Jito's Joyride
Hello,
Memes have a strong cultural relevance in crypto. Towards the end of 2022, when the Solana ecosystem was battered with FTX-related contagion, BONK tokens were airdropped to Solana NFT holders, OpenBook (Serum fork) traders, artists, collectors, and developers. This airdrop was worth hundreds of thousands of dollars for those who held on.
The point is that the airdrop, dubbed ‘for the people, by the people’, came right when the Solana community was reeling from a major setback in the ecosystem. That’s why the meme stuck, and BONK now has a market cap of around two billion dollars.
On December 7, 2023, Jito airdropped 10% of the supply to those who staked SOL in Jito’s validator client and used the liquid staking token (LST) JitoSOL for DeFi activity. Jito had already rolled out a points system in which points were distributed based on the size of the stake, the duration, DeFi activity, and so on.
A total of 100 million tokens were distributed to three groups:
Jito SOL stakers and users (80 million tokens)
Jito-Solana validators (15 million tokens)
Jito MEV searchers (5 million tokens)
The Jito Foundation team used sybil detection techniques to weed out ‘airdrop farmers’ and dropped 80 million tokens across 9,852 addresses. Typically, airdrops are done for two primary reasons – to reward the first set of users and to distribute the token to a broader base. Distribution matters because it brings diversity to the governance process.
Users try to game airdrops by conducting activity across multiple wallets, but the idea of distribution is to put the token into the hands of as many people as possible. Not as many wallets as possible. Individuals can often own multiple wallets, and it is common for protocols to focus on wallets instead of verified users when it comes to airdrops. Employing anti-sybil mechanisms helps projects identify real users versus those just farming the airdrop.
Note that this will always be more probabilistic than deterministic. We covered how airdrop farming is both a feature and a bug here.
These addresses were segregated into ten tiers based on their points (tier 1 had the lowest points, and tier 10 had the highest). The airdrop significantly favoured small users. Everyone in tier 1, or users with the least points, received 4,941 tokens. At the current price of $2.9, the airdrop is worth ~$15,000.
Tier 1, with 4,930 users, received the largest share of the airdrop.
Interestingly, if we consider the lower bound for the tier, tier 1 received 49.41 JTO per point, whereas tier 10 received 0.01 JTO per point. So, the lower the tier, the higher the value of the points.
Jupiter, a DEX on Solana, had disclosed airdrop allocation before Jito, but the claim process for the tokens is not live yet. Although it was known that Jito would launch a token, its magnitude was underestimated, which is probably why the airdrop was not heavily farmed.
Now that all eyes are on Solana, everyone will try to farm the next JTO. Projects like Tensor, Kamino, Marginfi, Zeta, Meteora, and others have announced their points programmes. Naturally, these points will later be converted to their respective tokens.
Many on CT think these points programmes are not a good idea. However, a counterargument is that they can be viewed as loyalty points and a more transparent way to distribute the token. They unlock behaviours that add value to the product. For example, Marginfi allots 1 point per dollar supplied every day but gives 4 points per dollar borrowed per day. It makes sense because the protocol needs borrowers. Of course, detecting Sybil activity now becomes highly challenging, as everyone farms for points, but projects like Marginfi and Zeta have means of detecting it.
For example, if a wallet matches wash trading patterns on Zeta, its Z-score (points) is set to zero.
What is Jito?
Jito is two things: a liquid staking derivative like Lido for Solana and a maximum extractable value (MEV) infrastructure for Solana. When you stake SOL via Jito, you get JitoSOL. Like Lido’s stETH, JitoSOL can be used across Solana DeFi protocols. JitoSOL keeps accruing interest from protocol emissions and at the same time captures MEV rewards described later) in the article.
The MEV part is tricky, especially given how Solana differs from Ethereum. Before getting into how Jito is looking to solve MEV on Solana, it’s critical to understand a few things:
How does Solana execute transactions?
How do fee markets work on Solana?
What is the issue with wasted computation on Solana?
How does Solana execute transactions?
Solana doesn’t have a memory pool, aka mempool, where transactions wait to get into a block. At a very high level, a mempool allows Ethereum searchers to look at transactions and spot profitable ones. For example, if someone buys a million dollars worth of token A, a searcher can buy A before this transaction is completed and sell immediately after.
This is possible on Ethereum because validators usually pick transactions with the highest fees. So, a searcher can front-run a user’s transaction with a higher fee.
Solana uses a dynamic fee model, so the fees are adjusted during congestion. How validators pick transactions is also different from Ethereum. Solana is multithreaded; that is, it executes transactions in parallel. When signed transactions reach the leader, it validates them and randomly assigns them to threads.
Only when they are assigned to different threads local to the leader are they arranged by priority fees (i.e., transactions with the highest fees get in line first).
Remember local fee markets? You can read about how they work on Solana in detail here. But here’s a quick refresher. Just as Ethereum’s gas Solana has compute units (CU) capped at 48 million CU per block, a hotspot (any account or smart contract) cannot use more than 12 million CU per block. This allows Solana to execute activity at non-hotspots as usual.
Wasted Computation
A consequence of ordering transactions at the last minute is network spamming. Here’s how. For a transaction to make it to the final few that get queued in a thread, it has to fight other transactions (against high odds). The only way to increase the probability of making it to the final few is to replicate the same transaction. When you have 100 of the same transactions, you increase your odds 100 times.
Transactions on Solana are cheap (and also dynamic; i.e., fees are adjusted automatically), so it is easy to spam the network.
Let me explain how that happens. Say there’s a potential arbitrage that could happen on-chain. There will be multiple people vying to do that trade. But only one of them would go through at a certain price point. All of the other transactions are wasted, leading to a drain on the network’s throughput.
Let’s clarify this with an example. Say that SOLUSDC is $60 on Orca and $60.1 on OpenBook. Many arbitrageurs will want to sell on OpenBook and buy on Orca, but only one of these transactions succeeds; the rest are failed arbitrage. And because the validator cannot choose or order transactions before they are queued to a thread, it may pick N arbitrage transactions, while N–1 of them fail. This results in the wastage of the validator’s time.
As per Jito Labs, in one of the epochs (each epoch is 432,000 slots or ~2 days), 58% of the compute was wasted due to failed arbitrage transactions. What is the problem here? Processing replicated or identical transactions. Once you process one arbitrage transaction, you should not spend time processing similar arbitrage transactions because they will not meet the user requirements.
Enter Jito
Okay, there are issues, but what’s being done to tackle them? Enter Jito, protocol aiming to democratise MEV on Solana. Jito has built a validator client allowing operators to capture MEV. Is this a different client? Yes and no. It’s not made from scratch like Firedancer. It is a fork of Solana Labs’ client with a few thousand lines of code that optimises for MEV.
Here’s how.
Jito introduced bundles allowing sequential and atomic (all or nothing) transaction execution. When trying to tap into opportunities like liquidations or arbitrage, the transaction order matters, and often, you want it to be atomic.
Solana doesn’t have a mempool. For Solana, transactions are sent to the leader as a stream. The Jito-Solana validator connects to a relayer and tells the network to send transactions to the relayer. It holds these transactions no longer than 200 ms. In that time, it deduplicates (removes identical transactions) and filters transactions to forward them to the block engine.
The block engine finds the most profitable transactions for the network (typically the most profitable for the searcher since they have to share a 5% tip with Jito) and creates bundles.
These bundles are then auctioned off to the highest bidders. This 200 ms delta gives searchers that much time to construct their bundles. A searcher is any operator looking for MEV opportunities on the network. This 200 ms time difference also means that the block engine and relayer create an approximately 200 ms rolling mempool. Although this stops continuous block production, it allows for efficient MEV extraction.
Essentially, Jito’s validator client reduces blockspace filled with spam and more efficiently extracts MEV.
Valuation: Is it justified?
At $2.9, Jito has joined the unicorn list on Solana with a $2.9 billion FDV. On Binance, it opened at ~$4 and dropped to $0.2 as users rushed to sell the airdrop. As of December 15, the price has recovered to $3.3. Many argue that Jito should not be valued higher than Lido (FDV $2.1 billion), the largest staking derivative.
A total of 9.2 million ETH is staked via Lido. At $2,200 per ETH, that is over $20 billion in staked assets. Jito has 6.4 million SOL staked, which is ~$424 million. So, Lido’s stake is around 50 times bigger than Jito’s.
But a few things are worth noticing here. First, liquid staking on Solana is much smaller compared to Ethereum. Over 383 million SOL is staked (out of 427 million circulating supply, so ~90% of the circulating supply). Out of this, a whopping 362 million or ~95% is natively staked, which means it is locked and not availing of any staking derivative. Liquid staking is only ~20 million SOL.
The story is much different for Ethereum. Only ~24% of the circulating ETH is staked, but ~68% (31% LSTs and 37% exchanges) is via liquid staking platforms and centralised exchanges. If we look at the same ~31% staked through different LSTs, Solana’s LST market can be approximated at ~115 million SOL or $8 billion.
Second is the MEV component of Jito. Whenever validators earn tips through Jito’s client, a 5% tip flows to Jito.
These are the early days for MEV on Solana. In the last 30 days, the total extracted MEV on Ethereum was ~29k ETH or $63.8 million. In comparison, captured MEV on Solana was ~5.4k SOL or $378k, only ~6% of Ethereum.
The point is that Jito is a combination of Lido and Flashbots, but it is in the early stages in both fields. And it will likely grow rapidly in both areas in the near future. One way to look at it is that it’s very small, and the other is that it is early.
I think the market is leaning more towards early than small. After all, we are in that market phase where probability (of growth) is being priced instead of fundamentals (in reality).
The Jito airdrop added ~$300 million in TVL on Solana overnight. The TVL jumped from $1.13 billion to $1.43 billion and remained higher. So, it is likely that most of the liquidity stayed within the Solana ecosystem and was not bridged to other chains.
Prices of NFTs like MadLads and Tensorian spiked after the airdrop, speculatively indicating that some liquidity went to Solana ‘bluechip’ NFTs.
Even after the airdrop, Jito’s TVL did not drop much. The snapshot for the drop was taken on November 25, and the peak number of SOL staked via Jito was 6.6 million on November 28. It currently stands at 6.4 million SOL.
In all, Solana DeFi has witnessed a surge in activity recently. $356 million worth of liquidity is locked across Solana DEXs. Although this pales in comparison with Ethereum’s $6.5 billion in TVL, the weekly volume on Solana is $6 billion, not far off from Ethereum’s $8.7 billion. The volume to TVL ratio for Solana is 16.85 versus Ethereum’s 1.33.
One can argue that most of the Solana activity is due to farmers trying to use sybil protocols for airdrops. Still, the magnitude of activity cannot be overlooked. For builders looking for active users, Solana’s DeFi offers a much higher velocity of capital. With a few more significant airdrops around the corner, it will likely remain elevated and perhaps create stickiness.
Until next time,
Saurabh Deshpande