LST Oracles

Kamino uses the stake_rate of an LST to determine a theoretical_price for each LST in the platform.

As opposed to using market_price, using the theoretical price means the platform does not rely on liquidity in the market to determine the price of an LST.

How It Works

To calculate the price of an LST, we use the following formula:

LST Stake Pool Price: SOL_staked / LST_minted

Each epoch, the amount of SOL in the pool increases due to 1) SOL Proof of Stake emissions and 2) transaction fees. The LST minted remains stable relative to the SOL increase - thus, each epoch the LST price increases relative to SOL.

Why This Approach?

The amount of LSTs in Solana DeFi far outweighs the liquidity of each LST in DEX pools. This means that market depegs can easily occur and put borrowing positions with LST collateral at risk of liquidation.

Using the stake pool to determine LST prices removes the risk of liquidation due to price depegs. Should a market depeg occur, LST positions such as Multiply, for example, would not be affected. However, should an LST platform suffer a smart contract exploit, these LST positions would still be exposed.

Thus, our oracle approach removes the risk of liquidation due to depeg, but does not remove any LST smart contract exploit risk.

Our approach assumes that arbitrageurs will restore the market_price to align with the theoretical_price as determine by the stake pool.

Should arbitrage not occur and an LST depeg be sustained - the protocol is at risk of bad debt. In the case of bad debt, losses are socialized amongst all debt positions in the system.