Solana's Fee Shift: LSTs Surge as Highest-Yielding Option
1min read Solana's recent update has redirected all optional priority fees paid by users to the validators running the blockchain, marking a significant shift in the network's fee distribution mechanism. This change, activated in May 2024, aims to address concerns raised by validators who voted to eliminate the 50% burn rate, which was causing some validators to engage in mutually beneficial side deals with traders.
As a result of this update, liquid staking tokens (LSTs) have emerged as the highest-yielding option for Solana stakers. LSTs allow validators to pass along priority fee rewards to stakers, unlike regular Solana staking. With the new fee distribution mechanism in place, validators will receive 100% of the priority fees, making LSTs an attractive option for stakers looking to maximize their yields.
In response to this development, Solana LST provider Sanctum announced the creation of an LST for every validator on the network, increasing the total number of LSTs to over 1,000. This move has led to a significant increase in yields for LSTs, with Jupiter's LST yield rising to 11.96% from 10.69% prior to the update.
While LSTs offer attractive yields, they are not without their criticisms. Converting native stake into an LST could potentially create a taxable event for SOL holders, and LST holders must trust that validators are passing along the full yield. Some industry experts, such as Max Kaplan of Sol Strategies, have expressed concerns about the trust-based nature of LSTs and the potential for "rug pulls."
To address these concerns, projects like Jito have developed solutions such as TipRouter, which automatically distributes priority fees and can be verified on-chain. As the Solana ecosystem continues to evolve, it will be crucial for validators and LST providers to address these challenges and maintain the trust of their users.
