Utilizing Idle SOL Deposits in Drift Protocol

General
1

The goal here is to spark a discussion around utilizing idle SOL deposits in Drift Protocol to help grow the Drift DAO treasury as well as dSOL. At the time of this writing, there are ~310K in net SOL deposits and ~13K SOL in the SOL insurance fund.

Under the hood, excess SOL deposits could be used (with a sizable buffer) to mint dSOL. Excess staking rewards can then be sent to the DAO treasury on a per-epoch basis.

Example Implementation

  1. Stake 90% of the insurance fund staked SOL with Drift’s validator via dSOL
  • Insurance fund payouts and withdrawals will be processed using the 10% vanilla SOL on hand. Any withdrawal or payout beyond this amount will trigger a redemption of dSOL to SOL and a rebalance. Otherwise, rebalancing will occur once per epoch when gains are sent to the treasury. (Note: SOL IF has never suffered a 10% drawdown.)
  1. Stake x% of net SOL deposits with Drift’s validator via dSOL

  • When SOL is deposited into Drift, the protocol can convert x% to dSOL under the hood to accrue yield, and leave the remainder on hand as vanilla SOL.

  • If SOL daily withdrawal limit is hit OR the buffer is exhausted, all excess SOL deposits staked with the validator are to be unstaked immediately, and not re-staked until 3 consecutive days pass where the withdrawal limit is not hit.

Other Considerations

  • The % of SOL held in dSOL can be algorithmically determined based on utilization factors. It can also start at a low percentage and work up gradually. Since dSOL can be instantly redeemed for SOL, this should add minimal risk to the protocol even if the buffer is breached.

  • The protocol can automatically rebalance based on the percentages determined above on a per-epoch basis.

  • Any swap fees incurred from SOL/dSOL mints/redemptions should come out of the excess gains to be sent to the treasury.

Outcomes

If such a proposal were to be implemented, the treasury inflows would be calculated as such, using an arbitrary 50% estimate for net SOL deposit staking, and 6.5% APR for dSOL:

((13000 * .9) + (310000 * .5)) * (.065 / 365.25) = ~29.6 SOL per day or ~$5,190 notional value per day based on current SOL prices.

Risks / Points to Address

  • If dSOL needs to be instantly redeemed for SOL, losses could be incurred due to slippage/fees.

  • If dSOL depegs and SOL depositors try to withdraw, the SOL may not be available, or losses may have to be socialized and/or covered by insurance fund.

  • Any other risks the community can think of should be discussed thoroughly.

Goals

If implemented, this proposal would be beneficial on 2 fronts:

  • Grow the Drift DAO treasury. These funds can be used later on for protocol development, buybacks, or any other future governance initiatives.

  • Grow dSOL and the Drift validator stake, thus increasing Drift’s voting power and influence on the overall Solana network.

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2

Ship it. Put SOL to work.

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3

One of the key advantages of DEXes over CEXes is their non-custodial nature.

By deciding to assigning depositors’ SOL for a purpose that benefits Drift itself and not the depositors - given the goal is to “increase the treasury” - and may also potentially hinder withdrawals, Drift would be stepping over the custodial line.

all excess SOL deposits staked with the validator are to be unstaked immediately,

While you could request an unstake immediately, you would not be able to retrieve the SOL until the end of the epoch - which may be days away.

That means there is a buffer of time where users may want to withdraw from Drift or trade elsewhere but find themselves unable to. This is more likely to impact high volume or high frequency accounts, like a liquidator, which often needs to effectively withdraw the SOL so to liquidate on Jupiter. It would further increase the risk of executing these operations on Drift - worse, it would do it in a way that’s impossible to quantify ahead of time.

If Drift does decide to do this, it should at the very least be something that an account gets to opt into, akin to what happens with the vaults, not something that happens automatically without their approval.

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