Liquid Staking: The Battle for Liquidity | cbETH, Rocketpool

Transcript

staking is here it's ready for prime time it is a two-way door of getting in and out and we want to grow that overall participation of staking [Applause] all right everyone welcome back to another episode of Empire today we are talking about lsds this is not a psychedelics episode today we are talking about liquid sticking derivatives basically as ethereum moves from proof of work to proof of stake you are able to stake your ethereum the downside to that is that that eat is now locked up it is a kind of dead asset so what has been created is are these things called liquid staking derivatives which allows you to have liquidity on that state deth so a couple of the major

players in this space are coinbase with their cve product a rocket pool Lido which we'll be talking about and this episode kind of is going to focus on two different things like liquid staking and then just the staking Market in general and we're really lucky to be joined by Darren who is the GM of Rocket Bulls core team and then uh John who is the product lead one of the product leads at coinbase he helped lead the launch of CBE and now leads all staking at coinbase so Darren uh John welcome welcome to Empire guys thank you very much for having me thanks for having us yeah excited about this John is this is this pocket cast number one for you uh I think you have any podcast worth note uh which I put you in that camp but

uh I'm a little bit more under the radar on some of these things so good way to start the show but butter me up say the say the podcast is noteworthy I I like your strategies I'm just hoping for the softballs baby I'm making notes um cool well maybe John because because you buttered me up so kindly I'll throw this first one to you which is uh staking LSD is like really just in in a hot button topic obviously because of uh everything that happened with Kraken and settlement you guys have your own product uh CPE um I'd love to just get like a lay of the land like give me the you know we're coming up on Shanghai we've got a couple

big players you guys uh frax is making some movements obviously lydo is kind of the dominant player right now like give me the lay of the land of what's going on in in lsds and staking world right now absolutely so the way I frame it is that you know staking in general has been live for I don't know approximately two years or so and we've seen over that time period already some pretty Monumental shifts in market share I think one of the very first considerations to have and when examining a landscape is native staking versus liquid staking and also can wear it as home staking or DIY fitted and generally what we've seen is kind of you know over time that home staking

contingent I think rests around like 25-ish percent is kind of where we are today and these are do it yourself stand up your own node validator um in your home and and run a couple of these validators on your Hardware um and then we've seen that a lot of the centralized exchanges have built staking as a service programs um and that was kind of the next wave where you had Kraken um ourselves a coinbase um uh binance of course and then a number of others Bitcoin Suites uh state fish State us Celsius even they're allowing these centralized providers who then began offering staking and I think then the the most recent inflection in the

market was when Lido began to really gain steam they launched their Ste token um it immediately started to get some traction especially as they went through the different defy Integrations so that utility built up for sde and then what we saw when we looked at this uh the market share over time is the inflection of lyda's dominance really happened after their Ave integration and that's what kicked off a lot of additional usage of lsds in divide for many as different strategies and and um approaches but that was when we really saw Lido rocket to the top as the number one provider of staking through

the format of St um Darren how do you do what what are we missing here in terms of like lay the land end of February what's going on in the staking an LSD space that like from someone who lives in it 24 7. yeah so Lido definitely um kind of took the lead in terms of that they did they did it very very well in the sense that they they created a lot of liquidity um which then kind of gave them that utility um the first teeth uh again yeah as John said the Ave thing was was very very um good for them um a lot of other kind of players came into the market a little bit later and so

obviously we came in around kind of November um of uh 21 um onto Main net and slightly building up some steam um and then Jon could talk about them yeah CB um as well um so and then there's a lot of other kind of players like steak wise and a few other people as well who are kind of um developing these protocols and uh gaining I guess mind share at the very least if not if not kind of market share as well um and so that that's definitely that's definitely been an ongoing process obviously with the merge the merge was a big big thing for um staking protocols so I thought I think the alloy kind of TVO chart is ridiculous it uh you you

guys kind of like it's a steady steady growth until until the merge and then suddenly it just goes bam uh where you know the merge was a massive de-risking event for the whole of ethereum and but particularly for ethereum stacking so that is that you know that that was the kind of like a big a big moment yeah I'm looking at the market share numbers right now which are uh this I mean this is according to D5 llama 73 Lido has 73 of the mark uh market share CBE has 15 to 16 of the market share rocket pool has six percent of the market share and frax has like one to one point five percent of the market share why does someone maybe Darren will throw this one to you first like why

does someone choose to stake with one of those for someone else like what's the when I'm going to stake like what what is the product decision that I'm making there I think there's a there's a few different things um the first one actually so the first one is um the kind of style of token and so there are different styles of token um that does play into it a little bit in the sense that um so um there are kind of non-rebacing tokens and rebasing tokens rebasing tokens kind of have this daily increase of quantity and that you get and non-rebasing tokens actually increase by value over time um and there's some kind of advantages

and disadvantages of each approach um namely kind of like tax efficiency and that sort of thing uh non-rebacing tokens tend to be more tax efficient um so that's one element of it probably the most driving factor is is utility um as John said you know the RB integration um uh was was was very is is key um because it allows people to do kind of hyper staking uh which is kind of essentially leveraged um staking so you know utilities is the biggest is the biggest thing and so different um different um tokens have different um maturities in the market and you have to have a maturity in the

market and you have to have a certain amount of liquidity to kind of get these Integrations and in fact it's kind of like a Maslow's hierarchy of Integrations and you have like liquidity on the bottom then eventually you get into kind of like lending markets and once you get into lending markets then that that then enables you to get into like new aggregators and and a lot of other kind of protocols as well so there's this kind of like um stepped approach and you have to work through each of those and kind of go up that pyramid and to be able to do it so tokens that have been in the market for longer will will have more we'll have more utility um so that's that's kind of the thing and then obviously it's it's with some of it's

um like the decentralization Spectrum as well um you know different validator sets um uh you know each each um each liquid staking protocol has a different validator set and that definitely comes into play um when you when you look at that um and then and then the last thing is brand obviously um I think I don't know whether it's in that order or not but it's it's it's that around that sort of way yeah to tag on to that um I think a lot of those points that Darren made are great points and particularly like a big plus one to his points around utility and the hierarchy of needs or the like the the order of operations you need to follow

in order to build that utility uh We've experienced the same with CBE and we've gone through those processes so we're very very much agree um I would also add but like if we take ourselves kind of one layer up and maybe zoom out even a bigger to a bigger extent I think the market shares um you know that you provided their Json are all around liquid staking derivatives or um liquid state and tokens as we like to call them airplane base uh more than anything else and if you actually look at kind of the overall market share landscape um the differences aren't quite as wide right so you have like from my view like Lido has about 29 of market share coinbase 15 crack in seven and a half

Finance about six rocket pool around two and a half ish percent um when you look on those total bases so I would almost also say that like when a customer is thinking what's up from like why are my numbers so different than your numbers what's the what's the match what's the right metric that I should be looking at because I think I'm looking at the wrong stuff then yeah what you what the the marketer you might have given is on just the lsds whereas I looked at the total underlying State beat a crossbow native and liquid state uh so that doesn't include like Kraken staking arm or whatever I see okay HR and and finances too right I mean that data where can I pull that up I live on the hill Dobby dashboard oh

dude uh I don't know I can send you is there a link I could add it that's fine yeah yeah and yes that's that's one of the ones that we've used and then looking at the total stake overall in the network and then kind of comparing each of these providers uh against that number um so yeah to to get back to the point right is like that if you look kind of first on that kind of outer lens you you do kind of have a chance to sit back and say okay well if we put ourselves in the perspective of the customers and the customer's shoes there really is kind of a um spectrum of sophistication and knowledge when it comes to staking you got very warmy novice takers who might be in a centralized exchange product already seeing hey there's this

opportunity to earn apis on these assets and I'm buying and holding that sounds like a great use of my proceeds during a bear Market while I'm just holding and accumulating and then you probably need to go up the sophistication Spectrum you're going to land at the you know Advanced Traders up to the web 3 h5s and VC funds who are actively using these tokens so if we kind of you know use this framing of the customers you might also say that how those customers are are choosing there are different stating provider does also based on kind of what level of knowledge they're coming in at the more ignore me and novice users are probably most comfortable with a

solution that might or might not have an LSD associated with it to just be able to get in earn that interest or those rewards and then continue to you know just sit and hold but as those users are more sophisticated those who are kind of like you know accustomed to using self-custed wallets interacting on chain um or up to those crypto hedge funds that are trying to maximize returns that's where I think lsds become increasingly important for that top segment of the market and those uh user groups are number one looking to you know maximize their total proceeds and profit which does involve some of those strategies that Darren mentioned and using this different D5 protocols but

another huge wine especially when you're at that institution level is your security and Trust in the safety of the underlying statement and so that's another I think big component here which is it's not just utility and how much you can use the token and how much profit you can earn from it but how comfortable do you feel with the security of the underlying storage and some of these um you know mileage may vary between different providers and I think one of the reasons why there is a lot of faith in Lido is because there's a little bit that the Lindy effect that it's been around it's been tested and there's confidence in the underlying um security model Darren can I just okay so I have like a

very um I have like a five-year-old's take on staking which I see like a spectrum of staking platforms and I'm like uh centralized staking platforms coinbase Kraken Finance uh folks like that I'm like okay those are the centralized folks then I'm like all right then there's like the middle bucket and I've got like my Lidos of the world the middle bucket and then I'm like all right then there's the like very Pro decentralization rocket pools of the world so that's my like five-year-old's brain view of staking I guess Darren like won is that a Fair View or not a Fair View and then two like why do you think it's obviously you're spending your time at Rocket pool helping to like further this like decentralized staking Mission like why is that a Cause worth

fighting yeah I think that's that's kind of like a a fair assessment of the of the market um particularly around the validator set so obviously you know um we're having you know from centralized having you know one one provider or um to uh control over over the validator set to kind of us where we have over 2 000 um individual node operators so I I guess yeah we've spent kind of a long time building uh our protocol uh rocketpool has been around for six years and so ever since uh staking was even mentioned for it as a thing on ethereum we've been around so

um we we have spent a long time kind of building a protocol and um and so the reason why we do that is because um so ethereum you know aims so ethereum's Health kind of depends on it being decentralized um it and when I say decentralized decentralization is a it's a characteristic um but it's not necessarily the outcome the outcome you get from decentralization is uh credible neutrality um uh it's censorship resistance um it's resiliency it's all of those kind of things um that we want from an L1 blockchain um and so it is really important that we

um we we decentralized the validator set as much as possible um and so yeah so that's that's why we kind of that's why why we approach it in that way and why we spend quite a lot of time doing it that way and it is actually a very hard problem uh there are new kind of protocols coming through at the moment and uh you know we we're perfectly comfortable with competition and I think it's good that we there is competition in in the marketplace um particularly for you know running validators um as we've kind of seen um with Lido uh one it or you know one entity or one pool having um a lot of control over the um over the validator set is not a good

thing for for ethereum so um we need we need competitors in the marketplace um at the same time building a decentralized protocol is is very very difficult um so yeah they'll be kind of managed to do that over the last six years yeah what I mean you guys are I guess on on my five-year-old's view of staking like on two ends of the spectrum so maybe competing with each other there but like you're also both on the same team going after the like 800 pound gorilla in the space which is Lido what do you think is like is it like why is it bad if lydo gains too much of the market share what's the what are the negative ramifications of that

I can at least chime in to say that you know um there's a lot of push that we saw amongst you know in the ethereum community as Lido kind of approached the 33 first consensus threshold of uh our proof of sake consensus in ethereum I think there would be the ultimate top limit there is that like 66.7 percent uh upper Threshold at which point um if there was full control over the validators then a single provider would be able to distort and prefer the state of the network now very importantly what a lot of us talk about in the ethereum community is that there is still this all-important social layer that stands

on top of the protocol layer and I think if we ever got to a position where the protocol itself had been captured by like a 70 holder of market share that social layer would probably overrule and then work towards uh rectifying the situation either through some kind of specialized slashing a hard Fork other sort of tools um that are at the discretion of the community you know hopefully we never have to approach that and the community Works towards um a more decentralized future and and let me you know kind of just take this opportunity to remind folks that sure like you know Darren and team might have um you know RV coinbase is a big

proponent of CBE um but ultimately even if we are competing on these you know like our flavors at the same thing we should take an ethereum first approach here um and we are I think at first and foremost ethereates in this regard um we need to think of the whole state of the network as extremely important and Central to our mission here at coinbase you know one of our missions is to increase economic freedom in the world and we can only do that if we have like a truly neutral uncensorable permissionless base layer of ethereum that's number one like that needs to come first and foremost amongst all of our decisions of actions and I think if you take that lens we can also take a pro ethereum stance which is to say like

when you look at all ethereum staked versus total Supply we're only at about 14 so there's a ton of opportunity to grow the pie rather than trying to fight for market share within the pie and I think that posturing ourselves in the community in advance of the Shanghai upgrade and move to the enablement of withdrawals that's like the next big Catalyst that we can use to inform everyone out there all eat holders that staking is here it's ready for prime time it is a two-way door of getting in and out and we want to grow that overall participation of staking on the network um one can you guys explain this deal that happened last month which was um

it's like I think of you guys as competitors here but then in last month uh coinbase joined rocket pools odao um and coinbase Ventures announced an investment in in uh rocket pool so like maybe maybe this is a question for Darren here can you explain that yeah yeah uh so I should say I should caveat it with um they've been proposed to the Odell um they they still need to be accepted um uh but um uh yes so so yeah this is um so this is important because so coinbase um as John said you know everyone is you know they're kind of a ethereum first um company

um they want to invest in uh decentralized technology um and so coinbase Ventures is the is the kind of the BC arm of of coinbase and it's actually them who um who we're kind of dealing with um and so they've actually um uh done like an RPL investment um so it's it's it's essentially you know kind of buying RPL and investing in that but what they intend to do they intend to kind of run some um some mini pools and to kind of you know increase the capacity of arith um it's not in terms of the network network itself it's not going to be a significant percentage of that um but they um they are kind of um going to be running mini pools

um so that they are kind of investing in um and want to be a part of you know decentralized protocols uh coinbase Ventures are like one member out of I think we have 16 uh members um on the Oda at the moment um and so what it what it really does is it kind of um means that we are you know together on that kind of endeavor um yeah so there you go I think the only two cents I can add to that is you know um coinbase's mission right as I mentioned before is to increase economic freedom in the world and that is a attitude we take across our product portfolio to focus on how do we you know

grow that mission and grow the ecosystem at large first because we we realize how small the whole ecosystem is relative to its future end State and we view this kind of on the same Paradigm of um the internet and and this internet of value we're building and so we take this view that it is very early and if you look at kind of our product portfolio at coinbase from the you know consumer app that the flagship app that everyone knows and and hopefully loves um to you know the web 3 wallet which is now a feature within that app to allow people to kind of have this um semi-self-custody um approach that's based on MPC technology that allows you to actually

sign transactions and perform web reactions within the app all the way to coinbase wallet which is our truly web3 product you see a product portfolio here that matches this intention of wanting us to focus on growing the entire ecosystem not just being a first party centralized institution but focusing on something that we'd call internally our you know product 3.0 Manifesto which is put in place by Brian and and surgeon are um past Chief product officer to focus on being a web 3 first company and I think this um collaboration between rocket pool and coinbase reflects that attitude we are now a you know a self-focused central

institution we want to focus on growing the entire ecosystem yeah what one of the one of the ways also um look at it is so coinbase is one of those kind of so crypto in general um rocketpool uh ethereum you know all of it is on this adoption curve and um as we as we go along the doctor abduction curve we're still really in the early adopters uh sort of phase uh we are breaking into the early majority um but you know to get kind of the the early majority and the the kind of the rest of the majority you need you need people like um coinbase as those gateways

um and so that's why um you know that's why it's in kind of important because it means that D5 protocols can actually have the you know the positive impact that we're aiming to have uh because we can extend our reach um to to those people so yeah that's that's how kind of how we see it as well all right let's let's talk uh let's talk Shanghai so can one of you guys maybe set us up for this conversation and just explain give maybe the 101 on Shanghai when it's happening what's happening uh maybe John will pick on you for this one and then would like to get your guys's view into in terms of like what's the second order impact and like what's actually going to happen here

sure so um the tldr is that you know as the ethereum community we have over the last couple of years been working towards a transition from proof of work to proof of State consensus as a mechanism to increase the overall security of the network and bring down energy consumption the huge milestone that we hit last year was the merch the merge was the um on-chain deviation towards proof of State consensus and we have been working in that Paradigm flawlessly seamlessly it's been really impressive actually to watch um that transition happened and to the whole chain to continue to move forward

now a sort of fast follow so to speak from that upgrade was the ability to do eth withdrawals or the opportunity to kind of exit your validator and get your principle of your 32 increments back if you so choose because otherwise it's been locked up now lsds liquid saving tokens have been a kind of um remedial solution for that lockup period but ultimately your underlying eth right now is locked on chain until we get to the next hard Fork upgrade of ethereum which we have dubbed Shanghai also heard chappella because there's like the subway line capella like

there's like you know the execution layer the consensus layer but whether you hear um chappella or you hear Shanghai both of those are the ref referring to the upgrade that should happen seemingly On Target by around mid to end of March at which point on chain you'll be able to submit unstating requests to the protocol call you will be in an exit queue that is governed by the protocol of how much they allow unstaking to happen and then as we work through that protocol users will be starting to receive their unstaked vanilla eth and we now have in my mind sort of completed the um full scope of what was needed for the transition to prove the state

Darren you want to walk us through the impact of this just on the staking Market yeah so first of all it's it's very very exciting um it's it's the culmination really of proof of State without without this we don't really have previous days it is actually a remarkable feat of like open source code and I I I I really think that like you know people see these like EIP something something something and they're like oh that's great there's like this other thing like crypto e thing that I don't really get I I really think this like uh even people outside of crypto should be applauding like any technology would be applauding at like this massive feat of technology that has been pushed through over a many many year roadmap which is I think it's

really cool I don't know the research the research effort the the development effort I mean there are lots of teams working on this and they they all kind of uh you know interoperate and that sort of thing so it's it's it is it's a massive exercise um but uh yeah so withdrawals uh withdrawals are really exciting um as John said it's it's very very close um and they're they're con we're kind of finishing off the testing um of that now how it kind of affects the fix the market is that I mean to be honest uh what it really does is it okay very macro um it kind of further de-risks ethereum staking that's the that's the biggest

um thing that pigs take away um the merge the risk the execution risk of actually moving to proof of state and now um you know withdrawals actually de-risks it from a a staker's perspective so there are a lot there's a lot of people waiting on the sidelines that um you know aren't necessarily crazy enough to knock their money away uh for a a non-determinate amount of time um and so you know I'm surprised how much there is stake to be honest um so uh so now that that is uh implemented it means that you can you can become a validator you can run it for a few months

um and then you can unstoke kind of when you when you like as as John said there is this like execute so we don't know um kind of how they'll how that's going to behave in terms of you know how many validators how long it'll take you to exit and that sort of thing um but you know the essentially you can stake and unstake um and that's a that's a big deal and so there's a lot of there's a lot of people on the sidelines that either did not want to do that um because of the lookup or could not for um particular kind of uh you know regulatory reasons or something or you know compliance reasons and that sort of thing so that's that's a that's going to be a big deal um in terms of the actual protocols themselves um I mean I I can turn from our

perspective it it does actually make us it doesn't actually make that much of a difference for a liquid staking perspective um people can unstake um from rocket pool whenever they like anyway that was long as we put liquidity um so you know it what it really does is it increases that liquidity increases the liquidity to unstake um it also um potentially increases the APR slightly because a lot more of those rewards are being compounded um and so you know so they're they're kind of like the two the two things from a liquid staking perspective um also three things the you know de-risking slightly more yield um and

um uh yeah so yeah I'd also add on the de-risking side I think one what what like one metric for measurement is um looking at the training discount of Any Given LSD versus the eat that it represents so whether in the a token model the basic model or the C token model generally these assets you know trade at some proportion to the fair value representing kind of the Redemption value of how many eth units you would get underneath that token and historically what we've seen like if you go back to periods of high volatility um I think of like the Terra Luna collapse like around there you saw these

trading discounts wide pretty dramatically because people just I think in general were in a risk-off mode and we're kind of scared about the total possibility of collapse around all sorts of different crypto systems now since the merge you saw those uh trading discounts go much tighter like you would see um SDS trade kind of under negative one percent of its Trading discount and that kind of also represents that de-risking that happened with the merge and what I would expect to happen is after Shanghai and after the point where the execute has come down a bit we should see trading discounts go converge towards zero or near zero over the long term and it represents the fact that the Arbitrage Loop of going between

LSD to vanilla uh state to vanilla state to state D that whole circle is now bi-directional because if it trades at a small discount you can short long One Direction or if it trades at a slight premium just as in today you can art that out uh pretty quickly so that's what we would also expect is that these lsds will trade closer in line because of the de-risking to the fair value so just just to add a little bit more to that as well so our race which is our our second token um is actually been trading at a premium um like one point something percent um and that's mainly due to the fact that uh there's a such a huge demand for Ari um and we're a decentralized

um protocol which means that we need known upgraders to spin up you know validators um and on that side of things you know they've been uh kind of spinning up um validators but not quite meeting the demand on the R8 side um and so there's actually like an ARB opportunity and there in terms of you know spinning up a um a rocketball mini pool you can actually earn an extra 1.3 because you are being um uh by creating by creating a um a validator and what we what we're going to see is the opposite as well so um if um if this as John said you know if if we're trading it if the you know liquid

staking token is trading at a discount then there's an ARB going the other way which means um so you know we we can see kind of like validators using that as an as an arbitration as a you know as an ARB mechanism to um study the the price of the liquid second token have run quick break from Empire to tell you about another blockworks Channel that I know you're gonna love I've been in crypto full-time for five years and have always struggled with one thing which is keeping up with the next big Trend as soon as I wrap my head around MVB Rhonda aptunes as soon as I wrap my head around options we're on to liquid staking derivatives I'm sure you've been there lockworks research has solved that problem for me our team puts research

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follow their Twitter handles today links in the show notes trust me once you do that you're going to want to subscribe to the platform if you are already to subscribe right now I got you guys with a little hookup Empire listeners get a 10 discount for the first 50 people who use the code Empire 10 got your back check out the links in the description to find out more now let's get back to the show yep I'm I'm not sure if you guys have seen the the middle of the bell curve meme about basically what will what will happen uh uh around around the unlock right so like the middle of the bell curve take well I I would say the middle of the bell curve take is like uh like oh what like when Shanghai unlocks like millions

of Youth will get sold onto the market I'm not buying eth yet I'm gonna wait until after that happens and then I'm gonna rotate into I would I would call that the middle of the bell curve take um the right side and the left side of the velcrove take is probably like pretty bullish on the unlock so but I'm curious if you guys would agree with me in in that sense I I think I agree with you um I I had definitely more in the camp that I think um like well speaking of Curves I guess um my view is generally A J curve of what's going to happen after Shanghai whereas you're going to see in the near term all the first one to eight months or so there's going to be net unstaking and maybe net selling of eth um as

people feel for example uh users just got unlocked um about six percent of their validator was accumulated rewards so that now is a tax impact right and so at least to some extent you're going to see some people unstaking and maybe even just the rewards in order to sell on the market so I would expect that to happen in the short term but just to all the things we mentioned that J curve starts to inflect kind of once the exit queue kind of works itself out and you now get to a more steady state where people are saying ah this whole thing is Steve risk or it is a more stable system that has this two-way door of staking and unstaking and I do expect growth like net staking growth to happen from that

point on well I'm it's a good thing yeah I think that's a really good take John yeah I think that's a good take like net like I guess that that bell curve meme whatever it depends on your time Horizon right so like short term yeah probably a bunch of cell pressure long-term very bullish because people see that it actually works so yeah I think that there's there's definitely um so the partial withdrawals thing um is is actually an interesting mechanism so so anything above 32 East once we're one strength is delivered anything above 32 East will be withdrawable well actually we'll we'll um as soon as there's some other things going on there that um just to simplify it yeah and so anything above 32 eighth

will come back so that's actually an important mechanism because people won't necessarily have to exit their validator to like pay tax for example um and we are in the bear Market as well so that makes a little bit of a kind of a difference but um uh so you know if we if that partial withdrawal comes back the as I said as John said there might be this initial I'm selling I'm selling for tax um but ultimately I'm kind of seeing people use that and wanting to um compound their rewards and so what I'm actually expecting is that uh a lot of that will get restaked um either via you know spinning up more validators

um or and by using a liquid staking token so I suspect there's there's going to be a lot of that as well um but yeah there may well be a little bit of short term when people would self-attack yeah and Jason I would say that I think that um the bigger phenomenon is going to be market share reshuffling then it is going to be like net unstaking or or you know net staking um I think we'll see more changes in market share um and this is like you know definitely a Hot Topic that I'm talking about with my teams um but I think just general principles that are guiding my thoughts here are that number one lsds are going to be just as important in a post-shanghai world as they are now maybe just as is a

fluffy term but very important still very important and the reason why is because there's always going to be an execute when you want to unstake there's at least the um or there's always gonna be a cue there's always going to be the exit period which is a minimum wait time of like the 30 second Epoch something like 27 hours I think um that you're going to need to wait whatever you want steak so some people who have immediate liquidity demands are always going to prefer to have an LSD where they can get in and out of staking immediately at their discretion second reason why lsds are going to be still extremely important both Shanghai is because it unlocks a lot of capital efficiency you could now use your LSD either for on-trade activities like in borrow one protocols in order to get an

additive uh rewards rate there for for depositing it and and lending it or another approach is that you can even deposit these at centralized institutions and Prime Brokers for um that collateral reward so if you are taking leverage as a crypto hedge fund for example um you would probably prefer a collateral asset that's actually paying you money and earning you interest as you go right so I do expect um that even post Shanghai like it certainly makes a native staking a lot more attractive because you're now no longer in the sports lockup um but I still think that over the long term we will see lsd's grain Supreme as

the Premier Choice all right so I have a I have a couple maybe more quantitative questions on the back of that Darren I'll throw this to you and then John I'm going to ask you a similar question today uh I fix my market share numbers by the way John I got the hell Dobby Dune dashboard up we're good to go so today Lido has a according to this dashboard 29 market share what is lydo's market share if we're doing this podcast so let's call it same time next year it's very difficult to tell uh I would I would expect it to be lower than um uh there's a there's a few reasons for that as I said um that unlock is

then is now possible um there are a lot of people who are particularly from a risk perspective are we are looking at diversifying um across different liquid staking protocols um and I mean there's different versions of risk um but obviously there's this kind of smart contract they store all this or there's the risk that you know Lido plays which is having too much um too much stake in that sort of thing um so there's there's definitely a lot of that kind of uh management of risk um so there will be a reshuffling because of that uh there will be a reshuffling because you know prefer different black brands or that sort of thing um or different different

um aprs um so there's there's definitely that uh so I would imagine that they're um the percentage will be lower um one thing which is which is a rocketbook specific thing is that we've got like a big Atlas release which will actually kind of at minimum 3xr capacity and for um as well so one of the things that has been kind of slowing us down is the fact that we are a decentralized protocol and we have to scale in a particular way um and with our Atlas release um that situation improves quite a lot so um obviously that's a very biased very biased thing and but we expect to have more market share

um a potion card as well so we think Lido's market share is going down in rocket pools has gone up you've replied there I think you're gonna I didn't think you were gonna say this I'm not gonna I'm not saying that you're saying that um I guess John maybe let me try to make this more of uh and if I ask you the same question I think I'll get a similar answer Lido's going down and CBE their coinbase is going up what is um like like obviously you think that what is something that like could get in the way of that or like what's something that either you guys could fail at or like that Lido could do well at that would maybe like invalidate that that idea well here is I mean one thing that's

been top of mind to me which is that when I look at the LSD Market um one analogy that I like you know I spend a lot of times too much time you know researching all sorts of different Industries and understanding the history of those Industries but one of the I think the the uh markers here that's a pretty good analogy is the ETF Market and the way I think about this is that lsds generally are representing a state eth position at whatever you know provider you are trust and of course the security of that underlying need is incredibly important in choosing that simple

but then when it becomes deciding you know between one supplier versus another you can kind of then lean on that ETF analogy to say that when you look at the ETF markets there there's often A Winner Takes most ETF or strategy and the reason why is you know my my background in my first job out of school was you know in Wall Street that I was at a hedge fund for a while and the reason why is because when you are investing large sums of capital you are pretty tied to how much liquidity exists and how much trading volume happens in a given strategy which or in a given security

um or uh just product because I don't view LS liquid state tokens and securities uh but if you just view in any product the um overall demand is generally kind of this flywheel and and a bit of a network effect between having more trading volume so that there's more liquidity for a big institution to get in and out that then drives AUM into the ETF which then allows more natural wires and sellers which then turns that flywheel of equivalent to get liquidity yeah exactly exactly and so if we think of it in that model I think that would be the risk factor right to your question of like what could get in the way of Lido continuing to grow and and St growing is a bigger statute total it

is probably that that is probably my concern of something that could derail it and what I hope to happen is that we see the community and that social layer continue to push all in Upper thresholds for how much market share we want a single staking provider to have so that that ultimately we drive long-term network security as our top priorities and periods okay so then let me ask an incentive based question about post Shanghai world so if you look at our eth which is rocket pool uh so our eth swap volume on balancer increased pretty dramatically after turning on incentives back in

September um yeah I I think right now the most liquid market for CBE is on coinbase but the cve pool also does have this curve gauge right like AK like CRV emissions can flow there do you see coinbase voting on curve to drive incentives and on-chain liquidity in like a poaching High world um I would say that we like look I'll start by saying we haven't made any specific decisions there and would be you know willing to to speak to what we plan to do in those regards um but I would say that we ultimately realize that there is a lot of advantage to driving on chain liquidity as well as

off-chain liquidity in centralized worlds one of the reasons is to a point that Darren made earlier which I really like which is like Maslow's hierarchy of needs when driving utility is that in order to get into all the kind of you know Premier sexy new Divi applications you generally need to be integrated into the bar Lin protocols and for the bar lend protocols to adopt you they need to be able for their Liquidators to have enough liquidity to liquidate any bad debt so they don't end up with you know bad debt on their on their balance that means that ultimately uh Dex liquidity is the base layer of importance for on-chain utility and you can generally think of that metric and the success

metric for how well integrated you are in Auto Chain liquidity is by your slippage percents at X dollar intervals of how much of a cell size you would need measured by some aggregator of the one inch router so if you kind of put into that framework and you say okay well like we need to drive on chain liquidity and liquidity providers um in order to make sure that that slippage is low on large trade sizes then coinbase and I would assume rocket pool as well would be angling to do anything we really can to try and drive enough of that liquidity provision on chain um how we go about doing that I think that's you know up for discussion there's a lot of different approaches

but it does speak to a critical need there yeah Darren what do you think I mean like will you will you guys have to continue some of these uh incentives after Shanghai uh yes I think we'll um we'll need to kind of continue we're going to um assess it as we go and we have a we have a management committee within the Dow um that kind of look after uh our incentive program um we're definitely uh looking at it so so we we were we were quite reluctant to get into liquidity incentives um we um I think in in the long term I think

we'll we'll try to kind of um and dial it back but I I can't see us at the moment I mean uh they made the main thing that we needed to do was get enough so there is there is like as I said there's a there's a point at which you need to get to you need to get to that point to be able to get into lending markets because of those that those liquidations you need to get a certain amount of liquidity out there so that there's enough volume so that you can have oracles um so you know there's there's you need to have that bootstrap um to be able to get there um now I I suspect we will carry that on um uh but you know we'll we we could we kind of assess that on a on a kind of a

monthly basis anyway yeah how do you see the free market evolving so CBE I might botch some of these numbers but roughly 25 which pretty high fees I'd say rocket pool nodes I think can choose their own rate between like five to let's call it twenty percent uh so it actually so now it's so it's a little bit more complicated so now it's a bit now it's 15 uh as a fixed it's a fixed 15 and that but previous but what uh re folders actually get the average across their whole network um and um we did have a floating commission rate um kind of at the beginning so so some some node operators are like 20 some are like five percent and everyone in

between um and but for now on it's 15 uh post Atlas actually it's going to be 14 so we're actually lowering nice um so yeah um well what I would add there is that you know 25 years or our Baseline fee for uh each staking and for CBE and what is available to us uh ER feed me baits and that is something that you know we've written into our user agreement and is is clear and so larger uh investors institutions other large uh large and advanced Traders and investors who would like to discuss those fee rebates with us or you know absolutely

welcome to reach out to us through our pride broker through our sales team and so forth uh to discuss kind of volume based feed rebates and I think over time what I would expect is that it will be a competitive market but that there is some um kind of underlying floor which is an institution of large investors comfort with the underlying security model of the State team and I think that is one thing where us at coinbase we take a lot of pride in being the most trusted provider in the market above centralized exchanges all the way to you know for all of our products the most trusted and easiest to use become

top priorities for us and so building the really simple user experiences for retail and also keeping the assets incredibly secure underlying it are what we kind of always will use to Baseline the value that we're providing to customers yeah Tony mentioned this word like ethereans a couple times like I think everyone on this call is like very like pro evm pro eth world even coinbase is a company I would say is like a very like eat heavy company um uh Lido announced that they're going cross-chain so I think they're like launching with on Cosmos maybe Neutron I think it was I gotta revisit that but I'm curious to get both your s's takes on like going like like cross going to other chains staking on other chains

like what's the strategy there I sure I can I can start by saying like yep Lido you know has for a while um had different state like St tokens for different chains and they have their St soul I believe and they have they did have um ones on Tara Luna uh rest in peace over there and um you know I think there's they'll probably be adding more protocols as well uh Equibase we have uh staking programs but more than just eat and we are looking over time to add more staking programs and any ones that we feel like we can um dutifully add for our customers in a

safe and secure way we will be adding those over time and to maybe more specifically answer your question around the potential for lsds for other networks I think that is also a possibility something that we are uh exploring and considering and it definitely comes down to I think a function of how valuable is that instant liquidity for that other uh Native blockchain token with eth of course that was kind of the no-brainer because it was all locked up until Shanghai so it's you know Bill brainer to focus here on the east side but when looking at other tokens you do need to account what is the unstaking

illiquinity period look like on that chain what is the total defy adoption look like on that chain to speak to that utility argument of how much use can you get on that chain and then I think third there's also a little bit of a lens where you need to take a longer term view on the success and Adoption of that protocol if you take that view on like if you think if you're working with a network where you see developers in Exodus not actually building not a lot of new Innovations I'd say that probably leads less confidence in wanting to really invest in that protocol uh but just to be very clear you know while I maybe individually love ethereum and I was you

know kind of born and bred on ethereum is kind of the very first place I really sunk in I do take a multi-chain view of the future I think there are a lot of other chains out there that are valid working while in unique and different architectures and I think there's probably in that design space of different protocol architectures different things that's mechanisms probably other chains that will be best suited for certain applications over the long term so I by no means a um a a single-minded person on this I've got an open mind and do think that there's a lot of other protocols that do have Merit and there's probably opportunity to build staging analyzes there I was very uh PR friendly PR friendly I'll tell you John well the pr people who are

listening are gonna then thank me yeah yeah yeah they're gonna be happy with you there uh did Darren what do you think about this uh yeah our approach is is a bit different um in the sense that um so we in the future we're not going to say no we won't go to any other chains um obviously we'll kind of adapt as the you know as the future unfolds um but for us we have kind of a philosophy of do one thing and do it really really well we in ethereum ethereum is the biggest Market um kind of by far so uh it's worth spending our time in that market and getting it right um and so you know we we've got enough work uh working on rocketpool in

ethereum to last us decades so uh so yeah yeah no no no no decades so uh so you know we we want to do it really really well um we want to focus uh and be the kind of best that we can so um that's that's kind of where we we've taken as I said you know as a future unfolds we've been it may change but at this very moment we've focused on just on there yeah um uh future I want to talk like some like future of the market stuff as we think about wrapping this up like future of the market for staking um at large one question that I had here is like will lsds subsume staking or will like how what's the relationship between

staking and lsds and specifically like the size of the LSD Market relative to staking maybe John and Fiona take that one first sure I think over the very long term I would expect um if you break out kind of liquid staking or lsds in the eat that underlies it versus native staking of which a subset or those DIY home stakers my hunch is that of the long term lsds will subsume and take the majority share of total stake teeth on the network and my reason for believing that does come down to a couple of the points we mentioned before uh number one being the utility factor of it being able to use

it both as depository collateral that earns you interest or to be able to lend it out barlane protocols earn additive interest and so forth basically just be able to use that Capital rather than just having it locked up in your own of a value I think the other piece of that is the fact that um users will demand liquidity and even like in even in a world very far away from Shanghai once we have eth withdrawals there's still that 27 hour wait time and any execute that uh still exists on exiting ethereum staking so that involve some lockup and some illiquidity that I think

some users especially the larger bigger institutional investors are going to prefer extended with solution which I think for you know probably those two major reasons I think over the long term lsds would be the preferred method for staking on ethereum so so I agree but I I would kind of temper it slightly so there are a couple of things so I agree that um liquid staking will probably be the um uh will be the majority versus uh Native staking but I also so at Rocket pool obviously we are trying to lower that barrier of entry for Native staking as well um so not just for liquid saking liquid

shaking you don't need to any to run a note at all but on the on the running a node side we're trying to make it easier and easier um and lowering that collateral level so that you um so more and more people can do it so we get more and more homesteakers um so uh and on that side of things you have obviously on the liquid stake inside as John said you've got this liquidity you've got this uh utility um and you don't have to run a node so it's super convenient um but on the Node operator side you have you earn more the yield is is is is um a particularly um that's a particularly marketable way you get a commission on the the eighth you're staking on behalf of the pool you

you earn more um from that and um and so I I do see kind of Institutions and homesteakers alike looking at that and going I want to do that um even though it's slightly harder although we're kind of as I said lowering that barrier of entry from the technical perspective um and from a collateral perspective so that more and more people can actually do that and to be honest that's a good situation it means that we are you know further decentralizing ethereum you can get more and more people actually um mistaking so although although I say that you know I think lipid taking certainly will be the ball um uh where we're trying to grow that that um kind of native staking Pie as

well and it's it's worth just tag along that to say like the risk of the future that I painted is centralization and I think I applaud all the efforts from rocketball and even lighter with their V2 where they talked about the smart router and what kind of a permissionless entrance into this staking pool as very important uh actions to decentralize in every possible access axis um that is key to preventing that risk factor of centralization of a single LSD provider if centralization is the restaurant like aren't you guys driving centralization of staking by being a centralized

Exchange um I think you know look I think there's a fair argument to that uh we are a centralized institution and one of the reasons that we are it kind of comes down to the coinbase principle uh being the easiest to use and we want to be most trusted we want to be easiest to use and part and parcel for that is allowing especially those um newbies to ethereum and to crypto in general to have an extremely easy way to stay and participate um ultimately providing a centralized solution is the easiest approach for onboarding new users to crypto into ethereum at large

and I think there are trade-offs in any approach that you take but one of the benefits of being a centralized institution and having um you know a more centralized version of LSD is that we can provide a super simple experience to a user who maybe has heard about crypto maybe was told about it by friend or read some articles and needs a more a more simple and familiar experience for onboarding for their first talk can you talk about the regulatory side of things I forget if I was if there's one question I wasn't supposed to ask you guys but I forget it and I feel like this might have been it our producer told me so I don't know if either of you guys can talk about this but Kraken

obviously just settled with the SEC it was like 30 million bucks um seems like folks are coming down pretty hard on staking right now um can can either of you guys talk about this skip what what are your thoughts on regular regulation right now like how you weigh the risks and the rewards what um let me jump in to answer your question the best I can I feel like I feel like she's gonna get mad at me here uh well hopefully she'll view me as bet as as coached well here and and here's the answer that I get which is that we are different than what Kraken must do and um I think great resources here are

what Brian has said on Twitter but Paul graywall our chief legal officer I said on Twitter and in the blog post it's some of the key points to mention here are that we have first and foremost is coinbase always disclosed to our staking customers of what happens with the assets and we've always mentioned this in the user agreement um we at all times maintain a one-to-one relationship uh between any assets that you give us and what we have title so you know we are we hold your assets one to one that is a key principle and then lastly and very importantly what a user tells us that they want a stake we go and we put that stake on chain and we actually do what the user has told us to do and so these are

some key components that make you know our staking program different and very what I would consider buy the book um to more closely and and more closely replicate what the native on-chain experience feels like um all in a process to ensure and to make very clear that we do not believe that each staking is a security and we do not believe that the way that we are providing staking to those customers is a security item the Darren are you allowed to give a less kosher answer I can't look at another comment on the actual kind of uh regulations but I'll kind of reiterate some of the the stuff

that John was saying uh so the staking that we provide is transactional uh it is uh a transaction between uh a liquid Staker and a node operator the node operator is providing a service to the uh to the liquid Seeker um every yeah every um uh dollar every eighth uh that goes into the system is being staked uh there that we don't do any kind of management of that of those funds uh it is all just um being staked from the protocol so uh yeah like like it's all we can really say is is the nature of our business uh and and kind

of and let that unfold I I actually think one of the worst things for the regulatory side of staking was two things was one calling it interest and two calling it a freaking derivative I'm like why why did the word derivative here like you use any I was very reluctant all a derivative come on come on uh let's like yeah we like the term liquid staking tokens uh right because taken tokens and I noticed to use rewards instead of Interest so uh there's uh I'm but that's smart like I I actually don't think the SEC really understands what I think if they really understood what staking is it's a

totally fine thing to do it's just like secure your network right it's a there's it it's like it's such a great act to do the the other the other thing particularly with kind of id5 protocols is that everything is transparent like uh you know you can every every dollar every eighth that we state every everything is Unchained and in fact you know either we have a whole ecosystem of community projects that uh that um use that transparency uh and show people you know where where the money is and what's what's happening with it so um and to how kind of hold us to account that we are actually taking everything

and that's something so um yeah so it's a very it's a very different it's a very different thing but yeah yeah I'm not not a regular it might be you know it's helpful also to just ground us that like proof of stake is a consensus mechanism that replaces proof of work and these are really the two major production um widely adopted consensus mechanisms used in crypto and proof of stake is superior like it is far less energy intensive and that is something that many people including politicians have raised as a concern for the long-term viability of crypto and so a system where we have proof of stake is a better

system than one without it and I think we should also you know just really think critically about that and our Regulators should as well that provided you believe that crypto provides value to the world and duh it absolutely does it is a permissionless system that is allows anyone around the world to participate in interact at a peer-to-peer method and exchange value it is incredibly valuable as long as you provide that then you need some computer science tactic for securing the state and and right access to the uh data model of the chain and proof of stake is a better consensus mechanism for governing that data than proof of work

for for both the security and the amount of security provides and the less amount of energy intensivity that of course yeah yeah all right I think I think the last the last question I had here guys is um or I'm like uh Ellis like uh liquid staking moving to l2s so if you actually just look at a lot of the on-chain activity in crypto it's starting to move to some of these l2s and you you would have to assume that lsds would also uh like liquid stake would also move to l2s I'm I'm curious is this the way that you see things going as well um I can jump in to just say that I think the future of ethereum is going to be or the future of usability on ethereum is going to be built on top of

eltives and I love a saying that the bankless guys have which is that like um the future of L1 is for robots meaning that it's more of like the settlement layer for all of the layer twos that exist and I think that's a good framework as a reminder that um look even now like in this bear Market we are past like the ultrasound barrier as it's called like we're in a net deflationary Paradigm right now just based on on-chain usage and that remember is you know a function of what the fees are they actually transact on chain if we're at these fee levels you know in this status of a bear Market

when we can get to the next bull market these are going to Skyrocket just like they have in the last two bull markets that participated it and when that happens um the number of use cases that can feasibly exist on layer one um drop down pretty substantially because of the transaction costs that exist there so you have to imagine that especially as we enter the next bull market the new user experience is in dapps of the subsequent bull market are largely going to be built on the l2s and it just makes sense that you're going to want to have lsds that represent your state Ethan L1 to be usable in those application

experiences that will increasingly exist and be built on their twos so I do view it as pretty pretty darn important Darren I would assume you agree there yeah uh so yeah the LT future is looking very very bright um we're already seeing um obviously massive tbls into l2s uh reduction in costs so there's so you know all of that is working um in terms of uh liquid staking tokens uh if you hold a liquid staking token you are staking it doesn't matter whether you hold it on L1 or you hold it on L2 if you acquire it on L1 or if you acquire it on L2 it doesn't matter and

you are still staking you are still earning um that kind of those rewards so uh so what kind of deployment to l2s really mean is that people can access these um uh this this product um you know at a much cheaper bad color rate you know so so you can you can actually get involved um it's much cheaper um to use it on and then you can use the there'll be these burgeoning L2 ecosystems so each L2 will have their own uh kind of you know style they have their own um like blending platforms products um or you know non-financial stuff as well um and so you know each one you'll be

able to use the different things um and it doesn't really matter where you hold it um you hold it on your tool or no um so that's that's how we kind of see it we see it as actually we see l2s as a as a from deploying at our liquid seeking token to L2 is actually a new X thing um and and then an access thing you know we want we want um people to have accessibility to these things and having them on L2 doesn't necessarily give you that and having on an L2 does um we actually kind of won an OP Grant and to incentivize stupidity on optimism and that's kind of been helping as well to kind of drive that guys great great conversation

um really really interesting or just to get your guys's thoughts around the future of staking liquid staking market share Shanghai anything else final points here maybe a final point is just um future staking is bright uh you know don't let the flood don't let regulation by enforcement um scare you out of what I believe is going to be one of the most important verbs of the future of ethereum of course you know we've been in a world of buy sell trade store said uh receive and you know increasingly in the last and buyable Market more on-chain usage and I do believe that staking is here to stay and it's going to be of course the

important third uh of the future of ethernet actually it's also kind of like a primitive you know um we'll see kind of liquid staking tokens being used in some very interesting and innovative ways and that's so Innovation is actually something that's going to come out of this as well um and you know we're already seeing some protocols kind of use um we could take in tokens in in cool ways and we should see more and more of that in the future we're going to read Jesse uh Jesse the head of ecosystem or head of protocol at coinbase last week on the podcast and I think he said it well which is it's a bear market for prices and it's a bull market for on-chain activity so I think he said it well and Darren and John just

yeah appreciate I appreciate your guys's Insight insights and also just appreciate what you guys do for the space moving the uh the staking World forward so thank you let's build let's build build thanks guys [Music]