Hong Kim, Benjamin Hunter and Anthony Sassano - Institutional Staking Panel

Transcript

All right. Hello everyone and welcome to another episode of the dedicay refuel. I'm glad that that got a reaction. It makes me feel good. Um so yeah, we got a great panel here for you guys today uh to talk about I guess the boogeyman in the room which is uh institutional staking and what that means for the Ethereum network. Um yeah, I mean I I guess personally am less bearish on it than others out there. Uh, I think that it's actually a healthy evolution of where we're kind of going as a as an ecosystem. Um, but yeah, uh, before I get into all of that, I just wanted to let these two introduce themselves, uh, and what they're kind of working on. So, uh, yeah, Ben and and Hong be, just introduce yourselves.

>> Yeah. Hi, I'm Ben from BTCS. I'm the VP of engineering there. Uh, BTCS is a publicly traded Ethereum NASDAQ company. Um, we focus on Ethereum infrastructure, but we're also a digital asset treasury by uh by second nature as well. So, we accumulate Ethereum funds and deploy them into DeFi and staking. >> Uh, great to be here. Uh, I'm the CTO and co-founder of Bitwise. Um, Bitwise is an asset manager that that specializes in uh this asset class. Um and we manage about10 billion dollars worth of client uh assets in ETF like products generally regulated um financial products and uh we also have a staking division that stakes about five

billion dollars worth of ETH um in a self-custodial manner. So that's not inside the kind of traditional investment vehicles but just clients that hold ETH directly. So um I think those are the two kind of ways yeah that we uh engage with this question of like institutional staking staking within our financial products and also institutional staking offering to institutions that custody uh eat themselves but stake through us. >> Yeah. So, uh, maybe the first thing I wanted to talk about was something that I think a lot of people have a misunderstanding about. Um, and it's kind of what providers or what staking kind of setups the ETFs are going to use and that the DATs are going to use cuz Hillb had a slide just before talking

about if all of these ETFs stake with Coinbase, then Coinbase's staking share goes up massively and that's really bad for the network. But I think a lot of these entities, DATs or ETFs, they actually aren't going to stake with Coinbase. They're going to be doing their own operation for a number of different reasons. And I know Hong Bitwise recently acquired a testant which is a staking operator that has been around for a while. Um and that just I guess like for me sends a further signal out there that uh you know the ETF issuers and the DATs are interested in running their own setup. So maybe you can talk a little bit about how Bitwise is going to be uh approaching this um and uh what that kind of uh looks like in the context of the broader Ethereum staking ecosystem.

>> Yeah, absolutely. So Bitwise uh acquired a testant last year. contestants uh was a uh small focused team around eat staking and has been staking since Genesis and also is well known for the open source contributions around Fouch and Durk. Uh and uh they were um experts and and very much uh uh aligned with the ecosystem and network that we really loved and um uh brought them into the Bitwise fold last year. And um yes, I think something worth noting is that Coinbase custody doesn't mean that necessarily if you're staking through assets custody on Coinbase, that's going to Coinbase's validators. Uh they have a

number of validators on their platform. Um four or five, let's say a testant is one of them. So our ETFs uh on the US side is custodied with Coinbase, but uh uh could um would be staked with a testant. Um and uh that is the case for black rockck fidelity or like the other large issuers as well. So I think it's worth considering the difference between custodied and then staked is can be a different operator even though um it's it's from that type of setup. And yeah, I think the way that we thought about it um is that staking is a much more active relationship with the protocol um and the network than custody. Uh

custody just involves um custodying the private key and it's much more of a passive role. But uh staking and participating in consensus is much more active and um uh and that we wanted to be um have a product where we engaged in that way and that that is a way that we can be different from the black rock for fidelities of the world. >> In in some ways you can think of uh bitwise in the US ETF world we have a about a half billion dollar fund and the total kind of assets in US ETFs maybe 10 15 billion or so. So we have let's say something like 5% market share. So we're we're kind of like the like the uh independent solo staker of institutions

let's say and I think that role is very valuable because we can push for practices that we think are uh both institutional and better for the network um and implement them in these uh regulated products and demonstrate to the world that it's possible to do it that way. And um Hildobi mentioned that like we did that for example with Bitcoin ETFs where we published the addresses and demonstrated that that's possible. You can do proof of reserves in these uh US regulated ETFs and we also donate 10% of the profits of the ETFs um on on the east side and uh to to the protocol guild and the PBS foundation. So like we're we're one of the main ways that we think about how we're different from just the

traditional players is that we have traditional products but we try to build them in a way that is uh that can be kind of further contribute to the network and uh the protocol and um and that people that care about that buy our product and there can be a symbiotic kind of relationship there. So I think staking was one of the elements that we thought of as something that we can take on that could um make our product better and that we can also contribute back to the network as well. >> Mhm. Yeah. Yeah. So I guess Ben shifting over to how the DATs view things. I think the DATs maybe have more flexibility than the ETFs do in order with you know what they can do within staking but also what they can do outside of that. I know BTCS has been

doing you know Ethereum staking for for a while now. one of one of the first I think big entities to to kind of do it. Um so maybe you can talk a little bit about that and how maybe it differs from the ETF context. >> Yeah. One thing that we say is that if you're a a digital asset treasury on Ethereum and you're not doing active operations of your assets, you're you're worse than an ETF. Yeah. >> Like why would you buy a DAT that's not doing operations on chain? You should buy Black Rockck or not Black Rockck. Sorry. >> Not Black Rockck for a little slip right there. Um but yeah, we look at it from the point of view that we're we're really fighting for BIPS over other DATs, right? And if you're selling or giving away BIPS to a staking operator or node provider,

you're you're not going to be competing on the same level as a as a digital asset treasury that's staking an in-house or doing operations inhouse. Um we see that as a as a huge competitive edge over other DATs. Um obviously other DATs are doing the exact same thing. I mean once these DATs come online they see the opportunity with LSTs to get staking almost immediately with very little operations. Y >> um but they're giving away a portion of that to the middleman, right? >> Yep. >> Um but yeah, I think it's a huge competitive edge to have in-house operations and um obviously companies like Sharp Link being so close with consensus um and already consensus having operations with that. It's very natural for them to get into there where we see um other other companies like Bit Miner um taking a little slower, more conservative approach for that.

>> Yeah. Yeah. Yeah. And I I think that might be another thing that people kind of miss is that like the as you said, it's about BIPS. It's about kind of generating the most amount of value that you can uh for what you're trying to do here. Um and Ethereum staking has become incredibly competitive. Um not just with uh the ETFs and the DATs, but also with all these other kind of protocols out there. That's actually healthy for the network. >> Sure. So if we were to talk in the context of network health, which is what a lot of people tend to worry about, it's like these bigger stakers kind of these bigger institutions coming on board and and staking, you know, people will obviously worry and say, "Oh, well, what if they get like such a huge chunk and then they've got a vested interest

in uh you know, going after the core development process and influencing that." So that's always a big concern here. But for for me personally and and uh you know, I've spoken to a bunch of people about this. I just think that the fact that we have this broad competition between the DATs, between the ETFs, between the existing kind of providers and obviously the solo stakers, uh it's actually a really healthy ecosystem and it's very hard for any of these entities to actually acquire a large percentage share. Um even you know the the greatest boogeyman, Lido, that we've all been talking about for years, um their market share has gone down considerably as well. um and in in the same kind of uh time they've actually become more decentralized or they've at least moved towards a model where they can on board

even more operators. Uh so on that kind of topic there how do uh kind of you guys think about that? Um do you think that you know there's a certain point where you think that your your percentage of the network stake uh should be kind of capped at uh like you think oh maybe if we get to like 5% 10% we shouldn't go beyond that because that was another discussion that al also happened within the Ethereum ecosystem is like self capping which doesn't really make sense from an economics perspective it's like or from a capitalism perspective but like do you often think about that u and kind of how would you approach that if you were to get to to that level >> that'd be a great problem to Yeah. Yeah.

Yeah. Exactly. Like 5 10%. That's the That's the thing. I think because there's so many providers, it is it has become very difficult to to get there. >> Yeah. You know what they say is Tom Le's coming for your ETH, right? So hold on. >> Yeah. Yeah. Exactly. Yeah. Yeah. Yeah. >> So yeah know I think I think that the the risks of so much uh coll or Ethereum being held by institutions in the US is obviously censorship is the biggest one, right? like I I I don't really think that there's a huge oper or a huge centralization risk of too much capital being held by a single entity but all of that capital or all those validated operations um like being run by institutions you see OFAC compliance being a major concern right um which is a huge concern of ours as well like

we've been working with teams like shutter to help uh facilitate encrypted mimples into um Ethereum so that we can um get around that in the future and hopefully that the the protocol is able to um to get past that citrus resistance um or to to get more censorship resistance to the uh >> to the institutions. Um but yeah, overall in terms of self capping, I don't think you can get any of these any public self cap. Yeah. >> Yep. Yeah. Um I think for things like sensor resistance I think that's why proposals like fossil are very important because ultimately the network can't uh be censorship resistance over time if the way in which uh it maintains that is

to rely on stake weight. the largest thing waits to agree to uh censor not censor that's a very fragile system in some ways and so if a minority uh homestakers um uh solo stakers or or or small participants I mean like in the US ETF world I said that we're 5% market share so if we're 5% market share uh of of the validators that we run with kind of our own principles that might be different from black rockck or fidelity can contribute to sensory resistance in a meaningful way and in the current world it might not be uh uh uh like our relay setting anyways um but the I think that's why if we can solve it in in a in a protocol and network way like things

like fossil where a small minority can contribute to a meaningful amount of sensor resistance then that would be the kind of uh preferred protocol solution um another thing that I would just say on this note is that uh uh it's I think the way that bitwise thinks about this question of institutional staking growth um is can we actually make the network better uh as an institutional uh staking provider and our stake weight growing and so like an example of that is that uh we write our own um multi-node validator client called vouch and what that allows you to do is that it allows

you to run multiple consensus clients and uh have a stronger consensus rule internally within a validator about what blocks you would attest to and propose. And so um for example the kind of super majority fork uh problem that we had on uh if you want to avoid that type of problem yourself and if if uh a significant portion of the network had that type of policy then that would make the chain itself uh much more improved uh in terms of addressing that type of supermajority uh fork risk. And so uh that is something that we a we write that software and maintain that but also we we run it in that way. Um and so

we're increasing the state weight that is considering the long tale of protocol risks that maybe uh a smaller player might not be thinking about because you have to run all of the uh consensus beacon nodes rather than just one and that it is a kind of higher requirement. Another example is uh we write and maintain a um threshold uh key signer called durk which is essentially kind of sharding or um kind of MPC like multi-stig type thing for validator keys um and that requires you to run multiple machines and uh uh we also make sure that they are in different server providers as well so that you have much more resilience and security and that that increases the security and

resilience of the network ultimately if more of the network is less resilient to kind of single validator key risk and it's just a it's just a bigger operation. You need to maintain um uh more server provider relationships. We run all of our our machines um in their metal server providers and so maintaining those providers and machines and like set up for failover and all those things is requires more work. But if if you're set up as a as a as a company to do that and that's what you do, then you can get it done, right? And so in in that way the the the larger amount of the stake weight of Ethereum can be more resilient to higher uptime and security. Um and so there's there's there's um exciting aspects as well. Uh

I was I was talking about ETFs uh for for a second before and um ETFs allowed us to do uh kind of profit donation to open source. ETFs allowed us to do kind of proof of reserves because again the poolled aspects of things allowed us to do something different. So I think that's how Bitwise thinks about it like um institutions or kind of an institutional approach to things isn't necessarily de facto bad. Uh there's actually opportunities for the institutional approach to actually improve the network because we're a different type of participant in the network. And uh of course uh there's the risk that the uh large kind of economic agent or actor doesn't care about the the the network or the product properties of the protocol. But that

also kind of motivates me to grow a bit wise because um I want to uh make sure that a large economic uh player um uh cares about the network and consensus and all these things. >> Yeah. Yeah. We see that a lot with with DAS. They look for the lowest lift way possible to get yield exposure. Um, and you're right, you have to be an active participant in the network. And there's a lot of these amazing tools out there, especially, uh, DBT. Obviously, we're going to be hearing from plenty of people about DVT. It's been around for a long time. Um, I know the team at Oel and SSV making huge strides in the the uh, resiliency for these teams as well.

>> Yeah. And that might be something that a lot of people may may not know as well. Like you mentioned Vouch. Um, I know a voucher cuz I'm a nerd and I followed a test for ages. But, uh, you know, vouches probably something people haven't heard of in in the audience before. At least, you know, some people haven't heard of before. Um, but as you mentioned, there's DBT as well and there's other technologies that make uh, staking uh, or running validators or being a node operator safer, you know, more efficient, more secure for these entities. And actually like there are ways that you can have these setups that you actually take your own kind of power away like in terms of your control over your setup so that it has to go through multiple kind of layers in order for something to to kind of happen here. Um

yeah and just on that note like we talk about client diversity Ethereum community puts in so much effort and to some extent takes a hit on coordination overhead and execution speed to maintain uh many clients. Right? we have six consensus clients. Um, so six teams writing and coordinating the the same spec is is much more there's a hit on that but but there's a benefit to that but in some ways we're not maximizing that benefit because we say client diversity but like you have a thousand validators and 20% is running um prism and 10% is running like lighthouse etc.

And uh but from a fleet perspective you might have diversity but from that validator perspective if uh lighthouse has a bug that cohort of validators will go down and that cohort of the network will go down. Um, and unlike any other network that does not have a client diversity, Ethereum actually has the ability to have none of the network go down when any one client has a an issue and crashes because you could actually have a multi-node validator client like that where you're actually just running everything in parallel. And if one is just not up, then you can attest and propose blocks with the other consensus clients and Vika nodes that are up. And um that's actually client diversity in

in in the maximal way. Not the like you have 10 machines and you run different um consensus clients on each, but the you actually run everything on all of them. And that is like uh and and so um I I think like these types of uh of of of it's it's not just um prudent for the the assets uh and and is kind of part of the fiduciary responsibilities like issuers like us have but I think there's ways in which it can concretely benefit the the network's resilience. Um um Yeah.

>> Yeah. Yeah. And and I do find it funny like you mentioned other networks, they're so weak compared to Ethereum if you look at it from like a a validator kind of staking perspective like we're talking about things here that are are really tail risks a lot of the time like they're edge cases. They're things that are worst case scenarios that we don't really expect to happen and we we we've seen some pockets of stuff like over time like obviously with in the context of client diversity we have seen some clients be supermajorities but then >> you know because we have client diversity we could fix fix that then yeah you have other networks out there like even bitcoin that do not have this uh and then it's it's quite risky so I do find it a little bit funny how we we put so much emphasis on on this in the

ethereum community when we're actually in an amazing position already and we've also futurep proofed because you mentioned fossil before you we're kind of future proofing everything and putting in these these changes but it is very different to everything else out there like I haven't seen this level of of um you know focus on on this kind of stuff from any other ecosystem uh which is which is really cool so um I think Ethereum is is well positioned um uh there but you mentioned DBT I would like to just quickly hit on that um I think we're out of time soon but DBT is another technology distributed validator technology that allows us to have you know um you know more kind of like resilience in in the network. So maybe you can touch on that and is BTCS using it yet or do you plan to kind of use it?

>> Yeah, we uh we haven't announced it officially yet. >> It's it's a it coming into a public company. It was a big shift for me from private to public so I can't share too much information. Y um but we are actually um we are transitioning to DBT right now actually internally. I can't say the team uh but we do see that as a huge benefit. uh the geographic diversity, the huge incentives on there as well. Like we said, talk we're fighting for BIPS, but it opens you up to a lot of new uh possibilities on there. Um and there's also the ability to be uh client diverse through that as well.

>> Yeah. So, >> yeah. And likely we'll be moving to multiple DBT solutions, multiple um client solutions. I know Vouch is a great tool. There's also another one. I I forgot the name, but I see the guy. >> There we go. Um and so it's it's great to see that the market is actually focusing on the things that do matter and those worst case scenarios do happen. We we have seen issues where um some clients are are having adverse network effects through hard forks and uh those teams are great at at patching very quickly but it's also a huge risk.

Um but luckily the network is so uh so diverse. >> Yeah. Yeah. Oh yeah, exactly. It is so resilient, so diverse. And yeah, it's kind of crazy like even if you think about you mentioned the client teams themselves, like we even think about funding those people like long term. Like what if the EF went away? Like how do we fund these people? So just all of that kind of I think is is extremely valuable and it's why I don't worry about institutional staking being like this big thing that's going to like take over the network and everything's going to be, you know, bad. Um I think we've put in enough kind of guard rails and enough different kind of ways of of staking and um making things resilient that we're actually really well positioned for the future there.

>> Agreed. >> Yeah. Yeah. Unless you guys have anything left to say, I think that's time there. Uh if you wanted to add anything, Hong or >> uh yeah, I I think a part two I fully worry about if institutions start um um meddling in the kind of like L1 protocol road type of thing. >> Yes. So I think it's good for players like Bitwise to have a good distance from the client development uh especially on the L1. Um and so that's why for example in our uh ETH ETFs when uh we uh we think we should still be funding the the development because our business depends on it and also we we we have uh some economic ability to do so.

So that's why we donate to the protocol guild rather than individual teams or individual people because that's a more credible way for us to have um an almost like distance between the decisions but still support the development. Um and yeah and I guess I guess we we think a bit differently on the staking operational layer because that is more so taking the protocol and and running it in a way that is resilient and secure and we have views on that and we have we we think that there's ways in which we can do uh uh a a better institutional job about it without without having the kind of um distortions around the protocol direction.

>> Yeah. on the uh on the tone of what scares me most about institutions is how uh institutional uh I guess trust in Ethereum could be lost quickly by an institution losing access to their keys, losing access to the crypto and doing things the wrong way. >> Um and so we we do actually recommend teams if they if they aren't comfortable doing it in house. We've talked to a lot of these um new newer dads across Ethereum uh BSC and other networks as well to we we we push in the direction of other custodians. Yeah. because we we want that one one goes down it's it's bad for all of us. Yeah. So we uh that keeps me up at night.

>> Fair enough. >> Okay. Well, yeah, I think questions have about one or two questions here. >> Okay. In the back row. >> Sorry, not not uh a question but just for a piece of history. I think uh the client diversity um really showed in the Shanghai DOSs attacks. Yes. >> I think that was a big like point of people remembering how hard that was to get through. >> Yes.

>> Yeah. And also I think on the I guess pro in the proof ofstake world on the consensus layer side we've had some issues there as well with participation drop offs. Don't think we've lost finality but we got close. So yeah another another point there. >> Yeah. And also in the PBS life cycle as well, um some clients weren't uh fully signing the uh blob payloads and we saw a huge loss on the I used to work at Blox. I was part of the team that kind of caused the issue, but there were actually some some client teams were able to work around that properly. >> So awesome. >> Um hi. Um I was wondering if you had any thoughts on like liquid staking tokens and using those or even like reststaking would be even, you know, more risky. But yeah, >> I have a lot of thoughts on liquid

staking tokens. Uh I've I've talked about that at length so much already. Um liquid staking tokens have uh have been at the forefront of uh innovation in the space lately. A lot of people are looking for clarity from Fazby um and the SEC specifically for holding liquid tokens. Um personally at BTCS we don't touch liquid staking tokens because we've seen um two different companies specifically ESPAT and EAL take opposing views that one of them will have to restate their financials because of it. Um and we don't want to be on the wrong side of that. Uh it's a very very bad thing for investor relations and trust in the market.

>> Well, not liquid sticking tokens. Liquid sickening tokens are great, but the current the lack of guidance from the government right now has been a huge hindrance for us to get into that. Let me let me ask uh maybe a followup to that question which is um you know a couple of the liquid staking protocols like Lido, CSM uh Rocketpole uh they use uh you know a distributed validator set right maybe not DVT but just homestakers right that participate in their network. Have either of you two considered using uh their node operator set to help diversify your operators?

>> Uh we are a node operator on Rocket. uh we've been that was one of our the first initiatives when I got to BTCS was to join a um one of the distributed networks as well as a node operator. Um but yeah >> um I think it would depend on the product. Uh but I think for ETFs especially in the US side um there's more requirements around having um direct relationships with service providers and um uh uh understanding kind of their operations and liability and how how to deal with those things that make it a little bit hard to interact with a kind of a pool of operators that we don't have those types of relationship with. So um yeah but but that's not the gating factor of using

LSTs inside um US ETFs for example uh the gating factors are more so uh for the the largest products that are commodity ETFs those are single asset uh products um uh so it's hard to blend uh ETH and uh LSTs and if you're creating a single LST ETF then that has its own um uh trickiness and issue. So the there's there's some complexity there, but um yeah to Yeah. Excellent. Well, please give our panelists and our panel members a round of applause. Great.

Thanks everyone.