Understanding Sanctum
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Understanding Sanctum

Introduction to Sanctum

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Sanctum is the next generation stability protocol for Solana DeFi.

Sanctum acts as a buffer, or a backstop, that enhances liquidity depth across the chain, and helps reduce turbulence when volatility hits.

How does Sanctum provide stability?

Sanctum stabilises Solana through two functions.

1) Sanctum unlocks staked SOL to use throughout DeFi by providing a backstop of SOL liquidity. 2) Sanctum makes sure DeFi borrow-lend protocols remain solvent by providing a safe haven of SOL to flash loan and close LST-collateralised positions. By doing so, Sanctum unlocks new opportunities for staked SOL, and ensures the smooth functioning of DeFi.

1) Unlocks staked SOL liquidity

a. Why LSTs were created on Solana

Staking SOL earns returns and helps to secure the network. However, staked SOL cannot be easily transferred, and takes a few days to become unstaked SOL again. This fundamental trade-off between liquidity and returns is a problem that has existed for years.

Liquid staking tokens (LSTs) were created on Solana to solve this problem. They take your SOL and stake it according to their delegation strategy. In return, they give you a liquid staking token which can be easily transferred.

LST-SOL liquidity pools can then be set up that allow the LST to be instantly exchanged for SOL.

b. The problems with LSTs

However, staking with LSTs normally means giving up control of the validator that you stake with. The largest LSTs on Solana also charge a management fee of anywhere from 5% to 10% of your staking yields. Finally, LSTs also pose a centralisation risk if they get too big.

This future is about to change. The upcoming permissionless single validator stake pools release from Solana Labs will allow anyone to tokenise their staked SOL -- for free -- while maintaining control of their staked SOL and getting maximum returns.

As there will be thousands of different stake pool tokens, it is currently infeasible to have sufficient liquidity for these kinds of LSTs for them to be at all viable for use as collateral. The total liquidity would be fractured across all of these potential pairs. Depth would be laughably small. Even larger stake pools are limited by collateral depth.

c. How Sanctum backstops SOL liquidity

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Sanctum provides deep liquidity for all these liquid staking tokens. As the deepest reserve pool of SOL, Sanctum can accept staked SOL and give SOL in return. It can then unstake the staked SOL to replenish its SOL reserves.

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Unlike normal LST-SOL liquidity pools which fragment liquidity, Sanctum can service every single stake pool with a single pool of SOL. This allows every LST -- no matter how big or small -- to be used in all of DeFi. Borrow-lend markets like Drift, Jet, Mango, Marginlend and Solend can safely accept any stake pool token as collateral. Leveraged vaults like superstakesol can compose on top of any stake pool token.

Because Sanctum makes staking and unstaking cheap and easy, many applications can now stake their SOL where they previously could not. NFT marketplaces can now earn staking returns on SOL that's sitting around in unfilled orders. Sanctum unlocks DeFi opportunities for staked SOL and increases the security of the network.

2) Liquidity for flash loans

a. The Lending Protocol conundrum

In November 2022, FTX crashed and the lending protocol Solend ground to a halt as a large SOL collateral position (SOL that was deposited in the protocol to borrow USDC) became bad debt. Because most of the SOL collateral had been borrowed to power leveraged mSOL and stSOL strategies, there was no SOL in the protocol to pay the liquidators. Thus, liquidators could not liquidate the large USDC loan. And because liquidators could not liquidate the loan even as the price of SOL was free-falling, depositors lost millions of dollars (thankfully covered by Solend's insurance fund).

b. Flash loans could have helped save millions of dollars

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Flash loans are loans where a user borrows assets with no upfront collateral and returns the borrowed assets within the same blockchain transaction.

A "safe haven" of SOL with a flash loan functionality would have prevented this gridlock, and the millions of dollars of losses Solend had to cover. This safe haven could have provided the liquidity to be able to quickly close the stSOL and mSOL positions, which would have in turn allowed the large SOL collateral position to be swiftly liquidated.

Flash loans are critical not only in times of crisis; they are also useful for increasing the day-to-day efficiency of DeFi on Solana. They allow users to quickly swap the collateral type in an existing loan, or to move a loan from one lending protocol to another.

c. How Sanctum acts as a “safe haven”

As the reserve pool of Solana, Sanctum can be that safe haven. Sanctum can easily provide flash loans for a small fee, creating a more efficient and more resilient DeFi ecosystem that doesn't choke up when it matters most.

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Sanctum helps provide deep, instant liquidity for staked SOL and provide flash loans. By doing so, Sanctum unlocks new opportunities for staked SOL and ensures the smooth functioning of DeFi.

How does Sanctum work?

The Sanctum Unstake Program controls the Sanctum SOL Reserve Pool, which instantly provides liquid SOL to users or protocol that need to unstake their SOL (whether validator-staked or liquid staking token).

Additionally, Sanctum Router Program leverages on composability, cross-invoking programs and accounts like Sanctum Unstake and various stake pools on Solana to provide an interface for users to swap Liquid Staking Tokens (LSTs) without dealing with the stake accounts in-between.

For a more in-depth read, check this.