The Staking Economy (Past, Present and Future)

Transcript

[Music] [Applause] [Music] [Applause] [Music] Okay, thank you. Hello everyone. I really hope you enjoy Vitalik's keynote. That is very tough act to follow but I'm going to try. And today we are going to be discussing the staking economy. And what do I mean by that?

Now I'm guessing that everyone who is here and is here in this conference understand that staking is blockchain security. It is the foundation of everything we are building here and everything depends on this and it's what makes it all just work. But there's another side to it. It is actually an economy. It has a different set of factors, solutions, goods and services, big players, small players. And we are going to be talking about all of that today. But first of course I need to make some introductions. My name is Gabriela. I do research and analysis for Ethereum at course one and course one is a professional node operator that is here in Europe and we provide infrastructure and staking solutions for

many networks including and for me most importantly Ethereum. So in this presentation, what I'm going to try to do is follow like a linear timeline into staking with a focus on Ethereum starting from the past where it all began with proof of stake, present status and a view towards the future. And when I think about Ethereum and the future of Ethereum, I don't think about it in terms of like just like the next days or the next years. I'm thinking about it in the term of all the decades to come. Now the hard part isn't giving this talk. The hard part is making it last 15 minutes. So, let's get right into it.

First, I want to say that human economic relationships have been based in the same basic properties all throughout history's history, guarantees and obligations underlying all exchanges of values. So, of course, this idea also applies to distributed systems and digital assets. And that's when we start with staking. Proof ofstake systems require stakers to lock up their funds to participate in the consensus validation. It's a public service which allows them to earn rewards and the idea of staking has been around at least since 2012 with early examples such as purecoin. It was later popularized by the tender mean white paper and of course the Ethereum proof

of stake idea which was already in the Ethereum white paper. But proof the reality is that proof of stake is growing very rapidly. Right now it represents a combined market cap of $342 billion and it was clear from the start that Ethereum would move to proof of stake. So obviously users would want to take and participate in securing securing this network. However, there were several problems to be addressed like capital requirements, liquidity issues, and all the risk that comes up with log stakes, no native relegation models, things that could keep a very small validator set.

And these were very big concerns at the time that people thought that the big centralized exchanges and players would capture most of the staking market by the time withdrawals actually happen. But there was something that ETH had that separated from others and that's that they have separate validator key from withdrawal keys. So these actions could be performed by different parties. So that you needed let's say this trusted party who could be like a node operator. And back then there was only one way of staking. It was native staking either yourself or delegating these coins to the professional node operators.

And there were some networks that had in protocol delegation mechanisms that make it a little bit more like accessible to in protocol taken without custody. But Ethereum chose chose like a different route like we all know they launched the beon chain in parallel in 2012 2020 which I see myself as some sort of like incentivized test net that run for a while and the rest is history. Now as infrastructure providers we have been focused on having the least op opinionated approach to running these networks and focused mostly on like our performance and delivering very better services.

However, there are some influence that we can have because we have to make some decisions and we need to do that while remaining incredibly neutral and that has worked so far but there also weren't that many ways in which you could express your preference in the past. But now this is changing. Let's see the present state also of the Ethereum staking. Who are the players right now? When I look now, what are the differentiators or where the lines are drawn?

H like we talk a little bit about native staking in comparison to like liquid staking. So let's go a little bit more in depth into this. And one thing that people realized in relation to the risk that I mentioned previously about staking was that you could create a system where you would receive what is called like a staking voucher that represents the E that is staked and then you could be able to find someone who is in the market let's say willing to buy buy it and so on. I say people, it wasn't just any people. Actually, liquid staking as a concept was first presented by Cororus Swan by this guy, my coworker named Felix Lutch.

He called it delegation vouchers and later we presented like the whole design of liquid staking in this liquid staking report all the way back in 2019 which was inspired by our work in the Ethereum in the Cosmos ecosystem at the time. And essentially this this representation of a position would function as a receipt for state ETH and you could use that you could trade it in unisoft deposited in a m maker whatever you want to do with that but coming back to this uh the other line that can be drawn between these different kinds of types of staking let's say is custodial versus non-custodial or self-custodial and there's some overlap in here

happening between like liquid staking non-custodial and native and custodial. But there's also some node operators like course one that offer like native staking that is also non-custodial. And finally, there's another difference that exists between retail and institutional staking. And this is more related to which are the customer segments that you're trying to target and how best to serve those customers. And for example, there's a huge number of users which you can actually don't reach, you can't reach if you don't have a custodian and makes staking very simple like using the existing wallets, the exchanges either because of convenience or because of compliance.

Now speaking as a solo staker myself, but also as a node operator, h the staking rewards market is very volatile and kind of difficult to navigate. A lot of it is also has to do with like the dependency of staking providers that they have on like the asset prices. So we think also how can can we extract that and keep things going whether is ETH is like $100 or $10,000 crossing my fingers. Now, everyone sort of expected a significant increase in mistake ETH as a result of the last upgrade and withdrawals finally being enabled. And

there was certainly that was certainly like the bet we were making at Gorus one and we were right with Ethereum significantly the risk and net staking inflows have definitely surged as you can see growing by over $10 million per day in some cases. I'm making this like the closest to a risk-free rate that you can have in crypto. But what happened is that now in a burn market, Ethereum is suffering a little bit from success. If the validator entry Q is perpetually at capacity like for the next nine months, you could see the size of the active validator, let's say active validator set grow into

like two millions. And that's the second slide. like picture that you can see there and that can have like very significant effects on the peer-to-peer layer that the protocol has but yeah those are some issues but then what is the composition of this stake so the rated team estimated that 6.5% of people that are staking on like entities are like solo solo stakers that are on the set which is great like Most of the decisions that Ethereum has taken in in the past has been in favor of this. So it's nice to see like that exists some diverse and distributed set of

validators that provide let's say a strong backbone to all the network as a whole. But the market structure is very dependent on liquid staking. Actually, if the demand of staking remains as high as it is right now, it is possible that at some point SD flips ETH in the near future. And I don't know about you, but that's not the flipping that I was expecting. So, let's talk a little bit about that thing that we're all thinking. Okay, what is this LST market structure?

Well, there's two very oppositional sides that exist. Let's say on one side there's like institutional staking and on the other side there's selfstakers and in the middle exists everyone else and everyone else is taking with Lido and there are strong very strong network effects in liquid staking and I think we've all seen like the return to scale that this brings it has many reasons. One is the liquidity of a liquid staking token which not to be redundant liquidity of liquid staking but it is it it's how useful this can be and how instant can you use it the other one I guess is the

obvious opportunity cost of staking so from the perspective of the protocol that is creating the that liquid staking token you want to make it as useful as you can and the more useful it is the more people will use it and then it is a chain effect. That is in the end the power and I guess the biggest power that brand and trust has since staking which is also part of why we find ourselves in this situation.

Now the question is does this result in a winner takes all market? Good question. What I'll say is this. To the degree that a token is used at as money, it behaves as money. So it has the network the network's effects of money. In some networks where that doesn't happen, then this is not the case and you don't see those effects. But ETH is actively used and the network effects almost always win. Now don't be afraid. The outcome might not be as centralized as you think. Erh, but it will be very concentrated for those reasons that I specified. But

there's still like a big social layer to staking and in the Ethereum ecosystem that is always like there whatever happens in that case and I think for myself it is very important that it remains a very distributed system and a very secure system and for that to happen I think one of the main things you need is the oification of the layer below ETH to be able to unlock that authentification in the above level because if you can don't have that then it becomes very difficult to create products around staking and that is something that we've seen at course one we have a product called obus and we got well that is like the present

but this is like the fun part what is like the future of staking here's a few cool things and we're getting to the end of this but there are big three areas that I want to separate okay so one of them And all of this is what I would call like infrastructure level innovation that is happening in Ethereum when it comes to staking. Now getting right to to the big things me is a design by product a byproduct of block building since like the current blockchain doesn't have like rules that exist for the content and the ordering of the block.

A lot of ink and a lot of minds have gone into this topic even in this conference. There are so many so many chhats, so many talks that you can see. So I'm not going to explain like the supply chain economics or any of those models here. But as stakers, we can now take a more opinionated approach to ME through ME boost with things like relay selection, location, and more. and going deeper into it going deeper into this topic and optimizing it further makes sense as a node operator which is what we tried to do at course one and I think we've been kind of successful so far we can see here and we will be actually

publishing more on these results in our website kind of soon so watch out for that and maybe there's other ways to make yield more predictable in the future like me born but that's for other talks in the conference And we have two other things h that are the last links I'm going to mention and rollups and dbt is one of them. I put these two together because they are scaling solutions to both both sides of the stack the consensus and the execution. And with DBT we're are looking to increase the staking setup with high availability without making any security compromises that could lead to slashing and you can only do that with DBT. We are very interested in the effect that things like oval will have on performance and

also the effect it will have on the capital costs of running a node operation and something that is called the lazy validator problem which is why we're actually doing experiments on this on mainet. Right now we have a mainet oval node with other node operators and yeah that is other things that we're doing experiments with staking and finally saving the best for last liquid staking innovation and restaking for liquid staking first we have this role of light operators and we are very much looking forward to the staking router and how what that can do for the modularity in staking and then what they are trying to do is like moving from some no n note

operators to hundreds of node operators which will hopefully be a net positive for the network and with restaking this is a whole thing I actually wrote a report or a piece in our quarterly report about this topic it's called expanding the ethereum staking ecosystem h you should be able to download download that from our website very soon but in the staking world uh rehypotheation terms of terms of shape of risk takingaking and as we all know if validators are a very valuable asset and you can leverage that to perform other activities that be accountable for slashing.

I guess to the degree that this helps compete on rewards, not operators will move there as long as I guess their riskreward matrix makes sense and then stakers will also want to participate in that and the protocol that uses staking will also do that and improve the different differentiator I guess in the staking market and the risk of this is what everyone is concerned about. I'm with you. I guess this is like another topic but for me there's two pressures going on in Ethereum. One of it is like the pressure to change and keep growing in innovation and the other is the pressure to stay the same I guess to oifide this base layer.

But yeah, that is like a different idea that I want to leave you with. But I think it's almost inevitable that we will see more liquidity markets built on top of it, different levels of uh restaking, leverage and so on that happens here. H we all know what that could look like. But I think all in all these topics are testing the limits in regards to open innovation happening at the second level level in Ethereum. So yeah, those are the projects as they happen in parallel and the interesting thing will be when all of these come together and how they're going to interact together and when we we will have to do upgrades on all of these simultaneously and how

that will look like as node operators. I'm very interested. But yeah, in the end the point is how do we align and how do we work together in sync as a as an economy does and that is a staking economy. Now to close here, I think we're seeing like this staking and this is the centralized market happening in real time in front of our eyes. There is like all this open innovation that is happening in staking. Maybe some of you thought that staking was a very boring topic and nothing was happening there for a long time. Well, now a lot is happening and we are very hopeful on what that this can unlock and well we'll be heading into progress head

on I guess and I hope like that the community can also solve all the puzzles that we still have in front of us. I have full trust on that. But yeah, I am fully on time. 15 minutes is not a lot but yeah that is kind of like my telegram and we are a course one get in touch talk about staking this is also us so yeah thank you very much [Applause] [Music] [Applause] [Music]