forming interconnected security networks, restaking establishes ecosystem-wide resilience rather than isolated protocol-specific security islands.

b.) Allows the broader ecosystem to scale security in parallel with adoption while avoiding proportional increases in locked capital requirements

Who Will Provide the Security? (Supply Side)

There is a clear, insatiable demand for yield. The United States’ treasury market alone has a market size of close to $40T, yielding 4-5% across maturities, which is seen as a global “risk free” rate. This holds true in crypto as well. Funds and retail alike have an appetite for making their assets productive, whether that means participating in a network’s validator set to earn native staking yield, crypto’s adjacent to the “risk free rate,” or throwing their assets into a centralized black box of undercollateralized loans. These “black boxes” have proved popular, but also very risky. During 2021, we saw platforms like Celsius ($25B) & BlockFi ($10B) use this very concept offering 10%+ and securing a combined $35 BILLION dollars in deposits - a large amount of that being denominated in BTC.

The lessons learned from last cycle have hopefully stuck with everyone who was around, we believe users are showing a real demand for self custody, transparency and staying onchain. SatLayer and Babylon are bridging this gap for BTC holders, who have not historically had the access to DeFi and onchain yield as ETH and SOL holders.

Outside of your average BTC holder, there are several massive sources of idle capital that will want to earn yield on the BTC in the future.

1. Exchange Traded Funds and Products: There is enormous demand for BTC ETFs, seen through the $36.2B in inflows since launch. If other popular ETFs, like GLD, are any sign of what is to come over the next few years - there is a lot of additional room for growth. Additionally there is clear demand for staking. Along with Van Eck and others closely monitoring the market, there will likely be some form of combination between these two products in the coming year. While the majority of the conversation has been around staking ETFs for ETH & SOL, we believe that following market maturation, it is inevitable that we will see institutional-grade products focused around Bitcoin staking and restaking.

2. MicroStrategy, Miners, & Corporate Treasuries: The company has been financing BTC purchases through a variety of debt, convertible debt & preferred equity. At some point, MicroStrategy’s BTC holdings & obligations will become much larger than their actual operating business and it will serve them well to be able to make their BTC holdings (528,185 BTC) productive. If MicroStrategy was able to earn even 10bps of yield across their entire BTC treasury at a price of $81,000, that would be an additional $42.8M in yield per year – which is more than 40% of what the operating company generates in annual subscription revenue.

The Bitcoin Restaking Ecosystem

In order to fully understand the dynamics of Bitcoin Restaking, we will break down a few of the key players building out the Bitcoin Staking landscape:

• Babylon: Babylon is a shared security platform that enables Remote BTC staking - meaning that BTC holders are able to lock their native BTC to secure Proof of Stake chains and other protocols in need of crypto-economic security. Without access to native smart contracts on Bitcoin, Babylon was able to leverage the network’s “native timelock combined with extractable one-time signature (EOTS) to convert slashable PoS attacks to spendable Bitcoin UTXOs for burning.”

• SatLayer: SatLayer was built on top of Babylon Protocol to expand BTC’s use as restaked crypto-economic security asset across other crypto protocols in need of economic security. Much like EigenLayer does for ETH, restakers will be able to secure networks of their choice through Babylon BUT then also be able to secure “Bitcoin Validated Services (BVSs).” These BVSs will be oracles, data availability providers & other crypto protocols / products in need of capital and an Operator Set.

• Lombard / Solv / Lorenzo: These are some of the market leaders that are launching BTC Liquid Staking & Liquid Restaking Tokens. They enable users to deposit their native BTC into Babylon, receive a liquid representation on another chain (Ethereum, BNB Chain, Base, Swell, etc) and use that for collateral in restaking on SatLayer or throughout other DeFi protocols.

“A Bitcoin Restaker’s Journey”

Stolen from the Babylon Whitepaper, we thought that the process flow of staking and restaking native BTC was the clearest way for users to understand how their assets are being utilized, where the yield comes from & gain broader knowledge on the product itself.

Staking via Babylon

1. BTC holders are able to lock their BTC into a self-custodial wallet on Bitcoin, which will then enable the tokens to be used for securing a Proof of Stake network

2. The user is then validating the Proof of Stake network, receiving block rewards & transaction fees for the capital they provided

3. The user can request a withdrawal from the Proof of Stake chain, when their capital will exit the validator set and they will be able to claim their BTC again. If the user acted maliciously, a portion of that BTC will be immediately sent to the burn address

a.) If a portion of the BTC is to be burnt, the users private key gets immediately leaked to the public who is incentivized to claim the BTC (send it to the burn address)

Restaking via SatLayer

1. After a user has locked their BTC in a Babylon staking contract, they will have some form of deposit receipt (liquid or illiquid) on Babylon. If the user mints a Liquid Staking Token (LST) that represents their Babylon deposit, they are then able to deposit that as collateral within SatLayer

2. SatLayer delegates their stake across an Operator Set, which will then opt into securing any Dapps tapping into their economic security

3. The user will receive rewards for both their Babylon deposit, but also from any of the BVSs that they may secure through SatLayer, all of which can be seen in the visual below

Current State of SatLayer

As of April 2025, Babylon is the 7th largest DeFi protocol and SatLayer falls around 90th on the list. Even though they are both top protocols, they only account for 0.3% and 0.016% of BTC’s market capitalization respectively. We believe that a significant portion of BTC’s supply will eventually be staked through Babylon. For reference, Celsius & BlockFi held approximately 58+ basis points of BTC’s circulating supply - according to data provided by Arkham Intelligence. If we see a second wave in demand for yield on BTC, Babylon could very well become a $40-50B TVL protocol, enabling SatLayer to grow in its wake. The below image is obviously not to size, but shows the nature of BTC staking, where Babylon is attempting to become a black hole for BTC and SatLayer is attempting to be a black hole for Babylon deposits.

There is a clear opportunity for SatLayer’s BVSs to make an immediate impact within the broader DeFi landscape. Below is a high level breakdown of BVS use cases, as well as a highlight on a couple of existing partners:

1. Collateral Backstop / Insurance Fund

• BTC restakers will be able to provide emergency backing to lending, stablecoin & other protocols relying on leverage (Perpetuals) in long-tail cases where the protocols become undercollateralized

• The restakers would earn a percentage of the borrow yield on the protocol for providing additional backing

2. Oracles & Data Feeds: RedStone Oracle

• Restaking allows an oracle protocol like RedStone to guarantee data feed accuracy through slashable economic security

• Node operators face meaningful economic consequences for providing incorrect data

• Oracles can also generate sustainable yield from data consumption

3. Secure, Decentralized Bridging Infrastructure: Fiamma

• The trustless transfer of assets across chains requires creating an economically incentivized committee that is capable of approving mint & burn transactions - making them ideal candidates for BTC backed security.

Bull Case for SatLayer

For all of the reasons mentioned above, BTC is clearly a premier restaking asset. How can SatLayer ensure that it becomes the dominant asset within restaking?

We believe that over a long enough time horizon, supply and demand dynamics will take over and leveraging BTC will become a no-brainer for validated services. Meanwhile, protocols like Catalysis Network are building shared security abstraction, such that validated services can tap into restaked security across all assets & platforms without undergoing a full technical / developmental upheaval. Any economically rational actor will lean into the most abundant and stable form of security, which will almost certainly be BTC for the foreseeable future.

SatLayer has the wind at its back. The Bitcoin ecosystem seems very keen on building its own DeFi economy and it is due time for BTC to be further integrated within onchain activity. With the recent shift in the regulatory landscape, we are hopeful for a new wave of protocols, many of which may need to tap into economic security - a market that is not small we may note. As encompassed in the data provided by FirstSet below, chains paid close to $15B in staking rewards during the last calendar year. Very few of these chains are profitable, or even close, giving them plenty of reason to pivot to a shared security model that can make them more sustainable and save their token holders from unnecessary dilution. The combination of cheap security provided by the BTC Yield Layer and friendly regulation may spark innovation that returns yield back to restakers.

Conclusion

The market will ultimately show us the endgame in terms of demand for restaking: which protocols will seek to inherit external economic security, what is the going rate for the security, and how much yield can be earned on each dollar of restaked capital. As seen above, staking is a $15B dollar a year market that is ripe for disruption and bringing BTC into the mix could be what it takes for builders to rethink economic security.

BTC’s positioning as the clear winner in the Store of Value sector provides Bitcoin with a unique essence of neutrality. Combining this positioning with continued growth on the supply side for restaking, will quickly drive security costs down and make it difficult for early stage chains / protocols to not opt in to BTC restaking. We believe that the tremendous value of idle BTC could enable chains to significantly cut their security budget and position themselves for more sustainable growth. Babylon and SatLayer have the opportunity to facilitate this new wave of BTC yield generation via crypto economic security, which we will continue to monitor over the coming months.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

This report is also available in PDF format here - thanks to our friends at the Jito Foundation for the lovely design work!

1. Executive Summary

Solana’s resurgence from its lows in December 2022 has been nothing short of a paradigm shift, and it is now leading in key metrics like decentralized exchange (DEX) volume, aggregate protocol revenue, and real economic value (REV) generated. Solana is redefining how blockchains scale, capture, and distribute economic value. With memecoin speculation driving unprecedented on-chain activity and groundbreaking infrastructure upgrades like Firedancer set to push performance beyond 1M TPS, Solana is cementing itself as the premier high-speed, high-efficiency network for the next era of crypto adoption.

In this report, we’ll dive deep into the driving forces behind Solana’s surge in activity, and how these drivers are shaping its overall positioning as the premiere growth opportunity for investors. We aim to provide the most important data on Solana’s growth, allowing readers to see key trends in the ecosystem and form their own narratives around Solana.

Key Takeaways:

• Solana’s Market Rebound: Solana’s resurgence from the FTX collapse was fueled by price reflexivity, major airdrops like JTO and JUP, and a categorical TVL concentrated around trading, highlighting its ability to attract and retain liquidity.

• Trading Over Yield Farming: Unlike Ethereum’s DeFi growth driven by yield farming, Solana’s surge has been led by high-frequency trading, memecoins, and low-fee transactions.

• Jito’s Critical Role: Jito has optimized Solana’s MEV landscape, securing 90% of network stake, distributing over $1B in MEV tips, and enabling sustainable validator incentives.

• Memecoins as a Growth Engine: Platforms like Pump.Fun have significantly increased network activity, boosting stablecoin inflows and reinforcing Solana’s role as the go-to blockchain for retail trading.

• Scalability and Infrastructure Upgrades: Firedancer and Double Zero are set to redefine Solana’s scalability, with Firedancer increasing throughput beyond 1M TPS and Double Zero optimizing blockchain internet infrastructure to enhance speed and reliability.

2. Introduction

Over the last several months, Solana has emerged as a leader on key metrics such as aggregate protocol revenue, decentralized exchange (DEX) volume, and network fees paid.

These metrics provide data points on the greater story of Solana’s rebounding success in a post-FTX world. While there were key trade offs made in the design choices of Solana to optimize for performance, the strategic trade offs have led to a surge in activity and Real Economic Value (REV) being generated. Underneath this cascade of happenings, Jito, a protocol and network infrastructure provider, is helping the ecosystem flourish in a multitude of ways.

3. The Macro View: Solana’s Economic Health

For any blockchain’s Decentralized Finance (DeFi) economy, the pulse of the ecosystem is dependent upon the price and velocity of the underlying native network asset. For Solana’s SOL, the climb to its recent highs has been anything but easy. While SOL had previously reached a market capitalization of around $75bn in November of 2021 (~$250 a coin), it was beaten down terribly during the collapse of FTX, with which it had been closely aligned.

However, when all the dust began to settle, and people witnessed the resilience of select developer teams willing to “chew glass” and remain steadfast in their beliefs while they built through the chaos, SOL began to look attractive. Especially on a relative valuation basis to Ethereum’s ETH.

In crypto, price drives narrative, and narrative then drives price, creating a reflexive feedback loop. Therefore, SOL’s rebound started when it finally bottomed out at around $10 in December 2022. However, overall total value locked (TVL) remained in a downtrend on Solana, bottoming out in February 2023 - in SOL denominated terms around 10m SOL.

Solana’s TVL has been on a tear ever since, up to roughly 60m SOL at the time of writing. In dollar terms, the resurgence is even more astounding, surging from $230m to $14bn. The climb to $14bn (60m SOL) was not nearly as simple as the chart below makes it seem.

From December 2022 when things bottomed out for SOL, a few protocols saw massive rebounding growth: Save (fka Solend), Orca, Raydium, and Drift. From the bottom, their TVL has grown 2,390%, 658%, 9,580%, and 80,511% respectively. Non-coincidentally, all of these are DeFi protocols.

Also, when looking at Solana’s TVL chart, it’s hard to dismiss Jito’s $165M JTO airdrop playing a role in the economic resurgence of the chain. Solana’s power users receiving their airdrop stimulus coincided with BTC breaking old all time highs and breaching $70,000 - this combination appeared to be powerful enough to start the 2024 Solana snowball effect.

Since JTO was launched, several other key airdrops have taken place (Tensor, Parcl, MagicEden, Pyth, Pudgy & Jupiter). Notably, in January of ‘24, Jupiter, the chain’s leading DEX Aggregator and trading venue distributed 1 billion JUP (now valued over $1B) to Solana power users, with a promise to have several follow-on airdrops, one of which just took place.

Jupiter has written a post-mortem analysis on the first airdrop, showcasing how tens of millions of claim requests took place with a relatively low error rate and few network issues – one of the many stress-tests faced by the Solana network in 2024.

4. Deep Dive into DeFi on Solana

When looking back on Ethereum’s DeFi growth for comparison, much of it was catalyzed through protocols with concepts that were analogous to Traditional Finance (TradFi), but with different, improved mechanisms which allowed them to operate in the trustless environment of crypto.

The emergence of these primitive mechanisms coincided with a material increase in the price of ETH. This price increase was coupled with many protocols launching tokens of their own, which all led to a wealth effect across the ecosystem. However, as transaction throughput was still limited due to scaling constraints at the L1 level, a lot of the activity turned towards passive yield farming. This is an important bit of path dependency, as Ethereum’s DeFi activity all started with farming, that culture has stuck around. Solana’s DeFi activity will be looked back on as being catalyzed primarily with trading activity, not yield farming.

While yield farming on Ethereum was great in the short-medium term, it fostered an era of stagnation. However, with Solana, things unfolded much differently. Solana’s entire rise to prominence was catalyzed by an abundance of activity due to breakthrough primitives which could not have been built on Ethereum.

The wealth effect on Solana was first put into motion by the rise of SOL. This got more people using the network, and people started to use DeFi applications across the chain, specifically pre-token protocols such as Jito, Jupiter, Kamino, Marginfi, etc. The introduction of these protocols launching their tokens then led to an additional bump in the wealth effect of the network. Following these airdrops, users went out further along the risk curve and speculated on memecoins. While memecoin trading may not meet the world-changing purity test, this turned out to be more important than what first meets the eye.

The lower fees on a network like Solana make it a more attractive chain for a higher velocity of transactions, including payments and speculating on tiny, newly launched memecoins. Many of the same transaction types on Ethereum are more than 100x the gas cost, such that a fully different subset of users have formed on the respective chains. This low cost environment is exactly what led to Solana’s memecoin boom. At first thought, anyone can write off the idea of a memecoin being worth anything, let alone several billion dollars of market capitalization. However, this speculation led to a new primitive to emerge and find product market fit, in the form of Pump.Fun.

PumpFun allows users to easily launch tokens without technical expertise or liquidity. Say what you like about the platform itself, but there is no denying that this platform has had a positive impact on overall network activity and downstream benefits for various protocols. PumpFun started making waves in May of 2024, making up a significant portion of network wide transactions. In January, PumpFun accounted for 55% of all transactions on Solana. When a PumpFun token launches, prices dynamically adjust based on a bonding curve model that reflects supply and demand (i.e. SOL gets added to the bonding curve as users purchase the token).

When a token “graduates” from the bonding curve, the remaining PumpFun token & SOL get transferred to “Raydium,” the leading DEX on Solana. As of February 16th, 2025, that has led to over $309bn of notional volume being traded on the platform for pump fun tokens that graduated.

This has led to a boost in the underlying fundamentals of Raydium, which has had roughly 25% of their median volume attributed to graduated PumpFun tokens. Given Raydium has fees on their swaps, this has driven millions of dollars of revenue to the protocol off of this activity alone.

This rebound in usage has also led to a rebound in token price, helping boost the wealth effect of long time holders, and also usher in a new era of fundamental driven buyers.

The influx of activity fostered by PumpFun participants onboarded many new users to the chain, and while its difficult to discern what percentage of their 13m total lifetime users are real from bots, one undeniable fact is that the protocol has made $553m in revenue from trading fees. This activity allowed distribution channels to emerge through various consumer platforms like Photon and Moonshot, along with wallets like Phantom and Backpack. The blending network effects of distribution and onchain liquidity has slowly but surely cemented Solana as the preferred go-to platform for new users.

This was especially present for President Trump’s memecoin, which launched the weekend before his inauguration. The memecoin took an unusual route and launched with a USDC pair. This then led to an influx of USDC onchain, taking the Solana stablecoin supply to new all time highs north of $11bn, a colossal 86% increase in just two weeks. To put that into perspective, that’s roughly the entire market capitalization of Under Armour. While many things about these events were perplexing, one thing remained clear: platforms with the lowest fees, most users, and best distribution channels will continue to attract more onchain liquidity

5. MEV: Trends, Challenges, and Innovations

Up until March of this past year, Jito operated a mempool. While Solana’s architecture doesn’t include a native mempool, Jito Labs introduced this functionality to facilitate transaction ordering and enable validators to capture Maximum Extractable Value (MEV). However, in March 2024, Jito Labs suspended their mempool service due to concerns over “sandwich attacks”, a form of front-running where malicious actors exploit transaction sequencing to the detriment of regular users. According to blog posts from Jito Labs, this decision was made after discussions with key stakeholders in the Solana ecosystem to mitigate negative externalities impacting users.

This was a mildly controversial issue amongst various community members at the time. However, today, tips and bundles are at levels higher than they’ve ever been before. Additionally, the removal of the mempool service by Jito allowed for better price execution for retail traders looking to participate with memecoin trading as the majority of sandwiching taking place on the network decreased drastically.

A rising tide has lifted all boats in this situation. As retail flow was able to receive improved execution through faster speed and less slippage, this had snowball effects. This allowed for a more egalitarian environment where the increased execution and ease from the user standpoint led to more trading, which led to more tips, which led to higher yields across the ecosystem for stakers.

Higher yields on SOL, specifically bolstered via MEV rewards, provided some attractive rewards that users wouldn’t be able to receive without staking. Overall, this cycle those rewards were, and continue to be, highly beneficial. The benefits of the activity is continuously felt around the ecosystem, with Jito’s newly launched TipRouter NCN which takes tips and distributes them through what would otherwise be a permissioned mechanism. Additionally, TipRouter can help plug some gaps left from SIMD-96, a Solana improvement proposal which redirects 100% of Solana’s priority fees to validators, eliminating the previous 50% burn. There is currently no easy way for validators to share priority fees with their stakers. While there is going to be some additional flexibility implemented here to service this issue with SIMD-0123, TipRouter allows for validators to share priority fees with stakers.

6. Token Economics: The Role of SOL

The core variable in Solana’s economy is the price of SOL. Earnings and revenue for blockchain networks have recently fallen into the limelight of debate and comparison. However, they shouldn’t be valued or compared to equities, and in our opinion L1 tokens function much more like a hybrid of a currency, an equity, and a commodity.

While the underlying demand drivers are up for debate, the market is the ultimate arbiter for the aggregate of all demand drivers. However, one helpful metric to understand the health of a blockchain network is Real Economic Value (REV) measured by fees + tips. This REV metric has important second and third order effects which are discussed more in depth in the validator section

Supply One consistent topic that frequently arises within the Ethereum <> Solana debate is supply. While Ethereum launched via an ICO, Solana had a more traditional venture route, with several rounds of funding. This led to a token unlock schedule, as is common with most crypto projects. This, plus its overly simplistic inflation schedule has given Solana some unique structural differences that the market has had to stomach. However, at the time of writing, only 8.5% of the initial supply has not yet unlocked, and all of that is set to be emitted via inflation. The typical token unlock schedule for most crypto projects often come with criticism, and that is rightfully so. There’s no particular reason this should be the case, it’s just become the industry norm. And while this emission schedule for layer 1s can be particularly painful, it may have worked out for Solana in an unorthodox way that would be impossible to replicate. When FTX blew up, the estate then found themselves with a significant amount of the overall SOL supply, roughly 2.5% in total (11.8m SOL). This SOL was then “locked” and sold OTC in two tranches: one tranche around $64 per SOL and another tranche around $100 per SOL.

With a stake rate of roughly 62% at the time of the blow up and sales, the overall float of liquid tokens on the market was certainly impacted. And while difficult to discern how precisely this impacted overall market structure, it's certainly impossible to say it didn’t play a role. However, it’s also important to note that these FTX unlocks will have their own unique impact on the market given some buyers raised SPV just to purchase them.

Despite the road it took to get to where it is today, the SOL supply is unarguably mature. Having had 82.2% of the supply enter circulation according to Solana Compass, and the price having increased significantly from the lows, the issuance economics are now top of mind. On a daily basis, there’s roughly $41m of SOL emitted via block rewards. With a stake rate of roughly 65%, or $91.21bn, it's fair to argue there’s enough economic security. However, the flip side of that, is that current block rewards are continuing to enrich network participation, and that it's still very early in the chain’s history. While Ethereum has hotly debated the idea of minimum viable issuance, critics have proposed, maximum viable issuance, or the maximum optimal amount the network can emit to continue bootstrapping usage across the chain. However, as we alluded to above we are still in the very early stages of adoption, so a complete overhaul of the staking/inflation emission schedule could be risky if done wrong, but there is certainly room for improvement.

This is why Multicoin Capital recently introduced a market based approach to SOL inflation. The key stakeholders for this prop are stakers and validators, and validators have been becoming increasingly important on the Solana blockchain as the community aims to increase bandwidth and reduce latency.

7. Validator Ecosystem: Infrastructure and Economics

Validators have been key beneficiaries of the recent surge in activity for Solana. For example, in 2024 alone validators collectively made $612m. Additionally, in 2024 we saw a surge of protocols, exchanges, and various other entities launch their own LSTs. This was in large part due to stake weight quality of service (SWQoS) a feature in Solana that prioritizes transactions from validators based on their stake, and Sanctum. Sanctum is a liquid staking protocol on Solana that allows users to stake SOL and receive Liquid Staking Tokens (LSTs), which can be utilized in DeFi apps, while still earning staking reward.

Key Solana projects like Jupiter, Helius, Drift, and more have launched validator LSTs through Sanctum. For these three particular projects listed above, SWQoS also drove the decision. Between just those three projects, over 5m of SOL LSTs have been minted. This provides applications an opportunity to deepen their relationship with their users, and given Solana’s SWQoS, that means these application’s validators are able to produce more blocks, thus get more rewards back to stakers via block rewards, fostering a healthy flywheel.

8. Spotlight on Jito

One theme which was undeniable throughout our research was Jito’s importance in the grand story of Solana. Jito has provided key infrastructure that not only helped optimize the performance of the network, but also helped return an abundance of value to the network as a whole. As of the time of writing, Jito has distributed over $1 billion in cumulative daily value of tips paid out to stakers and validators.

Jito’s bundles, or batched transactions which are sent to validators, have been up only for the last year.

During 119 out of the last 185 days, Jito has produced more fees than Solana itself, highlighting users' preferences for time sensitive transactions.

Jito also provides JitoSOL, the largest and most liquid LST on Solana. The LST is also unarguably the most decentralized amongst all its peers, thanks to Stakenet, a decentralized Solana stake pool manager. Stakenet provides Jito’s SOL in its stake pool to a curated set of validators based on their performance, staking yield commission, and overall efficiency, prioritizing those that maximize rewards while maintaining decentralization and network health. Thanks to the economics and incentives at play, Jito is able to attract a cohort of validators with zero commission on both staking rewards and MEV.

In tandem with their other contributions to the staking ecosystem on Solana, Jito has also recently launched Jito Restaking, a restaking platform that will host Node Consensus Networks (NCNs), similar to Actively Validated Services (AVS) on EigenLayer. NCNs are services that benefit from decentralized consensus.

One key example is Jito’s own NCN, TipRouter. TipRouter is an NCN responsible for distributing Jito validator tips, which is currently done via a permissioned mechanism. This provides an opportunity for additional real-yield to be passed on to restakers from the NCNs on the platform. Using the 90-day moving average for Jito Tips, TIpRouter is on track to distribute roughly $2.1bn of tips to validators and stakers on an annualized basis. This will account for $56m of tips going to the DAO treasury and $6.3m split 50/50 to JTO and JitoSOL restakers on a prorata basis.

9. Emerging Trends and Opportunities

While the success that Solana has seen has been well received by network stakeholders as a whole, it’s also important to note that many novel applications are thriving on the chain in the form of Decentralized Physical Infrastructure (DePin). Top projects like Helium, Hivemapper, and Render are all objectively successful projects in their own right. Helium created a decentralized wireless network where users deploy hotspots, earning HNT tokens for providing IoT connectivity. With nearly 1 million hotspots and coverage in over 77,000 cities across 192 countries, Helium leverages Solana's scalability to offer faster, cheaper transactions, focusing on expanding network coverage rather than managing the troubles that come with running their blockchain tech. Hivemapper is revolutionizing digital mapping by incentivizing users to contribute street-level imagery with dashcams, rewarding them with HONEY tokens. They've mapped over 25% of the world's roads, covering 140 million kilometers across 2,503 regions, aiming to provide fresher, more affordable maps than centralized giants like Google Maps, all while maintaining a decentralized and community-driven approach. Render on Solana has seen substantial engagement, processing over 19,000 rendering jobs per month, with a network of more than 1,900 node operators providing GPU resources, showcasing vibrant usage and the platform's capacity to handle complex computational tasks efficiently. Performance Optimization

On the performance side, Firedancer, developed by Jump Crypto, is set to redefine Solana's capacity, aiming for transaction throughput exceeding 1 million TPS. Its modular architecture promises upgrades without downtime, and its C-based client adds diversity to Solana's validator setup, enhancing resilience. The testnet success, coupled with Frankendancer's mainnet presence, heralds a new phase of stability and scalability for Solana.

Complementing this, DoubleZero tackles the internet's bottleneck for blockchains, constructing a dedicated rail for high-speed networks like Solana. This initiative not only aims to amplify Solana's performance but also to change how blockchain networks leverage internet infrastructure, ensuring they can operate at their full potential. Together, these developments illustrate Solana's dual focus on fostering breakthrough applications and pushing the boundaries of a network’s performance and connectivity.

SOL as a Reserve Asset

Beyond its immediate growth trajectory, SOL’s value proposition as a strategic reserve asset is further underscored by its robust infrastructure and adaptability to future demands. Solana’s ability to process transactions at unprecedented speeds, soon to exceed 1 million TPS with Firedancer, paired with its low-cost environment, positions it as a scalable foundation for both emerging decentralized applications and institutional adoption. As nation-states and corporations alike vie for dominance in the digital realm, SOL offers the US an opportunity to capture the upside in the accelerating shift toward blockchain-based economic systems. With its ecosystem already demonstrating why it has quickly become the leader, Solana stands as a forward-looking investment that could anchor the US as a powerhouse in the inevitable transition to a tokenized global economy. Recent price action also indicates that there is quite an appetite for SOL, having briefly eclipsed $300, putting it at approximately a $125bn valuation, still only a fifth of Visa’s market capitalization. This was also accomplished without any access to select cohorts of investors that are only possible through structure exchange traded products. While Bitcoin ETF investors are largely being sold a currency hedge narrative, Solana ETF investors will be able to take advantage of the fastest growing blockchain with real activity and rapidly growing fundamental driving its valuation higher. Put simply, SOL provides finest exposure to the inevitable shift of the global economy coming onchain.

10. Conclusion

Solana’s resurgence from the depths of the FTX collapse to flipping Ethereum on key metrics - DEX volume, network fees, and aggregate protocol revenue - is one of the most compelling comeback stories in crypto. From a $10 price bottom in December 2022 to a $14B TVL peak, the chain’s recovery has been fueled by a reflexive loop of price appreciation, on-chain activity, and new economic primitives. Jito has been at the center of this transformation, distributing over $1B in MEV tips, optimizing validator incentives, and ensuring network efficiency through its client software, now securing 90% of Solana’s stake.

Looking ahead, the challenge shifts from resurgence to sustainability. With the activity boom and continued validator optimizations on the horizon, Solana’s economic infrastructure is still positively evolving. Jito’s launch of TipRouter NCN and expansion into restaking signals that its role in Solana’s next growth phase is only getting started. Lastly, the data speaks for itself - Solana has cemented itself as crypto’s premier high-performance chain, and if recent trends hold, its dominance is only just beginning.

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Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

We're thrilled to announce that Kairos Research x Firstset will be a genesis validator for Babylon mainnet.

Babylon harnesses Bitcoin’s unparalleled security as the largest crypto asset by market cap to bolster the economic security of Proof-of-Stake networks.

Amongst the top crypto assets, Bitcoin remains the least volatile, thus allowing for PoS networks to inherit more reliable crypto-economic security.

But security is just one side of the equation, the other half: Liquidity.

Babylon has paved the way for Bitcoin LSTs to not only exist, but thrive. Lombard, the top Finality Provider on Babylon, currently has over 22k BTC staked. Of those ~22k BTC, approximately 64% are being used throughout DeFi. That is over $1bn of BTC LST liquidity injected into the crypto economy from just one project alone, all powered by Babylon.

As Bitcoin becomes cemented as an integral macro asset into the global financial system, there will be countless centralized financial products built around Bitcoin "yield", but we believe the superior ones will ultimately be created onchain via Babylon.

We look forward to continuously working alongside Babylon, and Babylon ecosystem projects to turn this vision to a reality and unlock Bitcoin's full potential - all onchain.

p.s. - lot’s of new research coming soon

Designing decentralized systems has required 15 years of careful experimentation around economic incentives to coordinate independent actors into consensus. Proof of Work, Proof of Stake and yield farming all used ~worthless~ tokens to encourage a global network of users to build blocks, store data, provide compute, supply liquidity and bootstrap blockchains. In 2022, Multicoin Capital took this basic idea and wrote a blog about “Physical Proof of Work,” echoing that these incentive mechanisms should be applied outside of just blockchains and instead used to incentivize human actions and the building of real world infrastructure.

If nothing else, crypto has become a global & instantaneous liquidity layer, where everybody in the world now has the ability to send funds anywhere at any time. On its own that is an amazing breakthrough in transaction efficiency, but how can it become world changing for humans and companies alike? We believe that by combining the concepts of Physical Proof of Work with the global liquidity layer, you can uniquely remove a layer of trust that is necessary in almost every aspect of both life and business.

A key roadblock in building this vision is establishing some form of proving mechanism that can examine any information put forth and verify its key aspects (i.e. is a photo / video real, was it submitted from a certain location, was it taken at a specific time). As AI improves and the lines between the real world and the digital world become increasingly blurred, it will be of the utmost importance that we are capable of large-scale and instant verification of real world events. Witness Chain’s most recent product addition, InfinityWatch, fully encapsulates this vision of “Verifiable Observation.” The consumer-facing piece of Witness Chain enables the verification layer to be established between blockchains, AI agents & humans on the ground.

Just giving the concept of a Verification Layer a bit of thought can generate multiple examples to how InfinityWatch could be utilized:

1. Disaster response AI agents crowdsourcing information from humans: Consider the possibility of humans submitting images and data for ongoing hurricanes or wildfires, that could accurately feed AI agents information about new flood zones, temperatures, wind speeds and rate of spread. The agents in theory would be able to outsource information gathering & better dispatch emergency response teams to the correct locations.

2. Marketing Campaigns requiring verified data from consumers: Imagine a company that is running a campaign to grow brand awareness, through sweatshirts or other merch - they could request that any recipients of the sweatshirts wear them at a conference / public event and submit a picture. In turn, the recipients would have their data verified and automatically earn some form of reward for their service.

3. News Focused Social Media: A new platform could require that any images or videos publicized by their users go through the verification process to avoid deepfakes and other forms of deception that will only gain in popularity over the next several years.

InfinityWatch relies on a mobile application & verification hardware combined with Proof of Location to guarantee that submitted data was produced at an exact location and timestamp. Combining data verification with trustless and automatic execution enables a leap forward in market efficiency of the digital economy, which likely marks a large step forward for companies and consumers alike. Kairos Research believes that many years down the road, verification could be used in everyday interactions. Whether that be a shipping company proving that a package was delivered or a septic company proving that they came to your house and completed their service, the consumer will receive assurance that a task was completed and the business could instantly receive payment once they have finished their job.

Protocol Design

Witness Chain is built as an Eigenlayer Actively Validated Service (AVS), bootstrapping the network’s economic security via the restaking of ETH and other ERC 20s. We have written extensively about the benefits that Eigenlayer and restaking provides to newly launched networks: providing applications the sovereignty & customizability that comes with app chains without needing to bootstrap their own validator set. In place of a validator set, Witness Chain utilizes Eigenlayer Operators for a key role, including:

1. Running Challenger Clients & creating proofs: Users are able to call on the Witness Chain Watchtower nodes (Operators) to challenge information: whether that be an image’s location, or a DePIN node’s location or capacity, etc

When launching a native Proof of Stake (PoS) system, you have to widely incentivize a new validator set to buy your nascent, volatile token and stake it to secure your chain. The end result is double or triple digit inflation of your token, massively diluting non-stakers, which can include network users, investors, the team and the treasury. By building on Eigenlayer, Witness Chain is able to leverage staked ETH as their primary source of crypto economic security. This allows the network's validators (stakers) to hold a relatively stable, battle tested crypto asset with near zero opportunity cost as it is simultaneously earning Ethereum’s staking yield. The general consensus is that the incremental yield that must be paid to restakers is magnitudes lower than what is required within a newly launched PoS network.

As of March 6, 2025, network rewards are not yet live so there is limited data on Witness Chain’s cost of security. However, Witness Chain has 114 Eigenlayer Operators live on the network composed of over 45.2k delegates. Across these delegates, a total of 3.79M ETH has opted in to secure Witness Chain - at current prices this is north of $8.5B in economic security.

Beyond crypto economic security, Witness Chain built their Real World Verification Engine using the Polygon Chain Development Kit (CDK). According to a Tweet from the Witness Chain team, this provides key benefits across:

• Security: Proofs created by Witness Chain settle to Ethereum mainnet

• Interoperability: These proofs can be natively shared across other Polygon CDK chains

• Customization: Gasless transactions

In the next section, we will break down the mechanics behind Witness Chain’s core products and how they can be applied to users and the existing crypto landscape.

Campaign APIs

Through the Witness Chain application, developers are able to create campaigns in which they can request crowdsourced, geo-verified images & reward (not yet live) anyone that submits them. Powered by the Proof of Location mechanism described below, these campaigns can be designed to only take submissions from certain geographic areas at certain times. While we ran through a number of examples of how InfinityWatch could be used, we recommend diving into the longer list of examples provided in Witness Chain’s documentation. Before submitting an image, the application runs a challenge to determine your location as seen in the image below.

Proof of Location

Decentralized networks are composed of “mutually non-trusting” participants (nodes) that are responsible for verifying that the other parties are acting truthfully and in accordance with the best interest of the network. In DePin networks, the location of these nodes is often critical to the functioning of the product and it must be possible to verify that they exist in the actual location they are submitting to the network.

Witness Chain creates their location proofs using cryptographic UDP Pings to measure the connectivity timing delay between the network participants, such that it can measure an accurate distance between each of the active nodes all without being susceptible to VPN and proxy spoofing. Once the locations have been measured, Witness Chain puts forth a challenge that states a maximum distance the node can be from where it previously communicated & the proof is then returned to the network.

Connectivity networks, for example, are attempting to provide global, distributed connectivity so they desperately need their nodes to be globally distributed. If node operators were able to spoof their location and trick the network into believing they were providing connectivity in a typically underserved area - they may be able to earn outsized token rewards & trick consumers of the product into believing the network has more coverage than it really does. While certain DePIN networks like Helium (map below) already have in-house solutions for proving geolocation, this requires specialized, non-Byzantine Fault Tolerant hardware specific to each network. Given all of this, the broader concept of Witness Chain can be easily extended to both newly bootstrapping networks or to networks that want to opt into a more widely standardized form of proving.

We recently wrote a piece about how Akash & other protocols, including Spheron, a Witness Chain partner, are looking to decentralize the global compute market, such that anyone with un-utilized computing resources can resell them in an open, permissionless manner. If these networks were to utilize Witness Chain’s Proof of Location, buyers could be acutely aware of where they are purchasing their computing power, such that they know if they have sufficient geographic diversity or if they can purchase cheap compute while still following their jurisdiction’s regulations (OFAC, etc). While this is theoretical, the Akash network could also use Proof of Location to effectively incentivize suppliers in certain jurisdictions. Using token incentives aimed at specific regions would be a target for VPN style manipulation, but with effective triangulation a network could properly identify where these data centers and nodes are located.

Witness Chain provides a number of other scenarios for how its users can potentially utilize their Proof of Location.

Proof of Bandwidth

In a similar vein to Proof of Location, Proof of Bandwidth allows ANYONE to effectively measure the backhaul capacity of a DePIN network’s resource suppliers. Understanding the true capacity of a DePIN network, especially in storage, energy & compute, is an essential characteristic of a marketplace. As seen in the image below, somebody that challenges a node's backhaul is a “payer” and they put forth the capital necessary to test the full capacity of that service provider for a short period of time. The network then watches if the node is able to fulfill its stated capacity & records the result to the blockchain.

By bringing further transparency around node capacity, Witness Chain allows:

1. DePIN Network’s to:

a.) Properly allocate incentives to large & important suppliers

b.) Punish nodes that are misrepresenting capacity

2. Users to:

a.) Accurately estimate if there is sufficient supply for their demand

b.) Properly gauge the price of their required demand

As mentioned in the sections above, this transparency is a major key to creating financial markets around these decentralized resources. Not only in the sense of users paying upfront for future capacity, but also in the way that networks reward their resource providers - given that bootstrapping supply with token incentives is often a key step BEFORE finding real demand.

Witness Chain undoubtedly has the potential to add value to a wide range of more traditional industries & DePIN networks, as shown throughout the entire report, however, two of our main questions are explored below:

1. How does Witness Chain effectively onboard users to the demand side?

The roadmap to onboarding non-crypto native companies will likely be a long term vision, but it could clearly prove worthwhile. In the shorter term, we could easily see social media applications being enticed to use Proof of Location and Timestamps throughout their interfaces to generate an increase in user trust. The next step will be for them to understand why they should use crypto native solutions for verification & The examples of disaster response also seem like a no-brainer integration for local governments as they become informed about the potential of InfinityWatch. The grand vision of a wide variety of industries tapping into InfinityWatch may be years away, but friendlier crypto regulation & increasing comfort around stablecoins as a form of payment will make the sales pitch far more feasible.

We also believe that Witness Chain presents tremendous opportunity for crypto native protocols that will likely be the earliest adopters. For a couple examples:

a.) Protocols that want to tap into the global liquidity networks (i.e. Bitcoin, Ethereum, Solana, Tron), but require some form of on-chain compliance that can enforce decentralized policies via Proof of Location. 0xPredicate is utilizing PoL to build natively geo-fenced transactions, which can massively improve fair incentive distribution and compliance with laws across multiple jurisdictions.

b.) Newly launched & upcoming DePIN protocols that have yet to build out their own solutions for testing node location and bandwidth. By opting in to Witness Chain, developers can outsource a huge technical lift and focus on improving their own core products. However, there are a number of very successful DePIN protocols that have already advanced beyond their protocol design stage - how can Witness Chain get them interested in utilizing InfinityWatch?

2. How does Witness Chain monetize their product and accrue value?

Kairos finds it very likely that companies, governments and crypto networks would pay a premium for verifiable, accurate data especially if it is verified in a rather provably transparent manner. Witness Chain could become an effective connector sitting between real-world data and on-chain protocols and it is very possible that they could get a first mover advantage on anything related to proof of location, timestamps, bandwidth and more. As of today, Witness Chain plans to monetize via on-chain transaction / gas fees - but we believe in the future it will be increasingly possible to take a small spread on any campaign proceeds and economic outcomes enabled by Witness Chain’s data verification.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Our Solana Validator is Live!

It’s been about a year since we launched Kairos Research, and we’re incredibly proud of everything we’ve accomplished in that time - none of which would be possible without our readers (thank you!). Over the past year, staking, liquid staking, and restaking have become a major focus of our research. These mechanisms are fundamental to a blockchain network’s economic design, influencing DeFi ecosystems in ways that resemble, but don’t fully mirror, both monetary and fiscal policy.

Given the time we’ve spent analyzing these trends and mapping their downstream effects, we’ve decided to get even closer to the source. We’re excited to announce that Kairos Research is now operating validators in partnership with Firstset. When we launched, we said we would recognize and collaborate with those pushing the ecosystem forward. Firstset embodies that ethos, and we’re excited to take this next step with them.

Our first validator is now live on Solana - the first of many we’ll be running together. We believe the majority of financial transactions in the future will take place on blockchain rails, and the network that captures most of this volume will be the one with a continued desire for optimizing speed and performance. Right now, no chain is better positioned than Solana. With record-breaking Real Economic Value (REV) being generated and breakthrough primitives emerging at a pace we haven’t seen elsewhere, Solana’s economic landscape is the most compelling in the smart contract space. By operating a validator, we’re not just deepening our coverage - we’re becoming direct participants in the network’s evolution.

Support our research by staking with us!

You can do so directly through the Phantom, Solflare, or the Backpack wallet - or whatever your preferred self-custodial route may be. We’re excited to take this next step and look forward to contributing even more to the ecosystem.

The road to our first $1bn in stake starts now.

Executive Summary

• Renzo’s Record-Breaking Growth: Renzo led with a 4.6x increase in ezSOL supply, surging from 57k to 263k. Strategic incentives with Kamino drove 83% of ezSOL to the protocol, amassing $77M in current TVL.

• Overall TVL Surge: Jito’s 24-hour cap lift boosted aggregate TVL across Fragmetric, Kyros, and Renzo by 339%, reaching $190M in TVL - a testament to the growing impact of VRTs on Solana’s DeFi ecosystem.

• Fragmetric’s Growth and Decentralization: Fragmetric tripled its TVL to ~$70M, with unique wallets holding FragSOL rising from 3k to 21k. Top 10 wallet concentration dropped from 75% to 52.5%, reflecting healthier decentralization.

• Kyros’ DeFi Adoption: Kyros saw 15% of its kySOL supply flow into Solana DeFi protocols, with Kamino Finance as the largest beneficiary, demonstrating seamless VRT integration into the DeFi ecosystem.

Earlier this week, Jito’s (Re)staking deposit caps were raised for a brief 24-hour period, igniting a surge of activity across key Vault Restaking Token (VRT) providers. Fragmetric, Kyros, and Renzo each experienced substantial growth, with record-breaking inflows marking new milestones in TVL, and shifting distribution patterns.

This fleeting window offered a glimpse into the evolving dynamics of the role VRTs will play in Solana's onchain economy and sets the stage for what’s to come as caps are eventually removed. At the time of writing, the aggregate TVL of the three Jito VRTs is $190m, up more than 339% where it was prior to the cap raise.

While this number is also due to SOL's recent price surge, SOL denominated inflows to VRTs also played a massive role. SOL denominated inflows saw a 3x increase across the board for these VRTs.

Here's how each individual VRT faired during the deposit window:

Fragmetric

Fragmetric was able to more than 3x their TVL and surpass the $50m threshold (now at ~$70m).

The count of unique wallets holding FragSOL also saw a spike from roughly 3k to 21k as deposits flowed in. When looking at the distribution of holders, more than 50% of wallets holding FragSOL have 1 unit or less.

To break into the top 5%, depositors need to have at least 12.88 FragSOL at the current levels.

The overall distribution is fairly sound with the top 10 wallets only accounting for 52.5% of the supply, showing continued signs of progress.

This is solid growth in whale distribution since the last time we covered Fragmetric back in October when the top 10 depositors accounted for roughly 75% of the supply.

Overall, we anticipate that the distribution for FragSOL and all other VRTs will continue to improve as caps are eventually eliminated. The total FragSOL supply now sits just shy of 250k - where do you think TVL will be by the end of the year?

KyrosFi

Kyros' TVL surged 58% - bringing their total deposits to approximately $27m, or 107k $kySOL. (now around ~$34m)

The largest inflows happened right at the start of their deposit window, with over 33k $kySOL minted almost immediately.

Unlike Fragmetric which we covered above, $kySOL is currently transferrable. While FragSOL will be transferrable soon, this feature allows us to begin seeing where Jito (Re)staking VRTs will naturally flow to within the onchain economy.

At the end of the deposit window, roughly 15% of the total $kySOL supply had made its way into various DeFi protocols on Solana, with KaminoFinance being the largest beneficiary. Between Kamino's Lend & Vault products, 15k $kySOL have flowed into the protocol thus far.

Additionally, ExponentFinance, a newly launched DeFi protocol which is analogous to Pendle on Ethereum has seen 1% of the $kySOL supply enter their product.

As seen in the chart below, Pendle was one of the largest beneficiaries of the LRT boom on Ethereum early last year. At it's peak, Pendle held around 50% of the total LRT supply.

While the flow of capital is likely to be similar for Jito VRTs as it was to EigenLayer LRTs, it's likely to not be identical given there are already lending market integrations for these assets.

The overall kySOL supply now sits around 107k.

Lastly, while we find their name incredibly tasteful, it's important to note that we are two different companies.

Where do you think the majority of $kySOL will aggregate in the short, medium, and long term?

RenzoProtocol

Last but certainly not least, we've got RenzoProtocol who saw the highest level of inflows out of all Jito VRTs.

Renzo's ezSOL supply grew 4.6x from 57k to 263k, with an hourly average deposit of 7.6k.

Like kySOL, ezSOL is transferrable as well. Renzo has already seen first hand how the LRT market has played out on Ethereum, with lending markets like Aave becoming the top destination for these types of assets to be utilized.

Using this working knowledge, Renzo launched an incentives program with Kamino to incentivize deposits with their governance token, REZ, for 2m weekly supply side emissions. As a result, 83% of the ezSOL supply flowed to Kamino.

At the time of writing, the ezSOL on Kamino accounts for roughly $69m. Overall, it was a very successful 24 hours for all three of the VRT providers - giving us a glimpse of what is to come once deposits caps are fully lifted.

As VRTs continue to reshape Solana’s on-chain economy, follow & stay tuned for the next wave of growth and innovation—this is just the beginning.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Formerly known as Redacted, Dinero was born during the height of the DeFi Revolution and underwent their rebrand in 2024 with an expanded product suite and larger mission. To throw you back into the nostalgia of the previous cycle, their official protocol launch included an Olympus DAO style fundraising campaign - where participants could “bond” CRV (Curve), CVX (Convex) or ETH in return for BTRFLY, Redacted’s official token. The unique choice allowed Dinero to become a blackhole for DEX governance tokens, such that they could become a centerpiece in on-chain liquidity, directing market-wide incentives.

Dinero quickly leveraged their position within the Curve and Balancer ecosystems, launching the below products:

Hidden Hand

Similar to Votium, Hidden Hand is a “Bribe Marketplace.” It allows third parties & token issuers to take part in the governance process of liquidity protocols like Balancer, Aura, BeethovenX, Pancakeswap, etc, by providing incentives for holders to vote in a certain direction. The concept was popularized in the Curve ecosystem, where protocols that had a Curve pool for their tokens would bribe CRV stakers to vote to direct future emissions in the direction of their pool. It is worth reading additional materials on how CRV emissions work, but a high level explanation is that many liquidity protocols have chosen to distribute their native token as an incentive to liquidity providers over a long time horizon. Given that the distribution is subject to each protocol’s governance process, creating a marketplace for voting allows governance participants to truly unlock the value of their votes.

Who are the natural participants in a marketplace like this?

1. Supply Side: Governance participants that own and lock AURA, BAL, etc and are willing to vote in line with the highest bidder.

2. Demand Side: Stablecoin issuers, Liquid Staking Token issuers, Liquid Restaking Token issuers and any protocol that has issued a token and is in need of deep on-chain liquidity. Protocol’s like Lido, Frax, Rocketpool have historically been users of Hidden Hand in order to scale the liquidity of their tokens as the supply of the asset trends upwards.

Pirex

The second piece of Dinero’s product suite was Pirex, which enables the creation of liquid wrappers for DeFi staking tokens like CVX, GMX, GLP & even Dinero’s native token. Protocols often require that users stake tokens in order to participate in rewards distribution or voting activities, partially for standard “accounting / tracking” purposes but also because it better rewards long term participants in the ecosystem. Pirex attempted to mitigate some of the downsides that come along with token locks, including the lack of liquidity, the need to claim and autocompound rewards and the volatility of any future rewards.

pxTokens were liquid representations of a locked position, such that they could be used throughout DeFi all while reaping the benefits of their staked underlying positions. For GMX, there were additional benefits - anyone who staked GMX received a multiplier for the length of time their tokens were staked, which would reset as soon as the tokens were unstaked. pxGMX instead kept the underlying tokens locked, such that they would always be earning the max multiplier, but a holder would be able to sell the full position onto the open market if they were in need of liquidity.

We believe that it should be impossible to look past the team behind Dinero if you are remotely interested in DeFi, given their deep knowledge of the industry's current trends as well as its shortcomings. Through products like Hidden Hand and Pirex, Dinero has found themselves somewhere floating between the P2P (Protocol to Protocol) and P2C (Protocol to Consumer) realms. Now, their recent expansion builds on top of their crypto native strengths, but also attempts to look broader and target institutional participants - perhaps at the perfect time.

Rebrand & New Product Suite

Crypto Twitter is often shortsighted, the overrepresentation of momentum traders and shitposters creates an environment much like an echo in a small room. Certain trends are loudly discussed and it is easy to overweight the importance of any given topic. Many of these trends will be shortlived. If you are a builder or investor in the space, it is important to log off and create your own vision for what will matter in 1, 5, 10 years. We believe the rebrand from Redacted to Dinero in July was a realization of this & a showcasing of the conviction the team had that they can build something more important than short term tools for a limited market. I would highly recommend reading both the official rebrand blog post as well as 0xSami’s thoughts to understand the long term vision of Dinero.

“For us, Dinero represented a new approach to building products. We are no longer focused on the long tail of the DeFi risk curve. Instead, we’re entering the arena with some of the largest projects on Ethereum.”

So what is Dinero? As seen in the image below, Dinero is a suite of products that are all uniquely valuable on a standalone basis, but can come together in an exciting fully integrated system. We are going to break the product suite down at an individual level, below:

1. Liquid Staking: “An ETH LST solution designed to simplify the staking process, making it more accessible and user-friendly. Being a solo validator comes with opportunity costs. Other LSTs aren’t flexible enough. Pirex ETH aims to solve both of these problems.”

• pxETH: An ETH pegged asset, backed by staked ETH that does not receive any native staking yield, but can be used throughout DeFi.

• apxETH: A vault version of pxETH, that earns amplified staking rewards due to the subset of users that have chosen to hold pxETH instead.

2. Decentralized Stablecoin: Access to a truly, non-custodial medium of exchange is of the highest importance to building a strong crypto ecosystem. So far, the best way to do this is to issue a dollar pegged asset, overcollateralized by ETH or other crypto native assets in a smart contract.

• pxUSD: This stablecoin will be backed by apxETH and pegged to a dollar. It will differentiate itself from competitors through its capital efficient collateral and its utility in the broader Dinero ecosystem.

3. The Dinero Relayer: At a high level, a Relayer is a service that takes transactions submitted by users and “relays” them to the network such that they can be processed and included into a block. Dinero is able to build a network of Ethereum validators through their pxETH product, which will all run custom client software supporting the Dinero Relayer.

• Meta Transactions: Transactions that bypass the need for the transactor to pay a gas fee in ETH, by allowing the relayer to publish it instead of the EOA behind the transaction.

• Private Transactions: At a certain validator set size, Dinero will be able to construct blocks of transactions that are sent to them such that they can offer users a way to avoid the public mempool.

The first question you should ask yourself is, “Why would anyone choose to hold pxETH and give their yield away to the apxETH vault?” pxETH’s two token model is very interesting to us, because we believe that by separating out the holders into two categories, passive yield earnings and active yield seekers, you create an incentive for the active managers to provide deep liquidity for the whole system - where they can earn significant yield from a source of their own. Sophisticated market participants in theory will be able to provide sufficient pxETH / ETH market depth around a 1:1 peg with a limited amount of funds, finding a healthy equilibrium for the amount of pxETH that will remain outside of the vault. All the while, apxETH depositors will enjoy their higher yield.

This combined with Dinero’s role in the wider liquidity marketplace gives the protocol a huge opportunity to avoid dishing out billions in liquidity incentives as we have seen other LSTs and LRTs do in the past. We recently wrote a report on protocol financials, noting that Lido has spent $200 billion in Liquidity Incentives over the years and is just now able to significantly cut back after years of token expenditure. While these incentives clearly paid off and made stETH into the most widely used LST, it came at the expense of early LDO holders due to significant dilution. Dinero had the opportunity to learn from LDO’s growth and find other routes to generate deep liquidity.

The Dinero Vision

Dinero has been built around two core concepts:

1. Sustainable Yield Generation

2. Market Efficiency

Hidden Hand & Pirex both played a role in facilitating each of these for their users & the next wave of Dinero products expands on a similar playbook. See the graphic below to see the yield premium generated by the apxETH vault, over that of other LSTs:

Liquid Staking in the Ethereum ecosystem is one of the purest forms of sustainable yield generations and Dinero is rolling out several solutions to ensure TVL growth over the next several years.

Institutional pxETH (ipxETH)

In partnership with Galaxy Digital & Nomura’s Laser Digital, Dinero is rolling out an institutional liquid staking product. The product is notably differentiated from vanilla pxETH, given that it will be issued in a permissioned environment and will not be composable throughout DeFi like Dinero’s other products. However, it will be designed to give strictly regulated institutions like brokers and Registered Investment Advisors access to Ethereum staking yield. We think the cross demand for exposure to ETH and exposure to staking yield is impossible to overstate.

ETH’s liquid staking market is already sitting at $51B in TVL already amassed across Lido, Binance, Rocketpool and others. At $174M in TVL, Dinero accounts for 0.34% of Ethereum LSTs and has a lot of potential for market share growth. Kairos believes the whole pie will also grow significantly larger, given that the percentage of ETH’s staked (28%) is only a fraction of Solana’s (66.3%), Sui’s (78.3%) and Aptos’ (79.3%). If Ethereum was to double its stake rate, that would be another $130B in potential value for Dinero to compete over & there is clear social consensus that would push stakers to delegate assets to other protocols outside of Lido.

So where does the new demand come from?

The Ethereum ETFs are currently undergoing a delayed version of the Bitcoin ETF process, where Grayscale muted the impact of inflows as investors trapped in their trusts fled after years of being locked. We can see in the image above, that at the beginning of December, ETH ETF flows flipped positive and we believe that they won’t look back. There is clear institutional demand for ETH and we predict that the conversation around ETH ETFs staking their assets under management will be highly relevant in 2025 and 2026.

Branded LSTs

Dinero also launched a product that allows Layer 1 and 2 networks to issue ETH LSTs, native to their individual network. The process flow involves Dinero providing the underlying infrastructure by staking users’ ETH as apxETH and issuing a Branded LSTs to the network it was staked through via LayerZero. Partner chains are able to choose both what the LST is named and how yield is distributed, whether through rebasing or upon user withdrawal, offering flexibility in how the yield is managed and presented to their users. There are already 10+ partner protocols working with Dinero, including seiyanETH on Sei, zkETH on zkSync Era, iETH on Ink Network and moveETH on Movement which will launch once their chain is live.

As more and more activity moves to Layer 2 networks, a vast amount of the LST supply will also find itself migrating to scaling solutions. We believe that a differentiated product with a strong focus on LST integration across L2s will prove to be not only fast growing, but also sticky. As seen in the Dune Analytics query below, ~$619M worth of Lido Staked ETH has been bridged to L2s - a number that increased by nearly 11.2% over the past month. Over the next couple of years we expect to see exponential growth in LSTs across scaling solutions as liquidity deepens on Arbitrum, Base, Optimism and other staking / restaking focused L2s like Swell and Scroll.

Value Accrual - The DINERO Token

Redacted was very quick to return value to token holders after the protocol launched, a theme which has stayed consistent and carried over to the DINERO token. Users are now able to stake their DINERO for sDINERO which earns autocompounded rewards and gets a 3x boosted governance voting status. As seen in the image below, DINERO has a 7 day warmup and cooldown period for sDINERO staking, effectively making it a 14 day minimum process to ensure longer-term alignment on participants.

At the time of writing, sDINERO is paying out roughly 13.6% APR and 30.6% of the total token supply is staked. This translated to around a current run rate of $4M in annual payouts to DINERO stakers - which comes from a mix of protocol earnings and inflationary incentives. As noted in the linked blog post, the earnings are converted to DINERO and paid out to stakers

How are these earnings generated and how will they scale in the coming years? Each of Dinero’s products has some form of fee for value accrual back to the protocol:

Hidden Hand Fee: A 4% fee to all bribes paid through the marketplace, split half to the treasury and half to sDINERO

Liquid Staking Fees: A 10% fee on all staking rewards earned by the protocol and a 0.5% for pxETH holders looking to instantly withdraw their tokens back to ETH via a liquidity buffer.

We look forward to seeing how the team plans to monetize the Dinero Relayer, but we believe there is ample opportunity to do so. Users looking for Meta & Private transactions will both be okay paying a premium to the Ethereum network’s usual gas fee for the added benefits and Dinero will be able to charge a small spread and absorb this premium.

What's Next?

The Dinero teams’ ability to understand the industry and build useful products has been very clear. We think their push into liquid staking fits well into their objectives and provides them an opportunity to compete in one of crypto’s largest addressable markets. Beyond growing a product line with consistent, predictable revenue - amassing hundreds of millions / billions in assets under management or TVL will unlock a much broader future for the protocol. At Kairos, we believe that the ancillary product lines that can be launched once you achieve critical mass are how you can return the most value to token holders and the Dinero team has proven to be forward thinking and creative.

As seen below, Dinero has started 2025 strong seeing some of its fastest growth in ETH terms for their liquid staking product. Since January 1st, pxETH’s TVL has seen a 13.6% increase. Since December 1, 2024, pxETH’s TVL is up over 49%. apxETH’s growth is likely reflexive, given the boosted yield encourages deposits and increased deposits increases economic activity across pxETH pairs, such that the yield remains boosted for apxETH. Continued Dinero growth alongside a strong year for ETH and other crypto assets could make it very possible for Dinero to surpass the billion dollar in deposit mark. As of today, Dinero is the 13th largest Ethereum liquid staking protocol - check out DeFiLlama’s ranking to see their nearby competitors.

Over the next several months, Kairos will be tracking the data behind Dinero’s growth and providing updates on:

1. The protocol’s largest growth drivers, whether that ends up coming from Branded LSTs, ipxETH or elsewhere

2. The Dinero Relayer, its Go-To- Market strategy and who the power users of the permissionless RPC end up being

3. The value being returned to sDINERO stakers and the trends in protocol earnings

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

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As the year comes to a close, it’s hard to overlook the growth across Solana - and more specifically, @jito_sol’s critical role in that success. Here are some key metrics from 2024 that will be important to watch going into the new year: JitoSOL TVL up 125% in SOL terms with an average daily growth rate of 1.65% .

Of that 14.3m JitoSOL, roughly 23% of it is being productively used in DeFi through Lending markets, DEXs, etc. With the introduction of Jito’s (Re)Staking platform in 2025, along with a cohort of initial NCNs, there should be plenty of demand drivers to see JitoSOL TVL climb higher.

And while their LST growth was impressive, the most notable growth was around Jito Tips.

What are Jito Tips?

Jito Tips refer to priority fees or tips paid to validators by users or applications to prioritize their transactions in the block-building process. These tips incentivize validators to include specific transactions ahead of others in the same block. The compound monthly growth rate for Jito Tips in SOL denominated terms came out to 19.6%, and 32.7% in USD terms.

Why Do Jito Tips Matter?

With the passing of JIP-8, which adopts the TipRotuer NCN, along with the upcoming votes on JIP-10 & JIP-12 which further outline the specifics of this NCN, a portion of Tips will begin flowing to JitoSOL & JTO restakers.

What is TipRouter?

Today, Jito Tips are distributed via a permissioned mechanism. TipRouter itself introduces a decentralized way to distribute these Tips among validators and other network participants. TipRouter will take the form of an Node Consensus Network (NCN), similar to an Actively Validated Service on EigenLayer. The NCN receives its economic security through restaked JitoSOL and JTO via Jito's (Re)staking platform. In return for providing this economic security, the restaked assets (JitoSOL & JTO) receive a portion of the Tips they distribute.

Where Do the Tips Go?

Following the introduction of TipRouter through the Jito Improvement Proposals (JIPs) outlined above, Tips will be distributed in the following fashion: 97% - Solana Validators & Stakers 2.7% - the Jito DAO Treasury 0.15% to JitoSOL Restakers 0.15% to JTO Restakers

Estimates on TipRouter

The easiest way to estimate what these fees will look like is to take some moving averages of current trends. Crypto is obviously volatile, and thus so are the actions of users. So for estimating tip distribution, we can use the 30, 60, & 90 day moving averages for SOL's USD price and the Tip amount in SOL, and then annualize.

30-Day MA

DAO Treasury (2.7%) → $50,039,519
JitoSOL Restakers (0.15%) → $2,779,973
JTO Restakers (0.15%) → $2,779,973

60-Day MA

DAO Treasury (2.7%) → $54,701,658
JitoSOL Restakers (0.15%) → $3,038,980
JTO Restakers (0.15%) → $3,038,980

90-Day MA

DAO Treasury (2.7%) → $41,753,769
JitoSOL Restakers (0.15%) → $2,319,654
JTO Restakers (0.15%) → $2,319,654

Tips Visualized

For most of the year, it was rare to see a day where total Tips exceeded $2.5m in value, however this was the case 74% of all days in Q4 of 2024, reaching an all time high of $14.7m on November 17th.

Weekly MEV Rewards as % of Total Staking Rewards

Lastly, Jito was able to lift staking reward rates across the entire ecosystem thanks to their dominant client market share, which is up from 48% to 93% YTD. For their own LST, JitoSOL, MEV rewards made up 10% or more of weekly staking reward for 26 weeks out of the year, with an average of 11.79% for the entire year. The best week was Nov 18th-25th, where 43% of staking rewards came from MEV.

Overall, it was a great year for Jito - and with much of their success coming in Q4, this gives them a great deal of momentum heading into the new year.

We look forward to providing continued coverage of the most important Solana protocol going into 2025.

- Merry Christmas

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If you are unfamiliar with Babylon and need a quick primer, see our brief intro we wrote prior to this Cap Raise. Other resources include the white paper, and the Babylon website directly.

New Unique Depositor Growth

For 1,000 Bitcoin blocks, Babylon allowed new BTC deposits to be staked via Babylon. During this period of roughly one week, approximately 33,300 additional BTC were staked via Babylon from across roughly 110k new unique addresses, bringing total TVL to around 57k BTC, which briefly eclipsed $6bn in dollar terms.

Finality Provider Market Share

At the end of Cap-3, Lombard_Finance remained the largest finality provider, adding an additional 16k BTC of stake with them, bringing their grand total to around 23k BTC, which accounts for 40% of Babylon's total deposit marketshare.

SolvProtocol, the second largest Bitcoin LST protocol held strong and crossed the 10k Bitcoin threshold.

Overall, the Bitcoin LST providers dominated the show for Cap-3, and now 75% of total BTC deposits into Babylon are staked with LST providers. This is a great forward looking signal for BTCfi, as $4.2bn of BTC LSTs can be productively utilized across DeFi.

Babylon TVL Over Time

While the deposit limit was set to 5k BTC, the closest anyone came was 4998 and there were only 3 total transactions over 1k BTC, all by the same address. See our "Whale Analysis" section below for further details. Overall, Babylon TVL is now becoming a real rival amongst its other DeFi peers. After only 3 cap raises, Babylon is the 9th largest protocol by TVL, and the 2nd largest restaking protocol.

Deposit Count & Avg Txn Size by Finality Providers

While the Bitcoin LSTs saw the lowest overall avg txn size, likely due to exogenous factors like users, or bots, looking to gain exposure to potential airdrops, the institutional players like Galaxy Digital and Figment saw much higher averages. For example, Galaxy's average transaction size was 10.95 BTC (~$1m+) and Figment's was 3.02 (~$300k+).

Fees Generated by Finality Providers

Babylon's breakthrough for unlocking productive use of Bitcoin on its native network can also have second order effects for other existing network stakeholders. For example, the Cap-3 window saw 2.75 BTC of fees generated for miners via transaction fees. Over the long run as the block subsidy continually compresses, transaction fees will matter even more than they do today in order to incentivize miners to secure the network. Again, the LSTs will play a crucial role here as they will consistantly be facilitating deposits and withdrawals, all leading to more transaction fees on the Bitcoin network.

Whale Analysis

The largest depositor for Cap-3 was bc1pzfyw6gj38v4xskx8n03e8r8hk9wn0gsm3kr0xxcznle8xvy93xgsv60qxh The anon whale deposited 9998 BTC across Lombard (4998 BTC), Solv (3000), and PumpBTC (2000) respectively. At the time of the deposits, the aggregate deposit amount was roughly $1bn. The wallet funding is fairly easily traceable until it reaches 37XuVSEpWW4trkfmvWzegTHQt7BdktSKUs, an account which previously held roughly $7bn of BTC onchain before transferring it to another wallet ( bc1q8yj0herd4r4yxszw3nkfvt53433thk0f5qst4g ). However, tracing this original whale wallet back via first funded, it eventually leads to Huobi, roughly 8 years ago.

There was speculation that this wallet may be Justin Sun, and while not confirmed, he did have other wallets on Ethereum that withdrew around $200m stETH from EigenLayer (txn hash: 0x84af473143465d9d3f358c1573b5f6c3118b28e1579322ea1a1d51df10baaf3e) and then began withdrawing the stETH from Lido in 1k clips. The transactions between the actions on Ethereum & the Bitcoin network have roughly an 8 hour difference between them. It is important to note as well that he implemented a similar strategy on Ethereum with deposits across all the major LRTs as well while they were running their points programs.

This is an incredible vote of confidence for this longtime whale to put what appears to be roughly $1bn of their stack into the liquid staking token protocols built on top of Babylon.

*DYOR and it is left up to the reader to speculate on who the whale may be if they wish*

Additionally, the second largest depositor was bc1p3nmr2yzmgaml07lx7n3ehe8a2uvu2nrqfrqx8leqt562t4dnm8tsqxmpyt, but this address deposited exclusively to Lombard for a total of 7279 BTC, this accounts for 45% of Lombard's overall deposits. Between this address and the one above, the two whales comprised 51.8% of Cap-3's overall deposits. This wallet appears to trace back to a Binance hot wallet where it was first funded 4 years ago.

*All wallet analysis done via @arkham - DYOR*

Overall, the important takeaway is that the largest depositors are the ones seeking optionality and lessened opportunity cost by choosing Bitcoin LSTs. Hopefully, this means we see a meaningful injection of BTC liquidity to DeFi to the tune of several billion dollars.

Closing Thoughts

Overall, Cap-3 was a massive success. With over $3bn of new deposits, Babylon is now the 9th largest protocol by TVL in all of crypto, with a grand total of $5.54 billion in TVL. This Cap proved particularly successful for the Bitcoin LSTs, and now Lombard has surpassed Coinbase's own cbBTC in terms of BTC deposits by a margin of roughly 3k BTC. Notably, Cap-3 deposits even outpaced Bitcoin ETF inflows.

At Kairos Research, we believe a winner-takes-most market structure will likely play out for the Bitcoin LSTs, and Lombard is a clear leader if this these trends are to continue. What will make or break these various LSTs will be their ability to grow sustainably while simultaneously ensuring user's trust remains steadfast. On that last note, in the coming weeks we will be releasing standards and best practices for all the Bitcoin LSTs built on Babylon. These best practices are comprised of our own thoughts, along with thoughtful feedback and insight from ecosystem participants and industry leaders. We look forward to sharing these standards, along with future coverage of Babylon's flows, LSTs, and overall ecosystem.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

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Monthly Snapshot

Key Metrics at a Glance:

• Total Liquidity: $173m (47k ETH)

• Utilization Rate: 83% (Total LRT supply - those in EOAs)

• Trading Volume: $2.54 billion

• Top 5 LRT TVL: 3.38m ETH ($12.6bn)

Liquidity Updates

Liquidity across the board for the top 5 LRTs has increased roughly 5.6% in dollar terms, and decreased -14.21% in ETH denominated terms since we released our latest coverage last month. Swell's rswETH had the largest MoM increase of 4.77%, while Kelp's rsETH had the largest decline of -72.72%, all of which are on an ETH denominated basis.

DEX Trading Volume Updates

Overall trading volume for the top 5 LRTs rose roughly 4% to $2.5bn in total. Kelp DAO's rsETH saw the largest jump, with volumes up 85% MoM, and Puffer's pufETH saw the largest decline with a -45% decrease.

EtherFi was able to claim its fifth straight month for market volume dominance, maintaining roughly 50% dominance across overall volumes since July.

TVL Updates

Overall TVL for the top 5 LRTs currently sits at around 3.38m ETH, worth around $12.5bn. EtherFi remains king, and has actually seen a continued increase in deposits since our coverage last month. Renzo saw a slight decline after deposits began to rebound, and we anticipate we see further deposits flow in as the Aave caps are lifted accordingly. Kelp's rsETH saw a resurgence in deposits following their Aave integration, while Puffer seems it may have found its local equilibrium, while Swell's rswETH remains steady.

Swell's rswETH saw the largest liquidity to TVL ratio increase, while Kelp's rsETH saw the largest decline

LRT Peg Updates

Pegs remained relatively stable across the top 5 LRTs.

Categorical Flow Updates

Overall utilization hit an all time high of 83% for the month of November. This was primarily led by increased flows to Aave from weETH, ezETH, and rsETH. The majority of the supply for the three largest LRTs now sits on Aave with 51%, 42%, and 52% supplied to Aave respectively. Across the top 5 LRTs, more than 50% is now supplied to Aave.

Closing Thoughts & Looking Forward

As we enter a world of net-positive ETH ETF flows, the onchain economy is about to become a lot more reflexive. That is why we have been harping on the importance of LRTs in lending markets. The current 51% supply of LRTs in lending markets will likely grow as high as caps allow, bolstered with restaking rewards aside from programatic EIGEN incentives that are set to begin flowing soon. Let's revist our take on the importance of ETH ETFs and their impact from "Our Thoughts on the ETH ETF”

We're still in the early innings for not only restaking, but crypto at large. In the future institutions will have a plethora of risk adjusted strategies to get the most out of staking their ETH. Of the top performing strategies, it is almost certain it will involve liquid restaking, and money markets like Aave. As we enter this next phase of restaking, we'll see slashing and rewards go live. This will likely coincide with many of the LRTs reassessing their risk profiles, if they haven't already.

Renzo already announced they will be un-delegating from most AVS. Again, this lines up with what we predicted would happen when we released our initial coverage on LRTs.

We anticipate the flows of restaking rewards, coupled with substantial and sustained flows to ETH ETFs could create the perfect storm for the onchain economy. This perfect storm would enhance the already capital efficient LRT marketplace, leading to more borrowing, and more onchain activity across mainnet and all ETH L2s. Swell has strategically positioned themselves to benefit from this exact type of scenario, and we covered their potential restaking flywheel in depth a few months back.

Lastly, @dabit3 recently noted that EigenLayer is tracking over 600 projects building AVS and Rollups on the platform. While restaking lost a bit of its luster as the broader community felt fatigued from infra projects, there are many powerful tailwinds for the entire EigenLayer ecosytem going into the end of Q4 and into Q1 and beyond. It's time to get bullish on restaking again.

The rewards must flow.

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Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

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Executive Summary

A lot has happened since our last LRT Liquidity & Utilization report went live in June. Notably, EigenLayer had its second stake-drop, along with the EIGEN token transferability going live. EIGEN programmatic incentives are now live, with the aim to bolster restaking rewards. 4% of the total EIGEN supply has been allocated to ETH stakers and operators for the first year, with 3% going towards ETH restakers, and 1% going towards EIGEN stakers and operators. At current prices, that is approximately $160m of additional staking revenue across the board on EigenLayer from this incentive program alone.  

Notable News

Renzo:

• ezEIGEN Launch

• ezSOL Launch

• ezUSDC Announcement

• ezUSDC Case Study Released by Kairos Research

• wbETH Offboarding Gov Prop Passes

• Chaos Labs Risk Management Gov Vote Passes

• ezETH Launches on Aave

EtherFi:

• eBTC Launch (Bitcoin LRT)

• Surpassed $1bn TVL for Vault Products

• eUSD Ethena Partnership Launch

• LRT² Launch

• Deep Dive on DeFi Protocol Earnings Research by Kairos Research

• weETH Listed as Collateral on Synthetix & on BitGet for Spot Trading

• Gov Prop Passes for Incentives on Centralized Exchanges for weETH Collateral

Swell

• swBTC Launch

• SWELL TGE Date Announced

• Proof of Restake + OP Stack Pivot Announced

• EarnETH Vault Launch

Puffer

• PUFFER Launches Along with Their AVS and Based Rollup

• Withdrawals Enabled

Kelp

• Launch of Gain Product Suite

Liquidity Updates

Liquidity across the board for the top 5 LRTs has decreased roughly 60% in dollar terms and 43% in ETH denominated terms since we released our last coverage back in June. However, Kelp DAO’s rsETH has seen a net increase since June of roughly 55% on ETH denominated terms.

In total, there is roughly $143m of total paired liquidity on DEXs across the top 5 LRTs.

Swell’s rswETH saw the largest MoM gain from September to October, with Puffer’s pufETH seeing the largest drawdown in ETH denominated liquidity, likely due to them enabling withdrawals along with their TGE of PUFFER.

DEX Trading Volume Updates

October saw the first monthly uptick in DEX trading volume across the largest LRTs, with 2.25% MoM growth, totaling over $2.4bn for the month. EtherFi’s weETH/eETH has maintained the most consistent monthly trading volume, likely a function of its raw size as the largest LRT in TVL terms.

Puffer’s pufETH saw the largest monthly jump for October, with volume increasing roughly 77.5%.

TVL Updates

EtherFi still remains the king, with roughly 2.25m ETH, but Renzo’s ezETH has notably flipped Puffer’s pufETH to regain the number two spot. This comes after Renzo enabled auto-compounding rewards for ezETH and Puffer enabled withdrawals, which led to a decline of roughly 200k ETH. Puffer was the last of the top 5 LRTs to enable withdrawals. Therefore, as AVS begin to dish out rewards to restakers, we are in the most organic market conditions we’ve seen yet for the LRT space. The final phase will be when slashing is enabled, when we may see an additional shift of TVL across protocols if the market recognizes any potential risk / reward discrepancies across the top liquid restaking token providers.

On a liquidity to TVL ratio basis, Renzo and KelpDAO are leading the pack. In simple terms, they have the most available paired pool liquidity as a percentage of their total TVL. This can be a helpful metric for risk management, esepcially as it relates to tail risk. However, its also important to note that the overall confidence of the market can also be reflected in the peg of the LRT to its underlying fair value. We’ll dig into that in our next section.

LRT Peg Updates

Categorical Flows Updates

Following the second stakedrop from EigenLayer and transferability being enabled, the long-awaited farming events have mostly come to a close. This also coincides with all the LRTs except Swell having their TGE take place, and they’re expected to announce their TGE in the near future. (update: they announced claims will go live on Nov 7th) Following the end of what we have previously referred to as “exogenous incentives”, the vast majority of LRTs have flowed towards lending markets. This was expected, as mentioned in previous reports given LRTs can serve as superior collateral to LSTs and other non-yield bearing crypto assets.

The majority of weETH has slowly shifted towards lending protocols, notably Aave, now constituting the 3rd largest asset on the platform with over 1m weETH supplied. We expect this trend to continue given the economic superiority weETH offers over stETH and other liquid staking tokens. However, if the risk to reward balance shifts, we may see changes. We don’t anticipate this to happen in the short term given the close working relationships between AVS and LRTs.

Withdrawls for ezETH have essentially stopped, and we have seen an increase allocation to DEXs, and their bridge contract. Additionally, we’ve seen ezETH go live on Aave through the Lido instance, where we’ve seen the caps max out three times in a row thus far. We anticipate that during our next update the percent of ezETH allocated to lending markets will have grown significantly. Lastly, the allocation to “Farms” has dwindled, and the allocation to yield protocols like Pendle has remained roughly the same.

Swell’s rswETH has seen an uptick in allocation to EOAs and Safes, coinciding with a decrease from the “Farm” category which includes their Swell L2 deposit contract. The biggest depositor, Justin Sun (0x7a95f1554eA2E36ED297b70E70C8B45a33b53095) has not yet withdrawn, but given his actions following the PUFFER TGE, and other projects, it would be safe to assume he is likely to withdraw. However, this is just part of the process projects must face in the permissionless nature of DeFi. Despite all of this we believe Swell is well positioned to continue executing on their long-term vision of becoming the restaking yield layer.

While the “unlabeled” category saw the largest inflows of pufETH, this is actually because their withdrawal contract is lumped in there. We will update this before our next coverage piece is released. Aside from this, the rest of their allocations stayed relatively stable, along with a slight decrease in the DEX category. Puffer is unique among its peers as it was the last to enable withdrawals. We believe that this long-awaited event and anticipation, along with the launch of their token at the same time led to outsized outflows than they perhaps would’ve seen otherwise. However, they too have their own unique vision of becoming an integral part of the restaking ecosystem, with the launch of their own AVS, and based rollup as well.

Over the past few months, KelpDAOs rsETH has seen continued inflows to EOAs + Safes, and its Bridge contracts. We can attribute the increase in its bridge contract to it’s “Gain” product which helps users find DeFi opportunities across the ecosystem.

Closing Thoughts

Overall, the LRT ecossytem has entered into its next stage of growth. While previous stages were defined by points, airdrops, and shorter-term exogenous incentives, this stage will be defined by restaking rewards. Given AVS rewards in addition to EIGEN are set to begin flowing soon, we believe this next stage of growth will be defined by the amount and method of how restaking rewards are paid out to end users. It is fair to assume that given the shift of LRTs to lending protocols, users are going to become increasingly sensitive to their restaking rewards as they look to maximize capital efficiency. Therefore, we anticipate we will see most, if not all, LRTs move towards some sort of auto-compounding model, or at least give the users the option to opt-in to one.

Users who restake ETH are unlikely to truly care about longer-tail, lower-liquidity AVS tokens in contrast to ETH, unless an AVS achieves significant PMF with attractive cashflows. If you are going to risk a high-quality, highly-liquid asset like ETH via restaking, you are going to want to be paid out in ETH. Additionally, consider that more than half of EigenLayer’s TVL is through LRTs, this means LRTs also account for a significant distribution channel of restaking rewards. We believe, to ensure longer term sustainability, AVS should aim to pay out restaking rewards in either ETH or a USD stablecoin equivalent. Otherwise, the AVS tokens are likely to face an uphill battle as it is unlikely that net-buy pressure exceeds net-sell pressure associated with all the various restaking stakeholders including: operators, individuals, and LRTs. Additionally, AVS are likely to follow the "low-float” launch which many crypto projects do. Therefore, in addition to these organic market forces, the market will have to stomach significant unlocks as well.

To be clear, we do anticipate that as a collective, AVS will indeed be able to provide sustainable rewards over the medium to long term, but they may face multiple short-term headwinds. Despite this, even in the short-term, restaking rewards will remain higher than the native staking issuance rate, which we believe will continue to drive more users to adopt LRTs in place of LSTs. We look forward to AVS beginning to operate live so we can better assess their business models, associated cashflows, and the downstream impacts to LRTs and the overall restaking ecosystem.

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Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.

Executive Summary

The following report is designed to explore some of the most influential DeFi protocols from a financial lens, included is a brief technical overview of each as well as a deep dive into their revenues, expenditures and tokenomics. Given that we lack access to scheduled, audited financial statements, we used on-chain data, open-source reports, governance forums and conversations with project teams to estimate Full Year financial reports for Aave, Maker (Sky), Lido & ether.fi. The table below showcases some of our most important takeaways throughout the research process, providing readers a high level look at the current standing of each protocol. While earning’s multiples are a common way to conclude what is overvalued & what is undervalued, there are key considerations around dilution, new product lines & future earnings potential that tell a more complete story. 

*DAI Savings Rate included in Cost of Revenue, but Aave Safety Module is not

**Does not include ether.fi token incentives, as they were in the form of an airdrop 

***Is a very rough estimate, using growth rates, interest rates, ETH price appreciation & margin estimates from new products (GHO, Cash, etc) - not to be construed as investment advice 

****Aave is currently looking to revamp tokenomics to include an AAVE buyback & distribute

Through our analysis, we came to the conclusion that we are in the process of witnessing several protocols make the flip to sustainable profitability after years of bootstrapping liquidity and building moats. Aave seems to have reached an inflection point, achieving its first months of profitability and rapidly growing a new, higher margin lending product in GHO. ether.fi is still nascent, but has racked over $6B in TVL securing it a spot as a top 5 protocol by size. The liquid restaking leader has also learned from some of the shortcomings of Lido, launching a number of other higher margin, ancillary products to best utilize their billions in deposits. Read the full report to better understand our calculations, estimates & what each community is doing to drive value to their protocol. 

Problem Statement & Definitions 

On-chain data and analytics have steadily improved since the rise of DeFi in 2020, with the likes of Dune, Nansen, DefiLlama, TokenTerminal and Steakhouse Financial playing a pivotal role in creating real time dashboards on the state of crypto protocols. At Kairos Research, we believe that an important piece of fostering credibility within the industry is to push for standardization across protocols and DAOs, to showcase financial performance, health and sustainability. Profitability is often overlooked within the crypto, but value generation is the only way to sustainably align each of participants within a protocol (users, developers, governance & community). 

Below are a number of definitions that we will be using throughout our research & financial statements to attempt to standardize similar costs across each protocol. 

• Gross Revenue / Fees: This encompasses all of the revenue generated by the protocol, belonging to both the users of the protocol and the protocol itself. 

• Take Rate: The percentage of fees that users are charged by the protocol. 

• Net Revenue: The revenue left for the protocol after paying out users of the protocol and accounting for the cost of revenue. 

• Operating Expenses: A wide range of protocol expenditures, including payroll, contractors, legal & accounting, audits, gas costs, grants & could encompass token incentives and more. 

• Net Operating Income: The bottom line dollar number net of all costs that accrues to the protocol and token holders, inclusive of token incentives that are related to the operations of the protocol. 

• Adjusted Earnings: Adding back one time expenses to earnings to more accurately predict future earnings, subtracting known future costs that are not currently being expressed through earnings. 

Introduction to the Protocols

We will provide a high level breakdown of the core products offered by each of the highlighted protocols within this report, which were selected to include some of the most established protocols across a range of crypto subsectors. 

Aave

Succinctly, Aave is a “decentralized, non-custodial liquidity protocol where users can participate as suppliers, borrowers or liquidators.” Suppliers deposit crypto assets, in order to earn lending yield and earn borrowing power themselves, such that they can either leverage or hedge their deposited position. Borrowers are either the over-collateralized user looking for leverage & hedging, OR arbitrage traders utilizing atomic flash-loans. In order to borrow against their crypto collateral, users of Aave must pay either a fixed or variable interest rate on the specific asset they are borrowing. Aave’s protocol fees are the total amount of interest paid on open (unrealized), closed or liquidated positions, which is then split between the lender/supplier (90%) and the Aave DAO Treasury (10%). Additionally, when a position breaks above its stated Loan-to-Value maximum, Aave will allow a “liquidator” to close the position by taking on the risk of the collateral and paying off the remaining debt balance. Each asset has its own liquidation penalty, which is then split between the liquidator (90%) and the Aave DAO Treasury (10%). A newer product offered by Aave is an over-collateralized, crypto-backed stablecoin, dubbed GHO. The introduction of GHO allows Aave to offer loans without needing a stablecoin supplier on the other end of the transaction, giving them more flexibility on interest rates and allowing them to cut out the middleman and earn 100% of the borrow interest from any outstanding GHO loans. 

Aave transparently displays all of the DAO’s income, expenses and current run rate data through a Tokenlogic dashboard. We were able to pull the “treasury revenue” data from August 1 - September 12th and apply a multiplier to annualize the numbers to arrive at $89.4M in net revenue. To arrive at the top line, gross revenue number, we relied on TokenTerminal’s income statement data to estimate margins - as Aave’s revenue is now less simple than 90%/10% due to the split between traditional lending markets, liquidations and GHO borrowing. Our 2025 predictions are heavily based on assumptions, including a relative uptrend in crypto asset prices that will lead to increased borrowing power. Further, Aave’s net margins increased in our model due to a likely shift towards GHO borrowing over third party stables & a revamp in the protocol’s Safety Module, which will be further explained later. 

Crypto’s leading lending market is on pace to have its first profitable year during 2024, as supplier incentives have dried up and active loans have continued to trend upwards, sitting north of $6B actively borrowed. Aave is clearly a large beneficiary of both the liquid staking and restaking markets, as users deposit LSTs/LRTs, borrow ETH, swap the ETH for the liquid staking tokens and follow the same process again. This is called looping and it allows Aave users to generate the net interest margin (APY associated with the LST/LRT deposit - Aave borrow interest) without taking on tremendous price risk*. As of September 12th, 2024, ETH is Aave’s largest outstanding borrowed asset with over $2.7B in active loans across all chains. We believe that this trend, enabled by the concept of Proof of Stake + Restaking, has changed the landscape for on-chain lending markets - greatly increasing the utilization of a protocol like Aave in a pretty sustainable manner. Before looping grew in popularity, these lending markets were dominated by users looking for leverage against their crypto, such that they would tend to only borrow stablecoins given they were heavily skewed long. 

The introduction of GHO created a new, higher margin lending product for Aave.  It is a synthetic stablecoin from which none of the borrow fees need be paid out to suppliers. It also allows the DAO to offer slightly below market interest rates, driving the demand for borrowing in otherwise difficult environments. GHO is undoubtedly one of the most important parts of Aave to monitor going forward from a financial perspective, given that the product has:

1. High upfront costs (Technical, Risk & Liquidity)

   1. Audits, development work & liquidity incentives will continue to slowly dissipate in the coming years

2. Large relative upside

   1. The outstanding GHO supply is $141M, which is only 2.35% of Aave’s total outstanding loan balance and 2.7% of the outstanding DAI supply

   2. Nearly $3B in non-GHO stablecoins (USDC, USDT, DAI) are currently borrowed on Aave

3. Higher margin than Aave’s lending markets 

   1. While there are other costs to consider while issuing a stablecoin, it should be cheaper than needing to pay out suppliers 

      1. Maker DAO’s net revenue margin is 57%, compared to Aave’s 16.31% margin 

The protocol’s native token, AAVE, is trading at a $2.7B fully diluted valuation (FDV), giving it roughly an ~103x multiple on its estimated $26.4M in annual earnings, however we believe that this could be effectively compressed over the coming months. As mentioned above, favorable market conditions should increase borrowing power, spur a new demand for leverage and likely be accompanied by liquidation revenue - which has been quieter throughout 2024. Finally, even if GHO’s market share growth is just the result of the stablecoin eating into Aave’s traditional lending market, it should have an immediate positive impact on margins. 

MakerDAO

Maker Protocol is a decentralized organization which issues a stablecoin (DAI) against a wide range of crypto & real world collaterals, such that users can both lever their assets and that the crypto economy can have access to a “decentralized,” stable store of value. Maker’s protocol fees consist of “Stability Fees” which are generated by interest paid from borrowers and the yield generated by the protocol’s allocation to yield generating assets. These protocol fees are split between the MakerDAO and depositors of DAI into the DAI Savings Rate (DSR) contract at a rate dependent on the DAO. Like Aave, MakerDAO also charges a liquidation fee. When a user's position falls below the necessary collateral value, the loan is closed through an auction process and the protocol takes a portion of the remaining position value to discourage liquidations and protocol stress. 

MakerDAO has flourished over the last several years, benefiting from liquidations during the speculative ups and downs of 2021 but ALSO creating a more sustainable and less risky line of business as global interest rates increased. Introducing new collateral assets like United States’ Treasury Products and USDC allowed Maker to make their assets productive and generate returns superior to the standard DAI borrow rate. When exploring the DAO’s expenditure, a couple things are clear to us:

1. DAI being deeply ingrained throughout the crypto ecosystem (CEXs, DeFi) has allowed Maker to avoid dishing out millions of dollars in liquidity incentives. 

2. The DAO has done an impressive job in prioritizing sustainability

Throughout 2024, Maker is on pace to generate a net protocol income of roughly $88.4M. Given that MKR has a $1.6B valuation, it is trading at a 18x multiple to net protocol income. In 2023, the DAO voted on revamping the protocol’s tokenomics to return some of these earnings to MKR holders. As DAI accrues to the protocol through continuous borrow interest rates (stability fees), Maker builds up a system surplus which they target to keep around $50M. Maker’s Smart Burn Engine utilizes this surplus to buy back and burn MKR through their Surplus Auction.  According to Maker Burn and visualized by Steakhouse below, 11% of the MKR supply has been bought back and used for burns, protocol owned liquidity or treasury building.

Lido 

Lido is the largest liquid staking provider on Ethereum, a platform which connects ETH holders with a decentralized network of validators that are willing to stake their assets. When the user stakes their ETH through Lido, they receive a “Liquid Staking Token” or a fungible representation of their underlying staked balance, such that they can avoid both unstaking queues & the opportunity cost of not being able to utilize staked ETH within DeFi. Lido’s protocol fees are the ETH yield paid out for validating the network, which is split between the stakers (90%), the node operators (5%) and the Lido DAO Treasury (5%). 

Lido is an interesting case study for DeFi protocols. As of September 10th, 2024 - they have 9.67M ETH staked through their protocol, roughly 8% of the entire ETH supply and more than 19% of the staking market share. At $22B in total value locked, there is arguably no other protocol that has taken control of the market as well as Lido. However, you can see above that they are still shy of profitability. What changes could be made to ensure that Lido is able to cash flow in the near term?

The DAO has made massive strides in cutting costs over the past two years alone. Liquidity incentives were hugely important in bootstrapping stETH as power users naturally gravitate towards the LST that is the most liquid and ingrained throughout the ecosystem. We believe that the DAO will be able to further decrease this line item as it becomes clear that stETH has an impressive moat. If Lido were to completely cut liquidity incentives - like Maker - we estimate that they would already be in positive territory for 2024. Even with the cost cutting, $7M in the black might not be enough to justify LDO’s $1B+ fully diluted valuation. 

In the coming years, Lido must look to either expansion or cost cutting to grow into their valuation. We see a couple potential paths to growth for Lido, either the ETH network wide staking rate increases from 28.3% or Lido pushes hard to expand outside of the Ethereum ecosystem. We believe that the former is fairly likely on a long enough time horizon. For comparison, Solana’s staking rate is 65.5%, Sui’s is 79.5%, Avalanche’s is 49.2% and the Cosmos Hub’s is ~61%. By doubling the amount of ETH staked & maintaining its market share, Lido would be able to generate another $50M+ in net revenues to offset their costs. This assumption is also severely over-simplified and does not account for ETH issuance getting compressed as the stake rate increases. While increasing current market share is also possible, we saw Ethereum’s social consensus grow very skeptical of Lido’s dominance during 2023, which marked the top of its blitzkrieg growth. 

ether.fi

Like Lido, ether.fi is a decentralized, non-custodial staking and restaking platform that issues liquid receipt tokens for their user’s deposits. ether.fi’s protocol fees consist of ETH staking yield AND Actively Validated Service revenue that is paid out for providing economic security through the Eigenlayer ecosystem. These fees are broken up by ETH staking yield, which is split between the stakers (90%), the node operators (5%) and the ether.fi DAO (5%) and then Eigenlayer / Restaking rewards, which are split between stakers (80%), node operators (10%) and the ether.fi DAO (10%). ether.fi has a number of other ancillary products that generate notable revenue, including “Liquid” which is simply a number of restaking & DeFi strategy vaults that attempt to maximize yield for depositors. Liquid charges a 1-2% management fee on all deposits that is accrued back to the ether.fi protocol. Additionally, ether.fi recently launched Cash, a debit/credit card product that allows users to either spend their restaked ETH or borrow against it for real life purchases. Cash grants users the ability to earn cashback and avoid crypto offramps & gas fees, in exchange for an annual fee paid in ETH. 

ether.fi is the undisputed market leader in liquid restaking as of September 2024, with $6.5B in TVL across their restaking and yield products. We have attempted to model out the potential protocol revenue from each of their products within the above financial statement, using the following assumptions:

1. ether.fi Stake will have an average 2024 TVL of ~$4B, assuming the current stake remains constant for the rest of the year

   1. The average ETH staking yield will fall around 3.75% for the year

   2. EIGEN pre-market FDV is roughly $5.5B & the restaker rewards emission schedule of 1.66% during 2024 & 2.34% during 2025 means that ether.fi should be directed top line EIGEN revenue of ~$38.6M in 2024 and ~$54.4M in 2025

   3. By looking through EigenDA, Omni & other AVS reward schemes, we estimate a total of ~$35-45M will be paid in rewards to Eigenlayer restakers, an annual yield of 0.4%

Cash is the most difficult revenue line to model out, given its recent launch and the lack of transparent precedence across the space. We worked with the ether.fi team to gauge the demand for pre-orders, alongside the cost of revenue seen by large credit card providers to come to a best estimate for 2025 - something that we will watch closely over the coming year. 

While we understand that ETHFI token incentives are a cost to the protocol, we have decided to leave them at the bottom of the financial statement for a handful of reasons, including: these expenses are heavily frontloaded due to its airdrop and bootstrapping, these expenses are not a necessary cost of business moving forward AND we believe that EIGEN + AVS rewards will be sufficient to offset the diminishing ETHFI emissions. Given that withdrawals have been enabled for some time & ether.fi has already seen the heaviest of its net outflows, we think the protocol is closer to settling in on a longer-term sustainable TVL target. 

Token Value Accrual and Scoring System 

Beyond simply evaluating these protocol’s ability to monetize their product, it is worth exploring where each protocol's earnings end up - extremely relevant to the crypto industry. Regulatory uncertainty has been a driving factor in creating a vast landscape of earnings distribution mechanisms. Dividends to token stakers, buybacks, token burns, accumulation within treasuries and many more unique approaches have been taken to attempt to allow token holders to participate in the upside of protocols and have a reason to participate in governance. In an industry where token holder rights /= shareholder rights, market participants must thoroughly understand the role their tokens play in the protocols which they govern. We are not lawyers & are taking no stance on the legality of any distribution method, simply exploring how the market could react to each. 

Stablecoin / ETH Dividends:

• Benefits: Measurable benefit, Higher quality payout 

• Drawbacks: Taxable event, gas claims, etc

Token Buybacks: 

• Benefits: Tax free, constant buying pressure, growing treasury 

• Drawbacks: Subject to slippage & frontrunning, no guaranteed return to holders, concentrating treasury in native token 

Buyback & Burn:

• Benefits: Same as above, increases earnings per token 

• Drawbacks: Same as above + no treasury growth 

Treasury Accumulation

• Benefits: Increases protocol runway, diversifies the treasury, still under control of DAO participants 

• Drawbacks: No immediate benefit to token holders

Tokenomics are clearly more of an art than a science and it is difficult to know when distributing earnings to token holders is a more effective use of capital than reinvesting it in growth. For the sake of simplicity, in a hypothetical world where a protocol has already maximized its growth, owning a token that is redistributing earnings will increase a holder's internal rate of return and take risk off of the table every time they receive some form of payout. We will explore the design and the potential value accrual of ETHFI and AAVE below, both of which are currently being revamped. 

Forward Looking 

Aave 

As of today the GHO supply is 142M. Exploring the current dynamics, the weighted average borrow rate for GHO is 4.62% and the weighted average stkGHO incentive payout is 4.52%, with 77.38% of the total GHO supply staked in the safety module. Therefore, Aave is earning 10bps on $110M worth of GHO and 4.62% on the unstaked $32M. There is of course room for GHO borrow rates to drop below 4.62%, given global interest rate trends and stkAAVE discounts, so we have added projections for GHO’s impact at 4% and 3.5% as well.  There should be many opportunities for Aave to foster the growth of GHO during the coming years, the chart below breaks down how the path to $1B in outstanding GHO loans will impact the protocols earnings.

While Aave is clearly positioned for growth, Marc Zeller also put forth a temperature check within Aave’s governance forum to revamp the protocol's expenditure as well as Aave’s native token, AAVE. The premise of the revamp is that Aave is quickly becoming a profitable protocol, but that they are currently overpaying for an imperfect safety module. As of July 25th, Aave had $424M in the safety module, primarily consisting of stkAAVE & stkGHO, both of which would be imperfect assets to cover any bad debt due to slippage and depeg risks. Further, through token emissions the protocol is incentivizing AAVE secondary liquidity, such that slippage could be minimized if stkAAVE must be used to cover bad debt. 

This concept could be radically revamped if the DAO votes to instead utilize aTokens like awETH and aUSDC for the safety module, while isolating stkGHO to only cover GHO debt. stkGHO would never need to be sold to cover bad debt, simply seized and burned. aTokens like the ones mentioned above are extremely liquid & make up a majority of the protocol's debt. In the event of under collateralization, these staked aTokens could be seized and burned to cover any bad debt. The goal of the proposal is to lower expenditure on both safety module & liquidity incentives, while garnering more effective backstopping. Current safety module spend is ~44.3M  annually, making a 10-20% efficiency improvement is absolutely massive to the protocol and to AAVE as well. Zeller further explains the role of stkAAVE under the new plan in the image below. 

If the proposal is voted forward, it should have beneficial implications for the AAVE token as it will now have more constant demand, but also will allow holders to be rewarded without having the downside risk of getting their stkAAVE seized to cover bad debt. We are uncertain of the tax implications of the staking contract wrapper, but it heavily favors long term holders of AAVE through the constant buy pressure & redistribution of tokens to stakers. 

ether.fi

Establishing an earnings multiple for ether.fi is tempting, given the protocol’s success in quickly creating a sustainable business model. For example, the protocol’s development team and DAO move extremely quickly and have attempted to showcase their financial positioning through a successful proposal that will use between 25*-50% of revenue generated from the Restaking & Liquid products to buy back ETHFI for both liquidity provisioning and the treasury. However, using 2024 earnings numbers to come up with a fair valuation may be futile and complex given the lack of AVS rewards, heavily frontloaded startup costs and the fact that the majority of its product suite is brand new. 

The ETHFI token has a fully diluted valuation of $1.34B and is on track to be slightly profitable (barring liquidity incentives) on the year, giving it a very similar profile to Lido’s LDO. Of course ether.fi has to survive the test of time, but it appears that the protocol has a potential route to profitability much faster than Lido and a higher earnings ceiling given continued success with the broader product base. Below is a conservative breakdown of how AVS rewards will contribute to the protocol’s earnings beyond simply ETH staking and EIGEN incentives, which should add a much needed boost to earnings without a drastically different cost base than Lido. The AVS rewards yield is the rewards that restakers will accrue simply from AVS payouts. 

As seen with Lido, liquid staking/restaking is a highly competitive sector that keeps margins relatively thin. ether.fi has shown a strong understanding of this limitation and has focused on simultaneously dominating market share while building out ancillary products that fit well into their broader restaking & yield generation thesis. Below are reasons that we believe these other products fit well under the ether.fi umbrella:

1. Liquid: We firmly believe that LRT power users are familiar with DeFi lego blocks and are looking to maximize yield, drawing them to products that could automate their DeFi strategies. Once AVS rewards are actually “live,” there will be dozens of risk/reward strategies and a new native form of yield within the crypto economy. 

2. Cash: Much like LSTs, LRTs are a superior form of collateral to vanilla ETH, given that they are sufficiently liquid. Users can either use liquid restaking as a yield bearing checking account or borrow against their asset for daily spending at nearly zero cost (restaking rate - stablecoin borrow rate). 

Conclusion

Many of the numbers used throughout this report are subjective, given they are projections based upon partial year data, trends, market conditions and discussions with developer teams. We plan to follow up on this report at the end of 2024, to both paint a more accurate full year picture & dissect how the market reacts to the growing earnings of these top DeFi protocols.

Disclaimer:

The information provided by Kairos Research, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. Kairos Research does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.