Original text compilation: What To Build for Solana DeFi?

Original text author: YASH AGARWAL

Original text compilation: Shenchao TechFlow

Introduction

Solana DeFi has performed extremely well, with both its total value locked (TVL) and daily DEX trading volume exceeding $4 billion. Led by premium DeFi 1.0 protocols such as Marinade, Phoenix, Jito, MarginFi, Kamino, BlazeStake, Solend, Jupiter, Meteora, Orca, Raydium, Lifinity, Sanctum, and Drift, the Solana DeFi team is firing on all cylinders. These teams have weathered the FTX crash, built through the troughs of the bear market, and are now in their harvest season.

However, the performance of new teams entering the Solana DeFi ecosystem has been somewhat lackluster, partly due to a lack of new narratives and a focus on Solana’s new Only Maybe ( OPOS) mechanism has fewer teams.

Now is the time to focus on new DeFi ideas and encourage more teams to build in the DeFi space, thereby driving Solana’s economic activity.

This article attempts to present the top 10 topics, each with relevant ideas worth exploring. While we focus on Solana, some of these topics can be applied to other high-performance chains as well.

In this article, we will discuss:

· DeFi Stablecoins

· LST, MEV and Re-hypothecation

· Money Markets

· Interest Rate Derivatives

· RWA and DeFi Composability

· Perpetual Contracts and Derivatives

· DeFi Infrastructure

· MemeFi and Social DeFi

· Protocols tend to become platforms

· Interfaces (UX aggregators)

Topic 1: DeFi stablecoin mechanisms will become more diverse

We need more DeFi-native stablecoins as DeFi currencies to form liquidity pairs in DEX and lending projects. Primarily, their utility is driven by yield. . DeFi stablecoins lack utility as a medium of exchange (i.e. used for transactions).

Stablecoins or synthetic dollars can be roughly divided into the following categories:

1. Stable coins supported by legal tender, such as USDC, USDT and EURC. M0 is another upcoming stablecoin player on Ethereum.

2. CDP stable coins, such as DAI and Frax.

3. Stable coins supported by LST include:

· CDP structure, such as Lybra eUSD and Prisma’s mkUSD.

· Delta neutral projects like Ethena and Resolv Labs (UXD on Solana is a pioneer).

4. Stable coins supported by RWA, such as USDV, USDY, USDM and ISC.

5. Perpetual DEXs that offer their synthetic versions, such as Synthetix (sUSD) and Aevo (aUSD).

6. Algorithmic stablecoins, such as Gyroscope, use segregated treasury reserves to reduce associated risks and implement dynamic stabilization mechanisms that utilize the diminishing bond curve for redemptions .

On Solana, two LST-backed stablecoins are emerging: MarginFi’s YBX and Jupiter’s SUSD, as well as very early-stage projects like Surge Finance.

Alpha suggestions for Builder:

· Updated design mechanism, stable from Ethereum Get inspiration from coins.

· Market entry strategy: Most stablecoins have difficulty with initial liquidity and traction; since the primary utility is yield, this can be an interesting How to play. For example, increasing DAI’s Enhanced DAI Savings Rate (EDSR) resulted in an increase in DAI’s circulation, adding approximately $1.5 billion in DAI deposits (approximately 30% of the total DAI supply). USDV provides yields to verified miners such as DeFi projects to increase circulation, which can then also provide rewards to their users (think how Arbritrum DAO provides ARB to projects that distribute ARB to users).

· Ethena, the most popular Ethereum stablecoin (with a circulation of over $1.3 billion), is also coming to Solana. One could also build a "Solena" with Ethena-like mechanics but using SOL. However, the CEX listing of Solana LST and the depth of the SOL perpetual contract are a major hurdle but will surely be reached slowly.

The case of on-chain foreign exchange (FX) market

The foreign exchange market is huge, with daily trading volume exceeding US$6 trillion. The emergence of fiat-backed stablecoins with sufficient liquidity could pave the way for spot FX markets on-chain through order books and automated market makers (AMMs). Imagine merchants could accept payments in USDX and instantly convert them to YENX, routing transactions to multiple liquidity venues through Jupiter. Sooner or later, someone will build a spot FX trading platform on Solana.

Topic 2: (Re) Pledge and LST - the currency of SOL

Solana The LST scene has now consolidated into three major players: Jito, Solblaze and Marinade. Sanctum is another interesting player in the LST space, solving the liquidity problem and building LST as a service. However, the number of LSTs is still very small, and more LSTs would also be good for network decentralization. Furthermore, LST is a major contributor to DeFi and increasing their deposit volume in the lending/borrowing market or LP pool will increase the total on-chain value locked (TVL).

Alpha suggestions for Builder:

1. More LST: in token issuance Supported by hype and incentives, new LSTs still have a chance to enter the market and capture a significant share of LSTs. For example, Solblaze grew from $30,000 SOL to $3 million SOL in just 8 months by leveraging BLZE incentives and focusing on DeFi integration.

· Another strategy is to follow new design mechanics. For example, follow the dual-token model of Frax Ether (over $1 billion TVL), which has two tokens:

· frxETH: 1:1 with ETH It is pegged and does not accumulate staking income.

· sfrxETH: Accumulated staking income.

· This enables higher yields on staked ETH while ensuring frxETH has deep liquidity and full ecosystem integration. frxETH also has a higher DeFi TVL due to Fraxlend integration and liquidity incentives compared to peers like rETH.

2. Validators initiating LST: As MEV and priority fees increase, we are likely to see validators launch their own LST and compete with staking Participants share more rewards to attract stakers. Sanctum is a key project driving this change.

3. LST’s revenue maximizer: For example, Kamino Multiply provides a one-click treasury product, through the cycle (staking LST and lending SOL → for LST Staking SOL → Repeat) is designed for LST leverage returns. There can be a huge number of products in this space (more on that later).

4. SOL re-staking: Solana also has the opportunity to adopt a shared security/re-staking layer similar to Ethereum, allowing projects to further increase their returns through re-staking. Connect with the best validator. Unlike Ethereum, where AVS is a rollup/chain/bridge that requires economic security, Solana has yet to adopt modularity.

However, this is still worth exploring, as AVS on Solana can be a Clockwork-type Keeper network, a Python-style application chain, or anything like DePIN that needs to be economical A secure, "SOL-aligned" network. Additionally, if the Rollapp/AppChain perspective on Solana is taken hold, the SOL re-staking narrative could be huge!

5. About MEV: Recently, Jito Labs suspended the mempool service provided by Jito Block Engine due to an increase in sandwich attacks. The decision has sparked mixed reactions within the community, with some appreciating Jito's proactive approach, while critics believe it could lead to side deals and the possible development of new, private mempools in response.

As DeFi activity increases, MEV will only increase, and projects (and LST) can take full advantage of this.

Compared with Ethereum, the number of SOL in LST is still unsatisfactory (<5%), this needs to be addressed. Overall, now is the time to increase the monetization of SOL and ensure that increases in SOL price are also captured by the DeFi ecosystem.

Theme 3: Next Generation Money Market

While core money markets (lending) such as Solend ($300 million) ), MarginFi ($800 million) and Kamino ($1.1 billion) are already established, but now it’s time to innovate on the design mechanisms to make them more efficient. For example, MarginFi still lacks eMode (a feature of Aave v3) that improves capital efficiency.

Focus on higher capital efficiency: as blue-chip lending/borrowing like MarginFi and Kamino consume their points and issue tokens; users will want higher Capital efficiency, especially for liquid staking markets.

Alpha suggestions for Builder:

New design mechanisms: for example, EVM project exploration Some of the interesting mechanisms are:

· Self-paying loans provided by Alchemix, allowing you to leverage a range of tokens without the risk of liquidation.

· Modular architectures such as Euler v2 are composed of ERC-4626 credit libraries (lending pools) connected through the Ethereum Vault Connector (EVC) contract. This also enables Builders to create and activate lending vaults with various configurations without permissions, such as selecting any collateral, selecting oracle settings TVL, interest rates, etc. This can create network effects and compound liquidity, as shares of one vault can be used as collateral for any other vault within the Euler ecosystem.

· Morpho Blue improves capital efficiency.

It doesn’t hurt to take inspiration from upcoming Ethereum protocols and innovative designs. Better than just creating an Aave v3 branch.

2. Optimizer for the existing money market: Taking MarginFi’s SOL market as an example, there is a considerable gap between lending and borrowing returns. This situation is almost Available in all markets. This is because of the liquidity pool mechanism and insufficient pool utilization, resulting in lower yields: [Supply rate = Borrowing rate * Utilization rate].

A possible solution is to build something like Morpho Optimizer, where The liquidity provided is matched dynamically as borrowers come and go (effectively 100% utilization). For matched liquidity, the lender’s rate of return is the same as the borrower’s rate: matched lenders do not share interest. In the event that liquidity is not matched, it will connect to the underlying lending pool, such as MarginFi or Kamino. Altitude is also a good reference. Flexlend and JuicerFi are great for building this.

3. Fixed-rate loans: Currently, most P2P lending protocols (such as MarginFi and Solend) Following floating (variable) interest rates, low utilization leads to high spreads, essentially creating a TradFi-like banking system with high spreads but with pools as intermediaries. Fixed-rate loans are one way to solve this problem.

DeFi’s fixed rate market share is less than 1%, while TradFi’s fixed rate dominance is around 98%, due to several reasons:

· Passive: The peer-to-pool model has no expiration date and therefore requires much less maintenance.

· Lindy Effect: Floating rates are battle-tested, which results in a Lindy effect like sticky TVL.

As noted by the Delphi report, fixed-rate loans in DeFi still don’t exist. Yield protocol shutdown, Notional Finance's v2 shutdown (it started with $1B TVL and is now down to $17M) shows lack of demand. Notional Finance’s v3 launch moves to variable loans and leveraged vaults. Exactly Finance built some momentum and brought new ideas, but was heavily incentivized using OP incentives and native token emissions. Term Finance is another project worth keeping an eye on. A team that solves all the pain points (like maintaining a loan easily) and launches it with incentives can win over a potentially large market here.

Lulo Finance (the same team as Flexlend) has been trying to solve this problem on Solana but has not seen any significant traction. While fixed rates have their problems and were "ahead of their time," it's worth exploring them.

4. Solana’s Gearbox: Gearbox is a composable leverage protocol (leverage gained through lending, but with ecosystem-wide integration). Solana is highly composable in nature and can be integrated with multiple protocols such as AMM and LST. Assuming a bullish market, more projects will launch high APY incentive programs that can be integrated into this protocol for leveraged liquidity staking.

A similar idea could also be corporate debt, where revenue is generated on-chain Companies can start issuing bonds to raise capital. Think of it as revenue-based financing (RBF), but on-chain and fully transparent. This ensures that profitable on-chain companies raise funds without diluting their tokens.

Topic 4: Interest rate derivatives - unknown territory

Interest rate derivatives (IRD) are the second largest The second largest market for foreign exchange, with a nominal value of US$450-600 trillion. The absolute number comparison with TradFi may not be directly relevant. However, the emerging nature of the DeFi market, and Solana in particular, presents significant opportunities. In addition to generating money market (loans/borrowing) returns through asset management contracts, this can also facilitate the generation of organic returns.

Alpha suggestions for Builder:

Draw inspiration from TradFi, you can explore some interesting Ideas:

1. Interest rate swap for LST: This is a forward contract that usually allows parties to exchange a fixed interest rate for a floating interest rate and vice versa. Of course. In short, if you want a fixed staking rate, you sign an agreement with someone who is prepared to take the risk of a variable staking rate.

This will be very attractive to a new class of institutional and retail clients looking to gain DeFi exposure without much speculation. In TradFi, the swap is between two financial institutions, while in DeFi it will be peer-to-peer. People can choose to pay a fixed benefit or receive a fixed benefit. LSTs like JitoSOL or mSOL are the best target assets through Dividend Rate Swaps (SRS) as they are considered the “risk-free rate” of SOL in DeFi.

2. ERC-4626  is the yield token vault standard on Ethereum, ensuring the composability of all yield vaults with a TVL of over $10 billion. Building on Solana and ensuring its adoption may be key. This can open up a range of treasury products such as Sommelier

3. Earnings Peeling (Pendle) for Solana: Earnings Peeling is a cash flow discount play. Users can obtain predictable returns on the future value of the instrument, while speculators can obtain future assets at a discount. It involves separating a bond's interest payments from its principal payments. Pendle’s revenue tokenization is an implementation of this.

Some examples of Solana earnings that can be traded include: Liquidity-staking SOL, Lifinity earnings, Meteora Pool earnings, Kamino_Finance kTokens, and Solend Protocol’s cTokens (yield deposits Receipt).

An early-stage project called Exponent is exploring this direction, starting with MarginFi’s loan yield trading and then expanding to other yield derivatives. Solana DEX is also exploring "Pendle for Solana".

Topic 5: Making RWA and DeFi Composable

As more RWAs are launched chain, especially liquid and income-bearing assets like Treasury bonds. Logically, all RWAs are permissioned due to KYC and regulatory restrictions. However, Ondo’s launch of USDY (a tokenized treasury bond) and making it permissionless opens up a whole new design space. Ondo also demonstrated an interesting mechanism for tokenizing stocks that, if implemented correctly, could spark another wave of DeFi composability.

Alpha suggestions for Builder:

1. Token expansion: In terms of RWA, There are many opportunities especially with token scaling. Our article delves into these details.

2.TradFi Giants: With giants like Franklin Templeton, BlackRock, and Fidelity looking to pilot RWA on Solana, this will be a big step in the future1 - Huge opportunities can be unlocked in 2 years. First, these can be permissioned, but building permissionless wrappers and more DeFi integrations (such as Flux Finance for lending) could be a significant opportunity. For example, holders may have the opportunity to earn higher yields by tokenizing U.S. Treasuries, offering them as collateral on the DeFi lending market, borrowing stablecoins, purchasing more Treasuries, and repeating the cycle.

It is said that BlackRock funds and USDC can be combined.

Theme 6: The era of derivatives has arrived!

During the last bull market, structured products and on-chain derivatives (excluding perpetual contracts) were all the rage. Solana in particular saw DeFi Options Vault (DOV) TVL surge by more than $500 million ahead of the bear market across protocols like Ribbon, Katana, and Friktion. However, as the bull market returns and demand for yield increases, it's no surprise that these products are making a comeback.

Alpha suggestions for Builder:

1. Vertical perpetual contract or prediction market: Just like Parcl allows people to go long/short, one can build perpetual contracts for different market segments such as commodities. This is a highly category-creating game and Parcl is creating hype and amassing over $100 million in TVL.

2. Power Perpetual Contract: This is an idea proposed by Paradigm in 2021. It didn’t really take off in the last cycle due to timing issues, but it is worth a try in this cycle . Several protocols like Exponents are trying this on Berachain. Another adjacent idea is to explore perpetual options (think perpetual contracts are to futures what they are to options), which was proposed by SBF.

3. Perpetual contract aggregator: Just like we have aggregators for lending and spot DEX, although different design mechanisms bring challenges, building a perpetual contract aggregator Contract aggregators are a big enough opportunity. With the emergence of perpetual contract aggregators like Rage Trade and MUX, a similar trend may emerge with Solana, especially with designs like Flash and Jupiter.

4. Perpetual contracts on the Solana application chain: In the EVM world, most of the permanent DEXs based on the order book, especially Aevo, dYdX and Hyperliquid, for example, is transitioning to its own application chain. In the future, the Solana sustainable DEX can also build its own chain, which may provide several benefits:

· Protection from any mainnet congestion

· Provide users with an improved trading experience (transactions can be gas-free for traders)

In fact, Zeta has already begun to move towards this direction development.

5. Structured product: Build a product like Friktion. In fact, the Friktion code is still available for anyone to fork and use. An asset management protocol like Investin (a previous project by the Flash team) might also be a good idea for revival. Order books like Phoenix or Drift need to proactively provide liquidity, which can be achieved through market-making vaults. This ensures decentralized market making, otherwise all liquidity would be controlled by market makers (we witnessed what happened with Alameda after the FTX crash).

6. On-chain options: Protocols like Ribbon, Ava, and Gravity Markets serve as examples of existing on-chain options trading platforms. One can also construct binary options like Decalls (where the price goes up or down), but it is important to gain traction and build a moat.

7.HXRO: As the base layer for Solana derivatives and liquidity staking, builders can build on:

· Dexterity, Hxro’s derivatives protocol, provides the basic building blocks of derivatives (whether it is traditional DEX interface, advanced trading terminal, API, etc.), providing on-chain expiration, Perpetual and zero-day maturity futures and other margin-based derivatives markets provide all necessary risk and exchange infrastructure.

· Hxro's parimutuel protocol is the backbone of on-chain betting applications, enabling event betting with continuous liquidity through the network's "intelligent" AMM. The protocol can support a variety of on-chain betting markets for gaming, sports betting, cryptocurrencies and other active markets.

Topic 7: Building infrastructure and tools for DeFi protocols

With many billions of dollars Class DeFi protocols are emerging on Solana, and now is the perfect time to build the infrastructure and tools for these DeFi protocols.

Alpha suggestions for Builder:

1.OEV: a subset of MEV, Oracle Extractable Value (OEV) is when an application relies on Oracle updates so that arbitrageurs or liquidators can exploit this state inconsistency. As mentioned by multicoin, there is an opportunity for applications to capture OEV.

2.DeFi Infrastructure as a Service: Several protocols like Aave/Compound have been forked many times; the same is true for Solana, The protocol forks Solana Lab's reference implementation. There are considerable costs in terms of development, auditing and maintenance. It is possible to standardize and build a sustainable development company that provides a "plug-and-play DeFi protocol" - it can also be regarded as the "Metaplex of DeFi". Rari Capital (now defunct) had a similar vision and Vault infrastructure created. One result is building ERC-4626 equivalent infrastructure for Solana and taking advantage of Solana’s yield hype by servicing DeFi projects.

3. Risk management organization: This can be structured as a risk DAO or advisory committee to conduct research and risk analysis for DeFi protocols. These entities can publish public “risk analysis dashboards” with key indicators of the Solana ecosystem and provide paid research, risk assessment frameworks and risk rating services to DeFi projects.

4. Bribing aggregators or markets: In EVM, Curve Finance lets its token holders decide how much token incentives to allocate to their Every pool. This creates a dynamic where projects "bribe" token holders to vote for pools containing their tokens. Votium Protocol aggregates these bribes and automatically represents the voting power of token holders to maximize the incentives received. Having an aggregator makes it easier to coordinate activities between bribers and voters and leads to greater market efficiency. On Solana, this can be applied to:

· LST gives stake directly to validators through governance tokens

· Jupiter LFG Launchpad, projects can bribe their voters and provide token distribution as Returns

5. Privacy in DeFi: Privacy finds product-market fit in unexpected places, like airdrops. For example, centralized exchanges are also used by large players to anonymize their transactions, so protocols like Elusiv are heavily used as a result.

Topic 8: MemeFi and Making DEX are more vertical

Meme currency is a financial culture. Their value comes purely from attention and social consensus. We may be in a meme coin super cycle with Solana at the forefront.

In addition, DeFi applications will also become more social. We're already seeing some early trends:

· Buying via Telegram bots like Bonkbot has a daily trading volume of $250 million!

·Projects like Zeta or Kamino have public leaderboards.

The next front-end of DEX is likely not to be a Jupiter-style exchange interface, but a live broadcast platform for creators and viewers to place bets together, a platform with Trade integrated social feeds, or other network presence.

UI layer composability: Telegram bot makes the UI of DEX composable. Previously, people would learn information somewhere on the internet (X, Reddit, News, Telegram, etc.) and then navigate to a separate UI to trade (e.g., Drift, Binance, Coinbase, etc.). Telegram bots bring transactions to Telegram, where people are already gathering, socializing, and exchanging information.

Alpha suggestions for Builder:

1. Continuous predictions powered by Meme coins Market:

Existing prediction markets such as Polymarket are binary and discrete, so the room for upside is very limited. Most people want continuous, unlimited upside. A native crypto prediction market could actually be a meme coin (e.g., $BIDEN, $TRUMP). One could build a niche platform dedicated to trading meme coins (for example, a political platform that trades all political meme coins and predicts who will win). In fact, MetaDAO is an example of a vertical and continuous prediction market, but only for governance.

2. Meme coin frontend: Meme coin trading user experience is still not optimal: people Meme coins need to be discovered, checked for all their details on Birdeye or DEXscreener, and then traded on Jupiter, and for many early meme coins, wallets don't even have basic support. One could simply make a site like Birdeye, but dedicated to meme coins, more social, where bloggers could also praise each other and copy trades. Pump.fun is another interesting platform where people can get into meme coins very early (until $69k market cap). Another adjacent idea worth exploring is a DEX specifically suited for meme coins (currently Raydium, but the experience is not optimal).

3. Vertical DEX: More experiments in DEX design for use cases like Meme coins or LST

Vertical DEX: More DEX design experiments targeting specific use cases (such as Meme coins or LST). For example, Sanctum’s Infinity is essentially an automated market maker for LST.

Cross-chain aggregator for high-performance chains: With activities increasingly dispersed across different L1 chains, such as Aptos and Sui, building a cross-chain aggregator is a A great opportunity with significant first-mover advantage. Intent-based DEXs (leaning towards order books) are also an interesting direction to provide users with better quotes.

Theme 9: Protocols tend to become platforms

Platforms enable the creation of new products. Amazon is a platform, and a brand on Amazon is a product. The launch of Uniswap v4 hooks marks DeFi’s first platform moment, allowing builders to launch their products on top of these protocols. Not just Uniswap, but all blue chip DeFi protocols like Jupiter are starting to build ecosystems on top of their protocols.

Project Serum (now Openbook) exemplifies ecosystem building as a platform, with over 30 projects developed on it. The platforming of Solana DeFi projects is still in its early stages, but is expected to surge in the coming months. It is advantageous for builders to identify such protocols, position themselves strategically and become early players in the ecosystem.

Alpha suggestions for Builders:

Some noteworthy projects include:

1.Jupiter: Originally an aggregator, Jupiter is rapidly evolving into an ecosystem.  Adrastea is a good example, which provides leveraged gains on JLP.

2.Drift: The largest sustainable DEX on Solana. Circuit trade provides Drift DEX with a market-making vault function and can develop similar products around DLP.

3.Phoenix: Although still in its early days, as an order book, Phoenix has the potential to develop into a comprehensive ecosystem. For example, Root Exchange, built on Phoenix, offers enhanced limit orders.

Structured products and strategic vaults provide clear opportunities for the development of additional products on these platforms. While converting to a platform is a long-term endeavor, it greatly benefits value accumulation (which is why Layer 1/Layer 2 solutions have significantly higher value than applications) and shifts revenue generation responsibilities to build applications on it. This also benefits token holders of the platform protocol.

Topic 10: Interface (UX Aggregator) will become more powerful

In crypto, attention is scarce, and aggregators command it. Whether it’s a DEX aggregator (like Jupiter/1inch), a bridge aggregator (like Jumper/Bungee), or a chain aggregator (like Polygon), they have become a new and attractive narrative.

The principle is simple: the aggregator controls demand and captures user attention. While they don't currently accumulate much value (most don't charge a fee), it's likely that the underlying protocols they abstract from will soon offer them a fee or share to gain priority or remain featured (similar to how brands pay Amazon for advertising ).

Interfaces add additional value on top of the on-chain protocols they facilitate. With additional tools like UniswapX or Jupiter’s DCA tools, interfaces can win the customer acquisition battle and capture value.

In fact, Solana has one of the most powerful aggregators, with Jupiter leading the way, while other aggregators such as Flexlend aggregate the returns.

Alpha suggestions for Builder:

Aggregation opportunities include:

· Revenue aggregator

· Perpetual aggregator

· Meme Coin Aggregator

· Everything DeFi aggregator like Instadapp for leverage, refinancing and migrating positions

Although the "platform" There seems to be a blurry line between "aggregators", but the difference is that aggregators are the front end, while platforms are the foundation on which products are built. A protocol can be both at the same time, Jupiter is an example of this.

Conclusion: It’s time to sow Solana DeFi 3.0

Now is the time to build a new protocol on Solana. While EVM does serve as an inspiration, protocols should focus on core design innovation, engage in research discussions, and build true OPOS like Sanctum or Phoenix. We will make Solana DeFi even more different from Ethereum, taking inspiration from TradFi and seeing what can be built on-chain to take advantage of high capital turnover and speculation.

The infrastructure has finally reached a point where it can withstand large-scale activity. A lot of DeFi that failed before due to premature timing is now viable again. It will be exciting to see how this develops over the next few years.

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