Distributing liquid restaking rewards matters for user experience, DeFi composability, operational cost, and, potentially, tax treatment. The following piece explores four practical approaches to distribution.
- Auto-compound
The simplest choice for users is to sweep every NCN reward into the underlying collateral backing the LRT. For ezSOL, an LRT entirely backed by jitoSOL, this means selling token rewards for SOL, and then redepositing this SOL into the ezSOL vault as jitoSOL. This way, users who hold ezSOL benefit from a slowly increasing exchange rate without needing to do anything.
This means no additional tokens cluttering wallets or DeFi positions, and no additional actions needed on the user’s part to earn rewards. ezSOL stays a single, composable asset, so it fits cleanly inside LP pools and throughout DeFi. US guidance (see https://x.com/jito_sol/status/1925538608938615294) also suggests that value accrued inside an LST isn’t taxed until you actually sell it or withdraw, however you should double check before filing.
On the other hand, NCNs may not like this method of rewards distribution as it puts sell pressure on the issued rewards token, and it may dampen the marketing effect of distributing rewards to users.
- Index and distribute
To avoid automatically swapping reward tokens for the underlying collateral, we can simply index every ezSOL / bzSOL holder at a chosen slot and distribute NCN rewards pro-rata. Renzo already does this across EigenLayer and Symbiotic and over a hundred integrations, so the tooling is battle-tested.
This means NCNs can ship one lump-sum transfer, with Renzo’s indexer doing the distribution. The reward tokens land in each user’s wallet, maximizing distribution.
The downside of this approach is that recipients inherit the hassle of custody, trading, and managing rewards tokens. Thousands of micro-transfers chew through Solana priority fees, and for users who hold smaller positions, this may lead to them accruing “dust” rewards in many different tokens that aren’t worth the effort of selling or using.
- Opt-in staking vaults and risk tranching
A middle ground is to let passive holders keep ezSOL untouched while power users lock it into a secondary vault that soaks up a larger share of rewards, and the first slice of any slashing losses. Think of it as senior and junior tranches, but onchain.
This benefits traders who want extra yield and are willing to self-select into taking on additional risk. It also benefits users who’d prefer a safer asset with slightly lower rewards.
The negative is that this type of tranching effectively creates a new token which competes for liquidity across Solana DeFi. The extra step to stake and unstake also adds friction which most retail users ignore.
- Token-2022 (and its limits)
Solana’s Token-2022 Program can append transfer hooks and historical balance tracking. In theory, this allows Renzo to ship rewards automatically without snapshots or wrappers. In practice, LP pools hold tokens, and the pool contract, not the end user, shows up as the owner. The fix is to add another wrapper layer which shares the same downsides as the staking vault. For now, we are watching the Token-2022 ecosystem mature before committing to an immutable change.
Today, Renzo’s ezSOL, bzSOL, and ezJTO are live with auto-compounding because it does the most good for the most people: zero clicks, no extra tokens, DeFi composability, and a potential tax deferral benefit. In parallel, we’ve built the indexer and we’ll keep it ready to go: when an NCN prefers direct user distributions, we can accommodate.
Renzo brings unparalleled experience to the Solana restaking ecosystem, having been active in restaking for 18+ months and delegating security to 35+ networks. If you’re an NCN looking for delegated security, reach out to me @dogwifbucket on X.
Restake with Renzo.