Lido V3: Ushering in Institutional Staking Through stVaults - Hasu. Ep. 592

Transcript

I'm not bullish on any of them because you need like a very specific set of circumstances to be true for liquid staking to repeat the kind of success story that it has on Ethereum. The first thing to understand about ETFs in general is like they will basically all compete on price. That's why staking ETFs are going to have a big advantage over non-staking ETFs just because they can pay you right from the rewards like your balance is still going to grow. It is actually a very good and like attractive product from talking about restaking and talking about institutional you know demand like the problem here was like in both cases that the staking setup that Lido gave you was not flexible enough right it was opinionated it was not putting your money in restaking you were getting the same returns as everybody else were not

able to choose who your node or is and like what MV relays they use and if they use DVT or not and so I think the idea of vaults is a very kind of organ organic one. Create your own staking setup with your own notators and then have the ability to mint the liquid staking token like in our case st against that with a collateral ratio that that is based on on that vault's risk profile. Hello and welcome to episode the show which talks about technologies, projects and people driving decentralization and the blockchain revolution. I'm Brian Crane and today I'm speaking with Hu who is a crypto researcher and writer and uh strategic advisor to Lido. Of course,

LIDO doesn't need much of an introduction although we will introduce it but Lido is the leading liquid staking protocol, one of the leading staking projects. So really exciting to talk about Lido and and and some of the evolutions that Lido's gone through and that are upcoming for Lido. So really excited for that. Now just before we go and talk with Kazu would like to share a few words from our sponsors this week. If you're looking to stake your crypto with confidence, look no further than Chorus 1. More than 150,000 delegators, including institutions like BitGo, Panta Capital, and Ledger, trust Chorus One with their assets. They support over 50 blockchains and are leaders in

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Cool. Uh Hazu, uh actually you've been on before. It's been four year almost four and a half years. So long time ago. It's good to have you back on. Yeah, the episode was a long time ago. I think uh with Kane from synthetics or something like that if I remember correctly. Yeah, it's good to be back. Thanks. Yeah, about liquidity mining. Yeah, when like all of that started, right? It's it's crazy that like liquidity mining was this topic that like there was a time when liquidity mining was like so new that we had to discuss it on a podcast, right? That's what it meant. Yeah. It was the stone ages of DeFi back then when you were

still using a a manual I don't know living in a cave but starting to defy right so how how did you first get involved in crypto what's your crypto journey yeah I think the the kind of short version is uh I was a professional poker player for 10 years um during that time uh you know what started as a hobby Um and like you know an activity where you if you you know you were motivated and you were somewhat intelligent you could make a decent living like it became much more uh you know a sport over time or I would say like a kind of became

professionalized in many ways and if you wanted to to be a top player you had to um work with uh you know what's now known as solvers um like kind type of like chess computers. But for poker, um, you had to, you know, build software. You had to study a lot using the software, try to improve your game. And I, over time, I became more and more, you play poker, but then you'd have software to help you decide what hands to play. So, no. So, you weren't allowed to use any of the software in, you know, in real time. The same way if you go to like chess.com, you're not allowed to use a chess computer on the site. That would be considered cheating, right? But with poker, how do you check that? And

is it sort of honors based or? So at the time, basically, you know, the kind of poker soveras weren't really common place yet, I would say, and the ones that were out there were like pretty crude. Uh, so it was actually not easy technically, I think, to even try to get that to work, to use it in real time. Today, it's a different story, right? Like today, you can get those things for like very cheap. um they're very fast and so yeah like today actually you know pretty much anybody could cheat uh probably in online poker if they wanted and that's why is a big reason why the game is kind of dying and um the the main games or like the biggest games now are played

exclusively between people who know each other and it's like reputation based and you know in a lot of cases also people just play offline where maybe you don't have the same challenges just thread. That's interesting, right? That's kind of like a maybe general, you know, it's interesting to think about that cuz with AI, I guess that's going to happen for like all kinds of stuff, right? But you so far had like humans compete and then you're like, this is not really working anymore. Yeah. I mean, there did you see this? I don't know the other month there was a a scandal about somebody had like invented a systematic way to basically cheat in in job interviews online using AI. Um so course one we have this issue like all the time right so we have it

all first of all you know we ask like questions when people apply sort of like essay written questions and then I think you know I mean our team is like ah this is an AI generated answer but you know of course I don't know how what's the detection rate is here uh and but then I think we've also had various cases where uh you know our team like suspected or or where clearly people I know clearly people are using uh you know live in real time as they're getting asked questions using like chat GPT to get answers but then I think some cases they're like okay that's definitely happening but then other cases they're like not sure and very tricky yeah so I mean chess had this problem

before poker because chess computers existed you know probably a decade or two before poker like poker servers did and Um they have I mean they have killed like uh poker like chess that's played for money like to a big degree like that used to be played for money same as gammon and those games got basically solved and like cheating became too easy and so you know the trust problem was basically insurmountable but there there are also forms of chess it's called centaur chess centaur because you know it's like you know the centaur is like half horse half human right and like a centaur chess is basically like half human, half AI. And so it's the idea that uh you know, you can have AIs

compete with each other, you can have humans compete with each other, but if you throw like a human and an AI together, it's still a challenge, right? Like uh you know, to beat another human and another AI in combination. And so it's the idea in a lot of ways that you know yes like AIs will play a much bigger role but like an AI that's somehow bundled with a human or controlled by a human will always be more effective than just a human or just an AI. And so that's the case for chess that like human plus AI beats AI. Yes, it actually did. Yeah. Like um because I mean there are many cases where I don't know how it works now, right? like but in in in poker um there were many uh

situations where the AI was actually completely indifferent between choosing like one of two or one of three options in a given situation and whenever something is close I think human intuition can you know can play a pretty big role also AI like depending on how good the abstraction was that basically the game was solved on because you you know poker is too big to solve like the full game quoteunquote like you have to make a simpler game that is kind of an abstraction of the bigger game then you can solve that but then you have this abstraction step also back right so because they you may the solution you see like oh I'm supposed to play this situation in this way uh but like if you're an expert in in in solvers then

you know that the AI probably never got to look at this exact situation this is only part of like a bucket of like 1 million similar situations that it's all grouping together. And so, you know, if you are if you know these things, then you can add a lot of kind of intuition and like nuance on top of maybe what the AI um is already suggesting. I mean that is I guess the great hope we all have know is that like somehow uh you know we'll be able to like leverage or merge and cooperate with AI in ways that you know we can amplify what humans can do and and you're not just become made redundant by the

computers. Yeah, I think so. Right. And this goes back to what we were talking about in job interviews and so on like to the degree that we're still trying to test human capability. I mean we now need to test like human plus AI capability, right? How good are you in working with AI? And I mean the the most obvious thing is like the things we test for can become much more complex, right? Like much bigger in scope, right? where previously you would send someone like five questions to answer, maybe you now give them a much more expansive work test that that fully acknowledges that.

That is a great point, right? Maybe one way to go would be or maybe that is the inevitable thing to go is that you say like, hey, we're going to do this interview and you explicitly are allowed to use AI and then we're going to see. But I don't know, it's a tricky one, too. I guess you'll have to totally redefine how the interviews work. Yeah. Yeah. And I mean you can even include, you know, let me watch you use AI or like document, you know, give me give me your your prompt history, right? Because even the way that like somebody talks, I'm like, okay, so I uh like a lot like um a lot of people I know are saying I mean I'm I'm not a

manager. I'm I'm more of an IC, but I used to be a manager in the past. And um I think the way that you manage people um especially more junior people is very similar to basically how you would prompt an AI. Like I see a lot of parallels and I think a lot of my friends who are managers are saying the exact same thing. they really see very little difference between like how you correctly prompt an AI and how you you know you delegate a task for example right and you know that is a thing that you you know first of all like humans are going to get much better at delegation I think and and management as a result of having AI because all of us have like you know a thousand junior

employees if we want like from now on and um you know you you can test those things right like in the past it used to be actually pretty hard to test someone's management skills in an interview setting. But now you can, you know, you can have a real kind of simulated management relationship even just by looking at someone's prompt history is very interesting. Yeah. Okay. Okay. Very interesting. But let's come back to the topic. So the crypto question. So you were playing poker and then Yeah. So I was playing poker. Um but I I realized over time I became you know fell more in love with the studying

aspect of the game. You know this way of like working with solvers but like mostly like thinking about the game and talking about the game with other people and uh kind of like unraveling you know its mysteries and you know finding new ways to think about it. uh and uh you know I was always part of a group with other people and we were kind of coaching each other and I was coaching some people and you know I realized that this coaching this like studying and coaching aspect like I was much more motivated by learning and teaching other people than I was at some point by competing um and I knew that you know when I am done with poker I want to do that full-time I don't I didn't know what

topic but I knew basically the form factor that that activity would have to take. And when I, you know, later found crypto, um I like crypto was always kind of maybe a little just like right outside my uh you know, my orbit basically. Um so that I knew a bunch of my friends were already like buying crypto since 2013, 2014, you know, making money and dabbling with like trading and also we were using it to send funds back and forth occasionally.

Um uh when I then started to actually look into it, I very quickly fell down the rabbit hole and that decided that you know this would be the thing that I want to spend probably the next at least decade of my life on. And you know I I already knew what form factor I wanted that activity to have. And so I for the first couple years I only basically focused on studying uh crypto from many different angles um and write about it, tweet about it, uh make a podcast about it. And luckily it turned out that poker I would say sorry crypto is actually uniquely well suited to such an approach just because it's so complex and so

interdicciplinary. Um, you know, you really need to kind of understand a lot of different aspects ranging from economics, politics, law, uh, computer science, game theory. Like, you can look at this from so many different angles and always find like new interesting ways. And a lot of good insights come from putting those different perspectives together. Yet crypto was still so new as an industry that somebody could come in from like totally kind of the outside and uh you know just by being a generalist you know catch up to whatever is the frontier of that industry within maybe 2 years and then start making net new contributions

to the industry right and I think when you come into I don't know like math or physics or really like really many like even AI probably like come into many other industries that you won't be able to do that. What were the things maybe before Lidor that you know the the rabbit holes you've been down on that were you I don't know like got you most excited or obsessed? Yeah, in the beginning I was very focused on Bitcoin. I thought this was the you know the main thing to understand first which sent me down you know rabbit hole of well what is money uh you know what is how does it work what is banking

um like I I could tell that there was some truth to I think what Bitcoiners were saying about maybe money and the banking system but also there was so much stuff that they were saying that was like simply wrong right like I think all of the ideas that Bitcoin people have about fractional reserve banking you know like all of that stuff and fiat in a lot of ways is is just like completely not true. But there were still kind of interesting like they were right about some parts. I mean the the relationship between like government and and money I think was is like one good example or the way that money can be weaponized and you know uh or like used to control um people and societies. And so I thought there is, you know, an

interesting connection here, but I think I I mean I quickly ended up thinking that Bitcoin competes much more with with gold than with the dollar. Um yet at the same time there's like a hierarchy of money in on which like both gold and the dollar also exist, right? And so it was kind of for me that was a very like formative I think couple years like just like getting building up all of these mental models um to make sense. And you know Bitcoin for me was very interesting like I I could see the value for sure. Um and once I did once I had that part kind of locked down it was more about like okay uh how does it actually work? Uh how is it how does it

evol like how does it evolve? how is it governed? Um, what are like the social systems kind of on top of maybe the technical system that is Bitcoin? What if we what if we have, you know, we have this model of like how Bitcoin works, but what if we play it out 10 years into the future, 20 years into the future, how does it change? And like for me, for example, the idea of Bitcoin security model and the the block subsidy that that is going to run out, that was like a very clear like that wasn't even a longtail risk. That was just a fat tail risk, right? that for some reason was like illegal to talk about.

Yeah, that's still something that worries you a lot when it comes to Bitcoin. Yeah, I think it does. I mean it it now worries me a bit less than it has. uh not I mean fees are still very low on Bitcoin but um I think now that Bitcoin is starting to have a bit of a layer 2 road map and you know we there is actually we are starting to see some reasons why people need to use that layer one you know maybe for DA may maybe for settlement uh between different layer 2s I think it is at least easier to envision that uh that transaction fees at some point like there is enough kind of an economy on top of bitcoin that you know you don't

have to worry maybe so much about that. Yeah. Yeah. It still worries me as well. Uh I do think it's a big kind of thing that people in Bitcoin just I I think it's also the sort of stuff where people talk about the risk for a while worry about it but then they're like is there anything actionable you can do? like really hard, right, to do anything and then you just sort of forget about it and then you ignore it, right? Because it's like, well, the risk was discussed, you know, it didn't go anywhere. So then like no point to sort of like people are interested in revisiting that discussion. So I I feel

like now it's really I feel the only time when this will become a big topic is when it's actually when there's actually real security issues. Yeah, I I actually thought the other day I was asking myself if I've become like more jaded and like more I don't know less uh kind of willing to like push for big things in crypto because when I you know when I was new to crypto I was very much like oh yeah the security budget in Bitcoin that's clearly a problem let me write you know like let me tweet about that uh like and write articles about it and go on podcasts and discuss discuss

it with everybody like seek out people to discuss it with try to lobby for not even for changing something in the beginning but like for getting people to agree that it's a problem so we can have a discussion about uh how to how to address that and I was you know that was uh like an uncomfortable time right but also like a time of basically like extreme growth and now I I mean I there are still of course like things that I would change in crypto But I I was wondering if I kind of still have that, you know, same maybe energy and like this confrontational energy as well, right? Uh to kind of go out and and and like just single-handedly push for like

something to change. And yeah, it was it was a kind of interesting maybe look in the mirror. So, you know, maybe it's time to go maybe go back more towards that. Yeah, but of course, it's so hard to make changes, right, when it comes to some of these things. How did you get involved in Lido? Yeah, I mean from Bitcoin, Bitcoin had this very simple scripting language. Um, you couldn't I mean I I'm not very technical, but it was clear to see that you can't do very much with it, right? Like when you're in Bitcoin, you don't have much maybe of an appreciation for what Ethereum is trying to do in the beginning. But for me, the time when I started to really pay attention was

maybe about like 2019. uh when some of the first DeFi apps started to launch and for me that was a sign that wow this is really interesting because you know this isn't just a a kind of fork of of Bitcoin that's maybe doing like some things differently this is really adding a new dimension to what crypto can do right the idea that you can build smart contract platforms you can have these decentralized smart contracts and um this is in some ways. It's like a super set of Bitcoin, right?

Because like you can like any token can exist like a token is just a a smart contract, right? It's just like a smart contract account where people have like you know balances like uh like you know signatures and and and balances, right? And so yeah, that for me that that was really eye opening kind of to see those DeFi apps. Um, and at this point I think I gradually started to spend like more and more of my time looking at Ethereum and looking at DeFi in particular because all that prior research and like education that I'd already done on uh on like how finance works and money and those things for me I think for me DeFi clicked much earlier than for other people because of that then because I had done that education in Bitcoin and I

mean you still like just I logged on Twitter yesterday and you know there was like a thread from like a top tier VC who was like talking about how we can bring like Algo stables back and like whether this or that hasn't been tried and it's like this just like extreme misunderstanding of like how banking works and like how money works and and I'm like yeah like you know sometimes you don't it's hard to appreciate like you know what you what do you know or like how how that's not you know you shouldn't take that for granted in that sense right and so there's like a lot of people even in like Ethereum who don't know even like the first thing about finance and and and so on and like we are I think we are still like early in

in kind of understanding DeFi and appreciating that and uh yeah so like more and more DeFi happened on Ethereum um and then um I think at this time I was uh you know you had George um on the show probably a couple times as well like we were very close back then he was still George was still living in Europe um at the time and we were working very closely together writing like a lot of research articles and doing kind of just like explorative stuff in the Ethereum ecosystem.

uh we were very uh you know when this was before EIP1559 happened and we were very focused on topics around me and you know transaction fee mechanisms which also like grew out of my interest toward transaction fee mechanisms in Bitcoin and how if we maybe change that we can change the way that like like how much fee revenue can be raised from people transacting right and so it was very natural for me then to ask those questions in in Ethereum And I gravitated a lot towards this EIP1559 proposal which Vitalik had made I think already like 2 years before uh and it got but it it didn't you know he never really pushed for it. it didn't

really catch on and so it kind of laid dormant and then there was a kind of push to revive it and bring it back and um we were like we were doing I think some data like simulation based analysis about that and writing articles about it and and uh you know one of the topics that we were interested in was basically staking pools because Ethereum at the time was uh was about to switch to proof of stake or like proof of stake had been in the works for many years. But that was one of the things we wrote about. We wrote an article about kind of staking pools and like the difference between centralized and decentralized staking pools and staking derivatives. And we basically concluded that in Ethereum

there was like a really good setup to create decentralized staking pool in between and like for this staking pool also to have advantages over over centralized staking. Um that would kind of give them a leg up in adoption. And between those staking pools, you had a real or at least we thought you had a real kind of winner take most dynamic because uh you could introduce a staking derivative that could itself become a building block for like other things and like be used in other in other DeFi apps and so on because you know like even like tokens themselves are are just like you know have liquidity effects and network effects and like and so on. And we thought that basically because

staking derivatives are going to be winner take most that means that staking pools would also be winner I take most and um yeah that article was very influential at the time and we well I mean Paradigm was already an investor in in in Lido and I connected with the Lido team over that article and we got to talking for a couple months and you know maybe like like a half a year later I became an official uh adviser to the team. Yeah, I mean we were also corres I think we started talking about you know like liquid staking idea in 2018 right like right when we started it I mean it's such an obvious idea right and then we were I think we did uh

built the first like liquid staking thing for Cosmos in like a hackathon in 2019 I guess. Yeah. also a long time ago now. And then we wrote this big uh kind of paper on you know the risks and how to do it and although it was kind a little bit focused on cosmos actually I remember we were also thinking about Ethereum a bit at the time but we were like ah withdrawal thing like how can you do it like you know uh I that was one thing of course then the having the kind of multisig initially or you know if the thresholds signature was like and and and then the other thing was like oh but LDO it's

just like looks a lot like a security in some ways but I think in the end um in the end I think the choices right and but then of course we were very involved in light as well right in like launching it from the very beginning but I think in the end it's also something where we kind of saw a lot of people were much more conservative back And in terms of regulatory risks, right? And I think we've kind of seen that yeah, just the the winning path has al I think I've also been just, you know, go ahead and do it, right? And you do it in an ethical way and try to have decentralization and be honest and stuff like that.

The the right level of risk in business is almost never risk, right? You know, there's almost like a form of controlled risk that you want to take. And I think what what I mean what matters at the end of the day is that you know you do stuff that like lets you still look in the mirror at the end of the day. Yeah. There's like so many things you can do that are risky but that are also unethical and there's like things you can do that you know maybe are risky but not you know in a way that you hope is going to become less risky over time and also that you know you have no problem justifying to yourself because there's no other people getting hurt from that right like it's like net good for the world I think. So yeah, I think that's

definitely one of those examples. Yeah. So of course in the beginning, right, Lido? Yeah. So there was basically kind of like a multisig in a way that was later removed, right, when uh they started having uh withdrawals. So you know, smart contract uh controlled. Yeah. The the problem was that like uh you know the you had the separation between the you know the beacon chain and the kind of the regularium uh chain, right? And so um the beacon chain you were not able to own uh a beacon chain validator with a smart contract yet because the beacon chain did not I think like support smart contracts like the technology didn't exist like you only EOAS could own um could control these

like beacon chain validators and so the best you could actually do here was a kind of like MPC secured like multisc right you you couldn't do the smart contract like that was added only later. Yeah. And then so in the beginning right so it was basically that and then you had five validators uh was the initial set and um you know people could just deposit their ETH get staked ETH uh and you know it had a huge amount of traction. I think probably the I I mean my views there was like two big reasons for it.

Um maybe maybe it was a third little bit of a reason but I think the biggest reason was the withdrawals right so where you basically uh you had to stake your EH and then you wouldn't be able to unstake it until actual uh the merge happened which you know you didn't know how long it was going to take could be three months six months a year who knows right so of course huge amount of uncertainty and then no native delegation right so Ethereum I I mean my view Ethereum is a kind of an example where the staking design the system staking design was a bit of a failure in some way from the perspective that like

it was designed around the idea that people will run their own validators at home and uh no in protocol delegation and that was just completely ignoring what people actually want and then Lido kind of built the thing that people actually want which is just a simple thing where you can just stake any amount. Um so then I think Lido really right we saw also even today right liquid staking on Ethereum there's like way way way more adoption than on any other chain um I think for for these reasons like I mean I've seen so many different uh liquid staking protocols

launched I mean every chain has like three to five different liquid staking protocols like even chain that have yet to launch, right? Like there's there's like three different liquid sync protocols on Monet and there's like two on Mega E and whatever, right? Like every chain has them and I'm not bullish on any of them because you need like a very specific set of circumstances to be true for liquid staking to repeat the kind of success story that it has on Ethereum. And you know, one big one was basically the fact that like if you staked it was st was like a one-way door, right? Like the merge ended up taking uh you know how long did it end up taking? Two years, right? Like I think it was like locked up for 2 years. Yeah.

Yeah, I think so. Or maybe like maybe it was 18 months, right? But like I think the the like most optimistic estimates were like around 12 to 15 months, right? So you know and like the conservative ones was okay, you know, maybe it's like 2 three years or even never, right? So like you were taking you were taking a risk. Um, and I mean the risk was was less of the problem. It was like the discomfort from basically locking up your money for a long time. And so the two solutions to that were exchange staking. If they offered you a derivative, then you at least you could sell the staked position inside the exchange, right? So maybe they could also issue like the derivative on chain and you can also trade it, etc. But like exchange staking

like we were very anti that because we didn't want like exchanges to play like exchanges are already the most valuable players in the crypto ecosystem at the time and we thought if they also control you know the the chain itself like wow that's really bad right and so uh and the other was staking in multiples of 32 Eve by like you maybe Eve was like 1 or 2k or whatever at the time maybe it was even higher but like it was like 50k plus to stake and you couldn't stake in like lower increments that was very bad also right and so I mean those two things were basically those were like the golden ticket right in a sense like why a liquid staking pool would do so well on Ethereum but

like all liquid staking ratios are super low on like virtually every other chain other than ETH like even Salana it has like 1% or 2% like liquid staking penetration I think it's a bit higher Yeah, but yeah, it might have increased like since I last checked. Yeah, but it's very small. Like it's not really comparable. I think that was like a good I mean both like both are necessary because like otherwise everything would be captured by exchanges and like and like a good environment for Lido to launch into I would say. Yeah.

Yeah, absolutely. So when you think of Lido and the history of Lido, what are the main um the main evolutions in the protocol, the main the main changes that have been enacted since the launch? Yeah, I mean I think I mean the launch itself is interesting. I would in some sense I would call it like the pragmatic age, right? like the V1 is like all about pragmatism because as you were saying like yes like there was a small number of not operators and the tokens were controlled by a multisig and like it was all basically for technical reasons right like you couldn't do you couldn't actually control like beacon chain validators with a smart contract yet and like the baseline also at the time it

was people staking on exchanges right like because people didn't want to lock up their funds for two plus years right? They, you know, they wanted some liquidity at least like all of the big capital did, right? And so it was like, is this better? Is this better? A, is this better than like staking on on an exchange? And B, does it have a path to decentralization, right? Like those were the two questions that that Lido was asking itself. like it made all of the the right choices that that that were like very pragmatic choices as well that kind of you needed to balance uh you know growth and and like help for Ethereum because you don't you didn't want the funds to end up on an exchange um and uh and and like path to

decentralization I would say. So then when I think 2 years later like the merge happened and this allowed um you know Lido then also to add withdrawals to the protocol. I think took took maybe like a couple more months uh for that then to happen and I would say Lido has always been on kind of two tracks. uh you know one is basically uh you know serving users and like making the best possible product and the other is about decentralization and it was always about balancing these two things and so the the first track I think in a lot of ways is about simplicity you know like let just like click one button and like have

me you know stake my E for you uh like give give you the most rewards right the other is I think you know also like integrations liquidity so You can actually with a token that you get in return, you can actually go and and use it, right? Like you can borrow against it in lending markets. I think that really was the biggest thing like unlock unlocking making making like st on the beacon chain turning that into like a collateral asset like unlocking the collateral value of that just made made it so much more valuable. And this would later I think this this like track like of just like making the best possible product for for as many users as possible that will then I think motivate like V3 as well as we're going to talk

about in a minute. The other track was always about decentralization. So having like a really good note operator set having like always like growing the number of note operators that stake is distributed across making sure it's geo distributed it's client distributed uh all of the node operators are following following like best practices um around how to run their sticking setups and like you know make sure that nobody's ever getting slashed. Um so it was a a big deal. Um and then the other two are kind of making withdrawals permissionless. So the idea that if you if you actually hold any stake Eve, you can always go to the protocol and you can redeem it for Eve and nobody can

stop you, right? That is that is a that is a big kind of northstar goal. And one step towards that is like going to be triggerable withdrawals. So that's you know I think uh that was added in the last hard I think uh in Ethereum. Um and the other one is dual governance right. So the idea I mean so first of all you need you need a way for like someone to programmatically trigger withdrawals uh from the beacon chain in the sense that like uh the node operator where the funds are delegated to you know it's just getting ejected so they have no way to like stall it out or something. So that was important and the other was for people to be able to withdraw without governance having any way to

stop that. And so that is the idea of dual governance. And so dual governance is an upcoming um upgrade to Lido where uh you know any uh where basically staked eo does have a way to escalate and like freeze the the governance system uh when they think like a contentious proposal is happening and that gives enough time for everybody to withdraw and so you know it's the you know it's what this really gives you as a staker is you can always withdraw like that nothing can happen in governance really like as long as you assume that like a small number of parties is paying attention to act on time and then the protocol can be frozen and like

everybody can withdraw their money and so that that will then basically make withdrawals entirely permissionless which which is a huge deal. Yeah. cuz probably uh not all uh listeners remember this or followed this back then but for a while Lido was very controversial. So I think there was different reasons for it right one was that Lido ended up getting very big getting up to about a third of all the ETH stake was in LA and so of course people were like oh if there's more than one third then and then I think the other big concern right here was that you had the LDO token which is the governance token of the

Lido protocol and so you of course had like well if now you have all this ETH that's kind of you know controlled by the LDO token and then you know maybe the LDO token or they could like do something to I don't know control the protocol, extract value. So of course that was never really uh was never a risk I would say in the sense that it wasn't the Lido philosophy or values or goals and I think Lido is very conscious right of these uh concerns right so I think then the dual governance kind of yeah I mean it I wouldn't say that it wasn't a risk

like I think the risk never materialized like it's not it's Not so I mean it's not zero risk these two things are related right like I mean like the fact that Lido controlled onethird of ETH I mean what does control mean right that's that's the big question and so the the reality was that LDO could really exert some amount of control like over the over the stake right uh like it couldn't really control like the hundreds of node operators that the stake is distributed to uh but it could with some reason like it could for example prevent vent people from withdrawing at the time. Like if that's if that's a proposal that like you want to make and that passes like the vote on chain. Uh and so it's really

like the question is how do you fix those holes, right? And like a very big part is like kind of neutering the ability for LDO to make any decisions that would actually be bad for users and bad for Ethereum. And so I think then you know there's that that that like attack vector becomes closed. uh you know that said like even people like on the Lido side or I mean there were many people this was a thing that the community was very divided about right like because even like many people weren't working on Lido were in favor of like not self-limiting the growth and the reason was that the other you know the alternative like self capping was also seen as risky like it

had its own risks right and that was the idea that um if the market really is like if the market for staking derivatives really is winner take all or winner take most then if like the good guys basically like safe cap and like the bad guys don't then you just end up losing you know the entire market right and so that was I think a big kind of rationale at the time and I think we're like fortunate that it didn't play out this way but I don't think it was a given right I think we we ended up seeing that like the demand side of the market ended fragmenting more than than we thought and then that led to like a basically like a fragmentation on the supply side as well which we will we can get into I don't know do you want to

talk about institutional staking or lido v3 maybe we go with light v3 first yeah we go v3 first there's one more thing on like I have on decentralization which is the other big northstar there's like you know having a good node aware set having permission withdrawals and the the third and like final one is having permissionless node operation so not just the ability for people like for stakers to join and leave like permissionlessly but also for note operators to do the same thing and um you know that that is basically like happening also in major ways there's community staking module that made um staking permissionless and it's slow it's it's like slowly being scaled up there's also like DVT distributed techn technology module just the idea that you

have uh if you have you know let's say like you you have like a multisig of five and you have like three uh notators in that set who are either curated i.e like secured by reputation or uh like CSM valid letters i.e is secured by a bond, then you can just add two more, right? And they, you know, they can't control the val, right? Like they can, you know, it's like another way to like make it so that people can join permissionlessly, maybe with like an even lower bond or secured by like a smaller amount of reputation. But yeah, so just the idea that like you can make the protocol more permissionless over time and also the way that like stake is routed across these modules becomes basically like more and more automated

over time. Yeah. So I was saying before one staking derivative didn't end up winning you know it didn't end up growing you know to to like the majority of the market and that was because it turned out that you know there were you know at the time staking was seen as like well one staking setup is like the same as every other staking setup you know so then liquidity became a real differentiator and and integrations and and and and that kind of stuff but And as it turned out, I you basically saw two big trends and one was the rise of restaking. So the idea that like people were staking like they wanted to like stake the Eve

on the beacon chain but also then kind of stake that value again in some setup where they were maybe earning extra rewards and LTO did not participate in that. It was like seen as not you know in the values of the protocol to do that. um to kind of take you know to rehypothecate people's stake and you know it basically gave rise to this new to new protocols that that did that that ended up like taking more risk but also paying more rewards and I mean mostly or like not mostly but like it was entirely fueled by kind of inorganic growth incentives right we were we're talking about liquidity mining in the beginning right this is like all

liquidity mining in the sense that there's nobody actually using you know actually using that like that stake and is actually paying any like organic rewards and there's also no slashing or anything. So, you know, it's just purely like building the supply side, paying people points and ultimately like layer tokens, for example, and you know, that ended up soaking up a lot of ETH. Um, and a lot that this was like a big use case that that Lido didn't serve. Um, and the other was like more institutional forms of staking. So I think as um as like more and more uh like institutional players started to

come into crypto uh what you ended up seeing was they had different often times you know either like risk management like more internal based or like more regulatory i.e like external based kind of constraints and desires about what they wanted to do. So for example, if you if you have a if you have a constraint like you need to know the node already you're delegating to and you actually need to have like a pen on paper like actual legal contact with them then that was a thing that like lido did not serve you at the time right aside from of course running you know lido validators and we started using a few also a while ago now but I think there was a one very elegant

uh design was the stake wise design and the stake wise design basically allowed you to have different vaults. So you know we can have we could have a public vault that people stake with or we could have a a vault just for a particular customer where like no other assets would be and then of course you can have whatever fee agreement you wanted. Uh you know you could decide or different maybe DVT for one or not. Uh like you could have one validate or different sets. It was extremely flexible. But then the thing that stake also allowed you to do was that all of these different vaults and there was no fee from the protocol on any of these vaults. But it it would allow people to then still mint the liquid staking token

OS uh that was shared across all the vaults. And then you know for example I layer added OEF right? So then you could say okay I I can part this with non layer right or I could do you know we we have this vault now where you can do leverage staking right where you can basically take the OC put it in a way borrow against it and and loop it. So like that I think was a very very elegant design um that I I think also inspired Yes absolutely. I mean so the same way that liquid staking had been around like 2 three years at least before Lido launched like the idea of vaults I think al is like a is similar. I think a lot

of people in in the like liquid staking space or staking space in general you know had been having like the same idea uh or like you know roughly the same idea but it wasn't the same priority or like timing I think for everyone. I think that stake uh you know I think they definitely had a you know great product um and you know it's it's a very strong I would say inspiration for for light v3 um because so if you if the you know if we kind of from talking about restaking and talking about institutional you know demand like the problem here was like in both cases that the staking setup that Lido gave you was

not flexible. enough, right? It was opinionated, right? So, it was not putting your money in restaking. You were getting the same returns as everybody else. You did not were not able to choose who your node or is and like what me v relays they use and if they use DVT or not, right? So, it was all like one big pool. And so I think the idea of vaults then to kind of put that like on top of what lighter already has is a very kind of organic one in in the sense that you when you have that you've already explained it perfectly right like a vault is just you know it's the idea to like create your own staking setup with your own valid with your own notators

uh and uh and then have the ability to mint the liquid staking token like in our case stake E against that with a like uh with a collateral ratio that that is based on on that vault's risk profile and I mean I would say that there's a big difference uh still between like vaults in Lido and vaults in stake and it's just like staked Eve is like just like a thousand times or whatever like more liquid right like that is that is like a big difference right and so the ability to to be able to mint the most liquid and most integrated uh staking derivative that that is that

does make it like a much better product. Yeah, absolutely. Of course, I think where stake is absolutely no doubt by far number one, right, is in terms of liquidity for stake and integrations in, you know, all kinds of places. But you know I guess especially DeFi protocols and yeah for sure. So that that is something where it's a very compelling offering. So now basically what that means is anyone or like can you explain to us how it works?

Can can now anyone go and create a vault or is there some kind of like um permissioning or you know only certain parties? So how how does that thing work and and then also how does it work with the the collateral ratio right because in the end in the end right one of the challenges is that in Lido you say like okay we kind of manage the risk by uh you know through all these ways right through the distribution through uh vetting node operators at least for the curated set uh now if people do their own vault you don't really have control anymore more about what they do.

Yeah. So, anybody can create a vault. Like a vault is just a kind of immutable primitive. A vault has, you know, someone who can put like the stake into it. It has a node operator that the stake is then going out to and being staked with. And you can also have a curator. So, very similar to like how it works maybe on like morpho and like you know the new like generation of lending markets. Um, you know, a void can have a can have a curator that's like setting like the parameters of the void and like you can have one or or or or multiple node operators. I think I think one. Uh, so did you ask about not operators or curators? No, node operators. Oh, okay.

Yeah, I think you can have several. I think it's like, you know, um, up to you. Um so what what a vault doesn't have by default is the ability to mint stake thief right so that that is you need you're basically starting with like 0% collateral ratio like your you know your your vault is like able to m like 0% worth like st against your the collateral that's that's in the vault um or maybe it's starting from some low ratio I don't know like the exact details but uh you know you And you basically need like permission from the light da in order to be able to mint the state e. I think it's working the same

way in in in stake wise as well. I think all everyone can mint oise in stake wise now. Uh but I think by default it has a it doesn't allow you to mint the entire amount but I think exactly well they set a very yeah they set like a very conservative ratio and I think that's that's how it would work as well probably in in Leido. Yeah. So by default in seg I think every vault can mint I think 95%. And then some vaults I think it's actually just the course one vault and the genesis vault uh they have some uh special like okay it has to get to

certain size it has to have some spice token collateral has to go through governance and then they can do 100%. Yeah. And I the way that I would like encourage people to think about that is like modules in Lido like right now stake is coming in and then there's a thing that called a staking router and it's like giving basically you know the right to like mint stake E against that E to different modules right and like that distribution function today is is permission because it's necessary for risk management like that there are we have ideas for like automating that in the future and like moving to kind of a policy based type of governance like your governance only sets the policy but policy is then like implemented automatically. And you know this is another this isn't technically a module

but it's like it's like a module in the sense that like the the DAO sets you know risk limits basically for for vaults like vaults as a whole and then can set like you know what what types of vaults like can get like what type of collateral ratio like what is their their minting ability. So that's very important. So that will basically will mean like someone creates a vault. I don't know let's say course one creates a vault or someone else creates a vault and then you want to allow this vault to mint uh OE against it. You would go through the lido governance process to get vaults whitelisted for this or

approved. I mean in light of DA we're not fans of like making these like very like low-level decisions. So I think more likely there's like a governance vote to unlock a certain amount of like overall vault liquidity uh to mstake Eve maybe like let's say like initially like 2% and then 5% and then 10% right of all stake Eve out outstanding and there's like a committee uh like a risk management committee that is basically then charged with like allocating that that capacity to different vaults. So I mean you you know if you uh you know that would be your touch point then as well like if you're car one and you're launching a vote and

what's the timeline on the lighter v3 roll out and are there different phases to it? Uh so yeah we are in in a pre-launch phase right now. So I mean right now there's like a kind of simulated way to do vaults. It's like not technically a vault, but it's like kind of like a trying to simulate that through like offchain refunds and like giving you some ability to do custom setups, but like the actual V3 and like we're like also working with like many different parties right now basically like um getting them ready to to kind of adopt it when it goes live. And like the actual V3 launch is going to be in

summer 2025. So in in maybe like one quarter. Cool. That's uh very exciting. Yeah. And I guess maybe that ties in a little bit with the institutional staking side, right? I mean I think that ties certainly the whole thing about hey I want to have a contract with my node operator. I want to have an SLA like all of that stuff of course becomes possible. Then I guess the other big thing is uh ETFs or kind of uh sort of products that are traded in a traditional financial uh world but that uh represent

underlying uh staked Ethereum where I redemption is a big issue right so where basically they generally have to serve redemptions like you know t+1 so someone says I want to get my ETH out they have to send it the next day but then that's a problem right because the E1 bonding period is uh much longer than that so then depending on the size of the exit queue yeah exactly yeah yeah I mean as you're saying right like so first of all between like ETF like non-staking ETFs and staking ETFs first like the first thing to understand about ETFs in general is like they will basically all compete on price like ETFs is like a you know an ETF is

like a commodity and like commodities compete on price like brand plays some role but you know not that much and so that's why staking ETFs are going to have a big advantage over non-staking ETFs just because they can you know like a a a non-staking ETF like actually needs to charge you like a fee whereas a staking ETF they can actually pay you right from the rewards like your balance is still going to grow and they can just like charge a much more like invisible kind of fee from that and so I think it's like it it is actually a very good and like attractive product and uh within the set of staking

ETFs you're basically competing on how much you can stake right like you you want you you're going to maximize like your return returns by staking as much as possible And that in turn is controlled by the size of the door or like how many doors there are right and so if you're if because you need to be able to as you were saying exactly right like you need to be able to surf the redemption requests when they come in um and when you when you use like native staking right just like go through you know just put your money directly on the Ethereum beacon chain you basically have like one door right like the door is the exit queue from the beacon chain back to the execution layer and So that door, you know, it you don't really know how

big it is. Like at it's like sometimes it's a like, you know, can move a lot of money through, but then at other times it's clocked and very often it will clock at the exact time and you like don't you you you need it to like not clock, right? Because everybody wants out at the same time for the same reasons. And so what staking the derivatives give you is a second door next to the smaller like official door. So there's like a back door, right? And so that's the idea of, you know, you can't just uh you can't just unstake your ETH through the beacon chain. You can also sell your staked Eve to willing buyers in the secondary market. And those buyers, especially if the stake

Eve is trading at a discount, they have all the reason to wait to hold it on the balance sheet and then maybe redeem it like a week later or like two weeks later. Like that's like that's a near risk-free arbitrage trade for them. And so you can expect that uh the like size of the kind of second door, the like secondary market is a is going to be a really good way to kind of exit your like or expand the total amount of exit liquidity that these ETFs have available and just allow them to stake more and thus charge like much lower fees. And so that's why using the exact Riot staking setup is uh that is

that is I think you know that probably is going to be like deciding between winning and losing for these ETFs. Yeah absolutely. Absolutely. Anything else you want to talk about with regards to institutional staking? I mean we are we are in advanced stages of discussion I would say with all of the major ETF issuers and yeah I think it's you know it's going to happen like at some point I think Lido is in a really good position because nobody else can offer like the size of the door that that state thief can. Yeah absolutely. So maybe we can do a final topic a little

bit and talk a bit about Ethereum more generally. I think there has been a perception uh of a well I would say state of crisis right a bit in Ethereum um I mean for one you've had Ethereum actually perform pretty badly as a asset for a while right so it's out massively underperformed Bitcoin massively underperform performed Salana for a few years now uh you've had the sort of crisis or big questions around all the L2s and is does value really go to Ethereum and what makes Ethereum

valuable and what is Ethereum in the first place? Is it the world computer or is it this kind of some sort of digital gold like money a bit like Bitcoin and like and then how should the Ethereum Foundation work and and now you had the leadership changes uh you had the Ethereum Foundation with new executive directors and though uh actually speaking with a lot of VCs in the last months I felt there was a really widespread bearishness on Ethereum. Uh, how do you feel about things?

Yeah, I think I tend to like not get so overhyped when things are going well and like mostly focus always on like the negatives and when when everybody is like dunking on a thing, I try to see more of its positives. So I I think I'm more from my character I'm more of a like flatline, you know, in that sense, like emotionally. Um, and I I mean I think in this in this particular case, it's like a positive. I think Ethereum has never been like like that downbeat like I think as like people were were saying very often. I think like price performance comes first and then people are trying to backfill like a narrative for why has it has it done poorly. I

think this is there's probably some some effect here like that where like like some something is performing poorly and then people are making up a narrative for why that's the case and that narrative is very convincing to other people then also sell it who reinforce the narrative. uh when you just look purely at the fundamentals then like yes like Salana has caught up to Ethereum in some of the metrics that matter but Ethereum is also leading in like many metrics that matter in your view what is I don't know if you have like I don't know one or two or maybe max three metrics that you think are most important to look at what

what are Okay. Well, I think it's like number of like number of VC backed protocols launched like on Solana versus like Ethereum plus layer 2, I think would be my this this is a very big one. Um I think um TVL is another big one. That one's hard to fake. Um like those two those two would be pretty big. And then maybe deck something like Dex trading volume maybe. uh because I most care about like finance financial activities use cases.

Yeah. The thing is like when you I think people are like looking for I mean I'm coming from the MUV space of course and so and like I mean so I know that like in Ethereum we see actually uh like MEV like ME becomes basically protocol revenue as like proposals auction off the right to order transactions in a block. We see that as like a that's almost like a negative indicator for like how well the chain is doing. Like if that number is very high, it means there's a lot of me. It means a lot of users like market makers and stuff are like basically getting the their money extracted from them and it's

it's it's a super bad UX and it's you know going to make people like not come back etc. And so we have worked very hard for like many years to build an MV supply chain where people don't get front run. They don't suffer like the worst. They don't get sandwiched. they don't get like they don't pay like this their max slippage tolerances and for apps to build to have the tools and the knowledge etc to build uh you know MEV resistant applications and stuff and then you like in Salana in a lot of ways it's like totally like the wild west like Ethereum like four or five years ago where like every user is getting sandwiched and like almost every trade

everybody's paying their max slippage and you combine that with these like coins and like use cases that are extremely speculative, right? Like meme coins where, you know, if I have a very short time horizon, I know I'm buying this thing to sell it like today or tomorrow, I don't care about as much about my execution, right? So, in this case, I'm fine paying like a 5% transaction fee or like a 10% transaction fee even in some cases because it's so volatile, you know, and my time horizon is so short. And so, and I think when you look at that, it's it's just like extremely, you know, first it's bad because it's literally like money taken from users, but it's also extremely unsustainable because a chain

that has this level of me extraction is, you know, never going to be able to scale to like use cases beyond the ultra like short term. So I'm not saying like the problem won't get solved because I think it will like the we know the GTO team pretty well like they are very like they are aware of all of the problems and like very sensible and smart. Um but I mean also like the revenue numbers that like Sana stakers and like J are making are like they're not good and and they're also not sustainable.

Yeah, for sure. I think that's definitely one place where Ethereum is far ahead of Salana and where I think there's still a ton of work to do to make uh the whole transaction supply chain and me more um kind of I don't know reasonably managed. Um, yeah, I agree with that. And I think the the majority of the DeFi ecosystem is also something where I think Ethereum is still far ahead. Yeah, I mean that's not even I mean I was just like by I don't know buying something on Solana I know the other week and like the I mean the exchanges are on like a different

level of quality but like not in a good way. I mean there's like uh you know I'm I'm very used to like Sal like using K swap for example like on Ethereum like disclosure I'm I'm an investor but just like I'm also like a user and like the idea that you know I can have multiple solvers compete to give me the best execution my trades are me protected uh I can pay my gas fees and like the output to like all of that stuff right like it just doesn't exist right on Solana and it's like not a good experience. Like I know people say they love the UX and I think the wallets are you know the like center wallet is a is a is a good UX but just like uh in terms of just the basic just like getting the

basics of DeFi right beyond memecoin trading I think they still have like some ways to catch up and and framed a different way like I think the maturity of the DeFi ecosystem like all in all Ethereum is still pretty far ahead. Yeah, I agree with that. But to come sort of to this point about you know the sentiment about Ethereum and the performance as an asset, what do you think it will take for this to turn around and for Ethereum to again be something that you know goes up and creates excitement. and you feel this momentum and people are like bullish about it and they want to buy more of it and like

what does it take what does it take I mean so I think the same way that like narratives reinforce like snowball and reinforce themselves on the downward they do so on the upward as well so I mean the way that you would expect this to turn around is like people are really uh you know they're really just like fed up with Ethereum and you know there's like bad news can't really face anymore because all they expect is like bad news, right? And so it takes like very little good news to like make people slightly more positive at some point and then like you know you can have a kind of snowball in the other direction. I think that's very often like how these things work. So you can try to make up

like okay we need like fundamental changes but very often there's like a cyclicality to these things that shouldn't be ignored. I think fundamentally like the leadership changes at the EF I think that that was good like hands down I think that uh Ethereum has been a like I mean Ethereum is researchled in the sense that like it has very long road maps and like things are in discussion for a very long time and it's trying to have very decentralized development process it's also researchled in the sense that like the cords and like the EF researchers are they are the ones driving the road And for a very long time like industry involvement in that road map was seen as

not desired, right? Uh and like you know you can have this at a time when you're the only chain but when you're competing with other chain ecosystems for the same developers at some point you need to start paying more attention to the ecosystem. And like I mean the DeFi people can tell you like everybody building in DeFi can tell you like at least one very bad experience about like working with EF in the sense that like they've there either they are like very dismissive of like the thing you're building in the sense that like I love Italic but also like his word carries a lot of weight and so when he's like maybe writing that he doesn't

like DeFi or he thinks that like you know crypto shouldn't be used for that and he hopes that there will be other use cases etc. like it, you know, it feels very dismissive for like the people working on that for example, right? Or another is like when they have ideas for how the protocol should be improved because they, you know, it's their users, right? They know, you know, what they get like a million support tickets for every year. Um, and like they know what they suffer with. I mean, um, then and you try to turn that like into an EIP and you're already meeting a lot of resistance in the sense that like are you trying to like co-opt the protocol? trying to take over the protocol. Um like I mean that those are like very bad experiences and I think

those are things where I think we have now the full like recognition that like hey that hasn't been maybe so good. Uh and like what can we do to change that? like there's a new energy I would say and like people getting like the right people getting promoted into the right positions like including the two new EDs and um like especially Tomas from Nethermind he has built an like a very like large and successful organization in in mind and they are very commercially minded right like it's amazing how they have built a successful a very big successful company on the back of creating an Ethereum client, right? Which really you

shouldn't be able to like commercialize that, right? But they have managed to like they're not making money through the client, but like they have built everything around that. And to me, that's like an extremely good sign. Like he has extremely deep roots in industry and knows all of the builders. And so um I think you you're seeing a new kind of energy around making Ethereum more uh commercially open and commercially minded and I think that is if there was one thing that I would change then it would have been that for sure and so and we're seeing that so that's very positive for me. I agree. I agree. No, I think I think that's that's probably one

of the big thing is also just a sense that like you know core development moves a bit faster more programmatic you know uh tries to I think I think some degree of sca faster scaling I think is an important one too that is the other thing yeah I mean if you listen to to apps then yeah you would have scaled the layer one right like so there's a kind of related but maybe it's still worth talking about separately But I think in terms of road map like I think there must be an like there is now an understanding that like you shouldn't give up on the layer one like I mean a lot of what makes creates this incentive for rollups to build on Ethereum is the quality of the layer

one it's speed it's finality you know it's DA costs and transaction costs like we need op codes for ZK verification like stuff like that right and um So like there's a bit more of the understanding where yes we want to have a roll-up road map that means rollups are a big group of customers so let's think about what they need holistically and a lot of what they need we can only give them by making the layer one better and so uh I think you're seeing a real revitalization also of that conversation and so I think anybody who's like buying Ethereum is also underwriting the they are underwriting the thesis

that like the these two like the people who who who want to push for those two things can basically uh you know break through like the resistance and like you know a lot of the entrenched like interests like inside these processes and like this bureaucracy that has built up right because Ethereum is a very like procedural kind of community um where and and like decision- making in a lot of places has historically grown to be very decentralized for better or worse and you know in some areas you have like there's the understanding that like well this like this group of people maybe or like you know I mean the core developers are like the main example

right like you have the client teams and like client teams decide what goes into into the fork and that's you know maybe that is like one very big assumption that like needs to be challenged in the sense that like often you know core developers do the implementing, but maybe they shouldn't, you know, they shouldn't be the decision makers for what actually goes into it because like Ethereum is not the type of protocol where you can have you can be like an extremely talented engineer, but you can also still have that kind of like strategic vision and like keep the old protocol in your head and like know what it needs like at what time like that at least like the set of stakeholders who get to make the decision needs to be like expanded.

Cool. I think that's a great note to end on and I'm also excited to see sort of what this new uh energy will bring to Ethereum. So, thanks so much for coming on House. We really enjoyed this conversation. Thanks, Brian. It was really fun. Thank you.