Thesis / Summary

Sanctum and CLOUD at $16M MC / $90M FDV is an interesting long idea, CLOUD stands to benefit from near-term structural changes to Solana staking, with little marginal sellers remaining and recently added new token sinks. The thesis is threefold:

1. Sanctum’s Validator LSTs and Router found strong PMF during a period of growing penetration in Solana liquid staking, allowing validators to differentiate in a growingly complex staking ecosystem. Validated by TVL remaining sticky at ATH in SOL terms post Wonderland S1 farming, and a diverse set of use cases ranging from infra providers (Helius), exchanges (Binance/OKX), DeFi applications (Jupiter), Memes/communities (Bonk)

2. Recent significant SIMD proposals (96, 228) set up dynamics where base issuance is lowered and priority fees to validators are increased, resulting in a larger proportion of rewards comprising of MEV and priority fees. Sanctum is in a pole position to provide a deeply liquid mechanism for individual validators to differentiate via providing idiosyncratic rewards to stakers

3. Sanctum recently revamped their fee model to monetize directly via a take rate on staking rewards, previously hindering the ability for TVL growth to be attributed to value acrual. CLOUD currently trades at 5.5x P/F, with little marginal sellers left for the next 5 months alongside catalysts for near-future token sinks: LFG vault buyers (at 180M FDV) are fully unlocked, 5 months until seed investor unlocks, CLOUD staking recently launched with ~25% of circulating supply staked with a 30d unstaking period, and Wonderland S2 on the horizon.

Sanctum Overview

Sanctum is attempting to bring the proliferation of LSTs to Solana by making them easy to launch and deeply liquid. It’s core features include:

• Infinity: a multi-LST liquidity pool, and Sanctum’s flagship LST. All LSTs will be able to share the liquidity of INF-USDC and INF-SOL, or route via INF to access the liquidity from any other LST pair.

• Reserve: a base pool of SOL that provides deep, instant liquidity for all LSTs on Solana. It can accept staked SOL and give SOL in return, serving as a shared source of liquidity for all staked SOL, and a backstop for emergency unstakes.

• Router: a swap algorithm that utilizes stake accounts swapping in and out of LSTs. When a swap is initiated, e.g. from jitoSOL to mSOL, the stake account gets withdrawn from jitoSOL and deposited into mSOL. Allowing for all LST liquidity to be shared

• Validator LSTs: Sanctum offers three SPL stake pools with different degrees of customization to allow for anyone running a validator to deploy their own LST and allow them to access liquidity from the router and reserve.

By removing the hassle of bootstrapping liquidity, teams can focus on creating unique LSTs that return idiosyncratic yields to holders. This ranges from hold-to-earn options like bonkSOL, where users receive BONK airdrops, to the classic validator tokens like hSOL from Helius

source: Decentralised.co

The Backdrop - Solana DeFi, liquid staking penetration, and recent growth drivers

Solana LST has seen a steady uptick in penetration throughout the cycle as Solana DeFi activity picked up, from ~4% to now 9.6%:

https://dune.com/21co/solana-liquid-staking-tokens 

During this period, while jitoSOL remains the most dominant by market share, we have seen the rise of validator LSTs, notable bnSOL, jupSOL, bbSOL, and hSOL, rise in adoption, taking market share from jito, but more so from marinade and solBlaze. These LSTs individually differentiate in their own ways, such as via distribution (CEXes) or enhanced yield (jupSOL/hSOL charging 0% on MEV and validator commission). There are also other kinds of issuers, such as smaller creator LSTs, where holding a certain amount gains access to gated content or alpha channels - though these have not seen meaningful enough adoption as of writing.

• SIMD96 - enables validators keep 100% of priority fees, where previously 50% were burnt. Priority fees and tips have increased drastically in 2024 as a result of network activity on Solana, but there’s currently no in-protocol solution to distribute that back to stakers. With validators competing to attract stake, Sanctum’s LSTs offer a simple way to distribute this revenue to delegators and an easy way for stakers to swap between LSTs offering the highest yield. This equates to ~2.5% of staking rewards or ~188M/y of additional rewards passed onto stakers

  

  SIMD228 - proposes to adjust Solana’s network inflation, which currently follows a fixed time-based model that begins at 8% annually and decreases by 15% yearly until it reaches a floor of 1.5%. Inflation currently sits at ~4.68%. If passed, Solana’s inflation curve will be adjusted dynamically based on the staking rate, encouraging staking when participation is low and reducing issuance when it's high. There’s extensive analysis on SIMD228 which I’ve linked in appendix below, but tl;dr is that at current staking rates inflation is set to reduce, which means MEV + priority fees will make up a larger portion of staking rewards. Notably SIMD has yet to pass, and is heavily discussed on CT.

Business model, comps, tokenomics, valuation

Sanctum recently revamped their revenue model to remove deposit fees for adding a 5% epoch fee on staking rewards, split between the DAO and validator partners, which translates to a 2.5% take rate on staking rewards. This change steers the business model closer to traditional liquid staking protocols, and allows them to much more effectively monetize their $1.1B TVL. Under the new fee model, CLOUD 

With a revamped fee model, CLOUD today trades at 5.5x MC/F or 31x FDV/F - far cheaper than its mature peers like Jito and Lido:

Catalysts 

• CLOUD staking was recently introduced, which uses futurarchy as a governance mechanisms. To participate in governance, CLOUD must be staked for sCLOUD, which has a 30d unstaking period. 41M CLOUD has already been staked, which accounts for ~25% of circulating supply.

• Sanctum’s new fee model, just announced today, to be implemented on March 14th

• Wonderland S2 is set to introduce additional token sinks to CLOUD, though timelines are unclear at the moment.

Risks 

• Liquidity is relatively thin with limited availability on centralized venues

• 33% of investor and team tokens (~12.5% of total supply), are set to unlock in mid July. Sanctum raised 2 rounds at $50 and $60M FDV respectively back in 2021.

Appendix:

Updates to Sanctum’s fee model https://x.com/sanctumso/status/1898234985372328274?s=46&t=1LgUh-sffBUPMCQpFSvkdA 

Analysis and information on SIMD proposals mentioned:

SIMD 96 

https://github.com/solana-foundation/solana-improvement-documents/blob/main/proposals/0096-reward-collected-priority-fee-in-entirety.md 

https://x.com/inSitesh/status/1889612890635731219

https://x.com/smyyguy/status/1880341498824388732

SIMD 228

https://github.com/solana-foundation/solana-improvement-documents/pull/228 

https://chorus.one/articles/an-analysis-of-simd-228 

https://x.com/kankanivishal/status/1897755581621907531