Solana uses PoS, specifically “Bonded Proof-of-Stake” (BPoS), meaning anyone who holds SOL can delegate their votes to any validator they choose and share in the rewards (or penalties) for validating transactions. Validators currently (2023) earn ~6.5% in inflationary rewards, but rewards will decrease 15% YoY until settling around ~1.5%. Validators also earn transaction fees but they are negligible at this point.
In addition to PoH, Solana uses a unique take on the Practical Byzantine Fault Tolerance (PBFT) in the form of a consensus algorithm called “Tower BFT.” This is a complementary layer to PoH, helping to optimize the entire consensus process. In short, Tower BFT leverages the sequentially generated clock from PoH. Because transaction execution is separated from finality thanks to the combination of PoH and PoS, Solana can operate with ~400 milliseconds block times, one of the fastest in the industry. In practice, a transaction is considered final on Solana once it has received 31 block confirmations (~12 seconds), anything less is technically still a pending transaction.
Additionally, over the course of 2022, Solana's network consistently improved over time. In H2 2022, the average block time decreased significantly. This is partly due to an increase in the ratio of vote transactions to non-vote transactions (as vote transactions require less computational power) but also as a result of various software upgrades to the network. The NFT minting/spam problem, which had caused intermittent downtime on the Solana network in the past, has had a reduced impact in recent months, and the situation is expected to continue improving with the implementation of solutions such as QUIC, fee markets, Jito, and Firedancer.
The JitoSOL Differentiator
Jito has paved its distinct path in this landscape by introducing a pool represented by the token JitoSOL, currently linked to over 80 vote operators or validators. What sets Jito apart is its unique approach to staking, choosing exclusively those validators operating the jito-solana client. This ensures the capture of Maximum Extractable Value (MEV). A fraction of this MEV is reinvested into the stake pool, providing Jito stakers an enhanced MEV yield atop the standard staking rewards.
What distinguishes this mechanism is the separation of vote (validator) and stake accounts. While it's feasible to run your validator by staking your own account, there's an alternative: using a "stake pool," a type of smart contract on Solana. Creating a Liquid Staking Token (LST) on Solana is straightforward, often achieved by running a singular line of code, resulting in the creation of both a pool and its corresponding token. Noteworthy examples utilizing this mechanism include JitoSOL, bSOL, and laineSOL. The comprehensive management and deployment of these LSTs occur within the designated stake pool.
Jito open-sourced their validator at the end of October. At a high level, the Jito validator not only enables a more efficient market for miner extractable value (MEV) but also effectively filters spam. The Jito relayer acts as a separate transaction processing unit, thus reducing the burden on validators and increasing the stability of the Solana network. Spam has been a major contributor to two of the four times Solana has experienced downtime and has also caused high transaction failure rates on other occasions.
Interacting with the Stake Pool
For users looking to engage with the JitoSOL stake pool, there are four primary actions:
- deposit_sol: This entails transferring SOL directly from your wallet into the JitoSOL stake pool.
- deposit_stake: Stake accounts that already exist can be merged into the JitoSOL stake pool.
- withdraw_sol: Withdrawing SOL involves moving it into a different stake account, followed by a deactivation period.
- withdraw_stake: A direct withdrawal from the stake pool via a JitoSOL swap, which comes with a higher fee.
Solana's embrace of the DPOS mechanism offers a dynamic environment for stakeholders. As JitoSOL illustrates, strategic staking and a deep understanding of the ecosystem can yield significant advantages. With 84 stake accounts currently under delegation, the future looks promising for those seeking to maximize their returns within the Solana framework.
