Key Takeaways on Jitonomics
- To make the most informed decision, we would need to know more about how Jito Labs is approaching the MEV business and developing the block engine.
- Blockworks Advisory is generally against buybacks and would be prefer reinvestment into other product lines (JitoSOL growth, more first party product NCNs, demand-side third party NCN incentives, Jito-branded stablecoin, etc)
- We’re in favor of experimenting with bartering with the treasury JTO at hand instead of using protocol revenue, with strict milestones/vesting schedules for both parties involved.
State of Jito Today
In order to figure out Jito’s value capture mechanism, the DAO must think deeply about the end goal Jito aims to achieve. To Blockworks Advisory, Jito is a twofold business (liquid staking and MEV) branching into a tertiary territory (restaking).
Today, Jito’s success is largely attributed to its MEV product, and thus it stands to reason that prioritizing innovation there may be the best. The reality is Jito’s dominance in the MEV business through the block engine today is not promised tomorrow. As Solana’s scheduler becomes more optimized over time, we foresee Solana REV coming increasingly from priority fees and less-so tips through the block engine. Today, Jito tips make up just over 50% of total REV, with priority fees hovering around 35-40%. Additionally, competition in this vertical is growing, with teams like Temporal, Bloxroute, Raiku, etc all wanting a piece of the pie.
As for the LST business, while Jito commands a decent lead at 36% market dominance of all liquid staked Solana, in our view the job is not finished. When looking at other ecosystems, leading LSTs have anywhere from ~70% market share, in the case of Lido and Stride, to 90%+ market share in other ecosystems.
With the restaking business, while it is too early to gauge success, Jito was a later entrant into this vertical and has already distributed over $330k in real yield via the Tip Router (a first-party NCN built by the Jito Labs team).
Due to possible future optimizations decreasing Jito’s dominance of the MEV business, then Jito may want to allocate more revenue to pushing itself deeper in the Solana stack and innovating within this area to further entrench its moat in Solana MEV. We give some potential first party product ideas that both dogfood the restaking business and/or leverage Jito’s MEV positioning, but would like to hear Jito Labs’ thoughts on the MEV business and a potential future roadmap. Additionally, there is certainly an opportunity for Jito to pull the ladder up and have JitoSOL cement itself as the stETH of the ecosystem as it grows. These aren’t mutually exclusive and of course a balance should be sought.
Balancing Growth vs Returning Capital
When discussing buybacks, we’d like to point out the important difference between programmatic buybacks vs. strategic buybacks. This discussion at large is a strategic buyback, which we are more in favor of today over a programmatic buyback. The endgame should be a programmatic buyback once all else has been saturated because this would be automated and consistent. A programmatic buyback could also be executed with some PID controlled method where there would be dynamic adjustment to how much/when to buy tokens based on certain market signals/internal protocol conditions. Though, of course parameter tuning for this would be difficult and could be gamed for vulnerability (a governance attack would be a nightmare here).
Generally speaking, Blockworks Advisory is against programmatic buybacks structured similarly to Raydium’s, which was indiscriminate and has led to over $82M in unrealized losses as of March 13th. As we alluded to above, we view this as an endgame decision that evolves throughout a protocol’s lifespan. It was too early for Raydium to initiate these buybacks, especially when competent competitors are still building and incentivizing growth (PumpSwap, etc). There’s also a paradox to a buyback program where if it stops then it may signal something negative to the market. Buybacks are an assertion that capital cannot be more effectively allocated to maximize future value.
With respect to the yield subsidy idea, we believe this could be a better use of Jito’s revenue in order to grow the dominance of JitoSOL. Jito must continue to cement jitoSOL as the dominant asset in the Solana ecosystem, especially as ETF staking conversations continue to move forward on the regulatory front. This means more than competing on yield, but competing on liquidity, utility, and peg-stability. Big investors prioritize avoiding loss over yield maximization. In the Ethereum ecosystem, we’ve seen Lido’s stETH maintain dominance over the existing liquid staking products because of the sheer liquidity it maintains. Staked Frax ETH historically has achieved higher yields than stETH, yet stETH maintains market dominance.
To deepen jitoSOL liquidity, it may be worth building a reserve of protocol owned liquidity (POL) so the DAO becomes the liquidity provider of last resort. The DAO could find prospective opportunities to deploy SOL or stablecoins to create deep JitoSOL-JTO or JITOSOL-SOL pools where needed. These pools could generate revenue for the DAO and deepen the liquidity for all users, especially institutions.
Jito DAO could either launch a liquidity committee or use veTokenomics to keep watch of utilization ratios of JitoSOL across the Solana ecosystem and provide additional liquidity in markets accordingly. There have been many experiments using veTokenomics to incentivize liquidity with emissions or real yield, but another option is to use this same mechanism to deploy POL (which is something the Cosmos Hub has been experimenting with).
As for VRT yield boost, while we think Jito DAO could use revenue and/or treasury JTO to bootstrap demand for NCN ecosystems, we don’t believe artificially boosting supply side VRT yield is the best use of funds. Restaking has shown to have a demand-side problem thus far, not a supply-side problem.
New Product Lines
To diversify Jito DAO’s revenue streams, we should start to consider other business lines that the DAO could fund the buildout of. Example: can the DAO fund new first party NCNs, similar to the Tip Router? In our view, there are still multiple opportunities on the table for Jito to potentially venture into:
- Decentralized RPC service similar to Infura’s DIN as a first party NCN
- Jito Stablecoin (this would also bolster the case for protocol-owned liquidity).
- This can be backed by TBill’s with additional yield from Jito’s MEV business, a delta neutral stablecoin akin to Ethena or Resolv backed by jitoSOL, or an overcollateralized CDP similar to Liquity v2’s design. Stablecoins make for a particularly interesting case for Jito, the market of stablecoins is still nascent on Solana, and existing decentralized solutions still do not have legs. However, a bit of pushback here is that bootstrapping a stablecoin business is extremely hard and has failed in the past even with prolific applications and web2 teams ( PYUSD which despite being 3rd in market share, pales in comparison to the 12b provided by Tether and Circle).
- Voyeuring into BTC with a JitoBTC variant similar to Gazelle’s Proof of Concept for an EigenBTC.
Jito DAO’s Treasury and Bartering
Another goal for the DAO should be to diversify and grow its treasury holdings. With a treasury of ~$12.8M largely denominated in jitoSOL, the treasury must be prioritized. Importantly, Blockworks Advisory does not view JTO as assets on the DAOs balance sheet - they are unissued tokens that require tokenholder dilution to realize their value.
Generally speaking, we like bartering, but we are against buying JTO on the open market via protocol revenue with the sole purpose of bartering. If the DAO is in favor of experimenting with bartering, we would propose the use of treasury JTO. We believe this is a powerful tool to supercharge growth for the DAO as Jito is one of the few protocols capable of owning a significant portion of the float for another token. For this to be successful, the DAO should give authority to the Foundation or a DAO-owned committee to execute deals of this nature in private to ensure the public markets don’t front run. Additionally, these bilateral deals should require vesting schedules that have KPI milestone targets agreed upon by both parties for longer term alignment. With other protocol tokens in the DAO’s hands, it could give Jito preferential treatment for jitoSOL or other first party products that are eventually built.
Interestingly, Aave recently executed something similar with Fluid, where Aave made a $4M investment into INST tokens (now FLUID). This was a low-lift strategic play that:
- Opened AaveDAO to the upside of Fluid.
- Gave AaveDAO the possibility to leverage its token holdings into Fluid governance.
- On a soft-level, opened up relations between the two protocols.