Liquid staking for DAOs: fixing a broken system

Transcript

[Music] [Applause] hello hello everyone good to see you all and welcome to my TED Talk no uh my name is Dennis Bertram I am from tally uh yes tally um I'm going to be talking today about a protocol we're building around liquid staking for governance tokens but before I get into it I'm going to take you on a little bit of a journey of why what we're building is necessary and kind of like an overarching concern that we have learned over the past few years that is happening with Dows so at its core if you think about many Dows you get a dow token maybe you

buy it off the market maybe you got it air dropped and you maybe vote with it maybe you don't at its core governance tokens really intermingle these two kind of ideas which is financial utility and organizational utility so if you see here if you think about it you know you can do things like sell tokens on exchanges take loans put them into reaking but then you can also operate the protocol defend the treasury vot on proposals and most Dow tokens kind of fall into this ven diagram the overlap of these two um things that you can do with the token uh the problem is is that token holders can't do both things at once you can't both vote on uh proposals and have your token in binance you can't both

vote on proposals and have a loan taken out against them and use them as collateral so token holders have this kind of interesting opportunity cost that they deal with they have to decide what do they want to do with their token and this tension um really has some interesting security consequences basically if the token price goes to zero you can generally assume the Dow is considered dead right like people aren't interested in it um there's no speculative premium there's no assump that this Dow is going to work so this token price goes to zero and either that means that nobody cares and the Dow is dead or actually for malicious actors the cost for attacking the Dow is trivially low because the the

tokens are simply so cheap so on the end where the token price is very low uh Dows lose their operational security but interestingly as the token price goes up um there's sort of this curve and when we get to kind of Infinity of a token price uh you end up with the same sort of failure of security because all of the voting power all these tokens end up for sale essentially right you can kind of Imagine as a dow token reaches its maximum price you have the maximum Financial opportunity cost now token holders have to decide do I want to vote or do I have this token that has extreme Financial opportunity right so you end up with this this curve where as you get to Infinity on the price actually

security of the Dow also goes away because of this Dows really struggle in setting their security parameters and this is an example based on Unis swap I'll walk you through it uh there's a billion outstanding tokens and DOW security parameters should be based on this outstanding billion tokens but instead number two they have to be guesstimated based on the total delegated tokens and governance these are people who' have decided to use the tokens to actually vote and they've at least spent some money to delegate them the undelegated token Supply although have happens though number three that are actually for sale are are just almost as large actually in Unis swap it's like 158% of Quorum is actually

available for purchase on the exchange so these are the token holders who are saying hey I actually opt for the financial opportunity on these tokens and then when you look at the Quorum down here for passing a proposal it's very low so average part participation Unis swap is almost exactly the Quorum required to pass a proposal but you could easily buy up all the tokens on the exchanges and be able to pass anything you wanted in unisoft right so basically at the end of the day what happens is because these Dows have to sort of guesstimate what their security needs to be um they end up being vulnerable for the outstanding token Supply basically holders who are stuck in some sort of limbo of this like duality of the usage of tokens what this leads to is Dows become

honeypots for malicious actors the longer da lives the longer the uh sort of opportunity here and what we see is Dows are actually becoming very vulnerable um uh work from Absa in the uh ens Dow shown that since March of 2023 the Dow is uh vulnerable to the free value Raiders this is a group of folks who declare the new defi is actually raiding down treasuries they buy up tokens when they see that the token cost is lower than the treasury and indeed in ens um you have a situation where it only costs well today is a little bit higher but it costs maybe about $70 million to earn $150

million so this is actually a big danger that's outstanding today ens is dealing with it they've created a kind of uh Council role on the Dow that allows like a coalition of people in a kind of centralized way to cancel proposals they think are vulnerable but we also see this happening Aragon fell apart because of the similar situation the free value Raiders bought up the the supply and there was a big conflict if you follow that nouns Rage Quit is very similar people started buying nouns when they realized that the book value of the nouns didn't match the treasury specifically so that they could drain the treasury and that was what was behind this the the nouns Fork uh we are tracking this well open zeppin actually is tracking this in compound where there are holders that are actually getting

close to Quorum and uh they've sort of amassed a large token position from the exchanges they're getting close the Quorum and sure enough there are now proposals in the compound ecosystem that just pop up that have some sort of sort of hey let's redistribute the the the treasury or let's you know pay for some sort of program um so there's some sort of extractive activity happening there but actually so this is a danger this is a true danger for the the ongoing success of dows this is something that we care very much at tally but actually there's a much bigger danger which is kind of in plain sight but kind of innocuous but actually seriously a big issue for Dows which is reaking reaking has a infinite need for

economic security so if you're not familiar with reaking these are services like enan layer symbiotic kak basically what they do is they uh allow you to borrow you can bootstrap new protocols by borrowing the economic security of ethereum um but there's a limited amount of e out there and reaking services basically always have to fight to have the greatest economic security like symbiotic Igan lay and others they will always compete with one another to have the greatest amount of Economic Security but there's only so much e out there so what's going to happen is is that they're going to actually end up outbidding protocols for their own Economic Security because if you think

about a dow such as Unis swap for example the token holders protect a protocol that in aggregate is extremely valuable right Unis swap has done $ 1.5 trillion dollars in VA in in volume since its Inception the protocol itself is extremely valuable and each Dow token represents a kind of share of that value right that economic value is something that can be used in reaking you can put any sort of economic value into reaking and essentially say hey if you misbehave we're going to take this from you right so what this sort of like logically leads to is is that in the fight to have the greatest amount of tvl the reaking protocols will eventually come to cons

assume all protocols on ethereum and probably eventually all protocols period as they fight one another for economic security so this is sort of I was just describing right if you have service a has 50% of all available e to restake service B has 50% of all available eth to restake the way that they continue to grow in their Economic Security is to consume protocols right and when I say that uh staking can always outbid the native protocol think of it like this you have a uni token holder who has this opportunity cost they can either Vote or they can somehow earn yield somewhere

right they could sell their token Well reaking Services can say hey if you take your uni token and put it into our reaking services we will pay you some sort of yield Unis swap now has to outbid the reaking services because the unisoft has to say no no no please hold on to your token so that you can vote in case there's a malicious proposal or you can vote to operate the Dow uh and that'll be really expensive this is a nice sort of if any of you played the game Katamari damasi basically you have this ball you this character and you're rolling it around and everything you touch you sort of suck up so I like to think of the reaking services like Katamari deasi where you just roll around and you

eventually suck up everything right so reaking can always outbid protocols because reaking can pay token holders as a share of protocol tvl right if you have 1% of Unis swap Dial's token you kind of represent 1% of Unis swaps tvl or Economic Security right because with enough of Unis swap tokens you can do anything you want with the protocol so reaking values it as a share of the tvl of the entire protocol however Dows can only pay token holders as a share of

Revenue right so in the case of Unis swap igen layer can pay Unis swap token holders as a share of the total tvl of of Unis swap however Unis swap can only pay token holders as their share of the revenue right Unis swap can't pay them as the total total uh tvl so because of that the resters can always pay more and of course then you can add in that you can restake your your tokens over and over so that um you sort of reec the value so there's very difficult for Dows to compete here this is also very inefficient right Dows shouldn't be giving their revenue back to token holders as a function of someone out bidding them they should be giving them uh Revenue as part of like a function of

operating the Dow so yeah at its extreme 100% of Dow tokens are locked in Ian layer symbiotic and kak right and the the end result is either no one is left to vote and operate the protocol which leads to the death of the protocol which interestingly you assume the reaking services should care about but actually there is no economic alignment for reaking services to care about the death of the Dows right if the underlying tvl of the the economic security of what you're staking goes down they simply look for some other new source of it right there's no mechanism here to turn around and say hey we should make sure the underlying um assets are healthy right maybe in eth where they have a main alignment with ethereum problem

that they have to deal with but when we think about thousands of protocols that are going to be locked in it it's not really in their interest right what's more likely to happen is is that as you know the Dow dies someone builds a new competing Dow where the tokens are not yet locked in igen layer symbiotic and then you have this sort of circle go on of course the other opportunity is is that everyone has their tokens locked in in reaking and then malicious entities are the only ones who don't lock their tokens because for them they have a longer term valuation of the token because they intend to rug the treasury so the solution here is to really split economic value from governance utility and if any of you saw the Avengers movie um there's this great

scene uh where she knocks basically Bruce braner out of the Hulk and that's a really great way to visualize what we are thinking about here right you have to split the governance utility from the financial utility right these things are co-mingled when you launch of Dow because it's important for bootstrapping the network effects of a protocol right you give out both something that has an economic value due to its speculative value and it has organ organizational value these two things have to be intertwined but for the long-term success of the Dow we have to split these two things so what is tally building tally is building the liquid staking layer for governance tokens right basically what

we are going to allow you to do is eliminate this opportunity cost the token holders have right users get a liquid Financial token and Dows maintain control over their security right because Dows can't outbid reaking for their security so they have to find some sort of alignment with the fact that token holders want some sort of utility on their token uh we are ideally positioned to build this we're building this as a public good as an open permissionless protocol because today tally already Powers the the largest most valuable protocols in the ecosystem uh we've been doing this uh since 2020 we support more than 50 evm networks uh teams have

trusted us to transfer over half a billion dollars on the platform and uh right now you can manage over $20 billion in Dow assets right so we're already positioned to actually create a protocol that we can distribute to the entire ecosystem all at once as a public good this is system diagram it's a little bit complicated I'm going to like just do really quickly basically the idea of how it works is token holders deposit their Dow protocol Dow tokens into the protocol underlying we pull these tokens and actually stake them in whatever underlying staking mechanism the Dow has I'm not talking about this in this talk but staking is coming to Dows the first example is unis Staker

Unis swap is launching staking to return um protocol Revenue to token holders we manage that position in aggregate which saves um money and time and and effort on token holders and we return an LST to the Token holder but what's interesting here is that LSC token holders can delegate they can participate directly in governance if they wish but if they don't want to participate in governance or they've put their LSD token into some sort of thing like reaking that doesn't participate in governance the undelegated voting power is redistributed to the Dow as its own security so the Dow always maintains control over its own security the idea behind this is that

speculative holders shouldn't take security away from the Dow this is kind of the problem we have many people participate in Dows because they want to participate in Dows but because of the bootstrapping problem many of the token holders are just speculative holders these are people that air drop Farm These Are People Who provided liquidity and they get tokens these folks are not entirely misaligned with the dab but they're not entirely aligned with the Dow either so the idea here is you sort of have these two sides active members can retain their voting power and participate in Dow governance while speculative holders can maintain the financial utility while the the security returns to the Dow this very important because when token price goes up what happens as

token price goes up as I was mentioning earlier the opportunity cost for token holders goes to a maximum right if you imagine a token once it reaches Infinity the speculative uh value of a token disappears because the token won't go any higher in price right so once you get to reach the infinity basically the only logical thing for token holders to do is sell their tokens because it'll only ever be worth less after that moment right and it might seem silly to talk about Infinity but actually when we think about meeme coins Infinity is a very real thing right if you remember from a couple Cycles ago there was a great tweet about someone investing in meme coins and they said you know if the token goes to to zero I lose $1100 but if the token goes to $1 I'm a

trillionaire right there's actually Infinity somewhere in meme coins where it's just not possible for them to get any more valuable and that's when everybody sells out of them right this happens with Dows as well where there's an upper limit where the tokens won't be any more valuable in the LST design however as the token price goes up more users opt for the LST so that they can access the financial utility right and this is also compounded in the fact that Dow is returning Revenue so it's kind of this one-way function where as the token price goes up the Dow becomes more and more secure there's actually no incentive for folks ever to leave this system this is very important many

people are going to be building liquid Stak governance tokens this is an entirely new idea we know people are thinking about this but there's a huge danger here as well when we talk about returning voting power to the Dow there's something else we could do with that voting power which is we could sell it for yield right we could basically say to malicious attackers or anyone else hey you can purchase the voting power and the amount of money that you spend to purchase this voting power we will give back to the Token holders and there's a really great simple example of what these sort of organic bribe markets for Dow tokens look like I can create a proposal that says everyone who votes for this proposal gets aort portion of the treasury and the earlier that you

vote for the propos proposal the larger your proportion of your treasury will be and everyone who does not vote for this proposal gets nothing right and this kind of single-purpose bribe Market is really interesting because the way Dows are designed there's actually no penalty if you vote for it right if you vote for it and doesn't pass nothing happens but if you don't vote and it does pass you're robbed right so there's this weird Game Theory design that ends up happen happing here where it's in your interest to vote to destroy the Dow it's very dangerous right so in our design here actually the liquid stake tokens that we create are actually owned and controlled by the underlying Dow this is a permissionless protocol where anyone can

launch the official canonical LST version of a dow token so think of Unis swap where you have the Unis swap protocol and anyone can launch liquidity pools right same sort of idea it's standardized everyone gets the same LST uh structure so it's very easy to integrate in third parties um we're redistributing the voting power back to the Dow this undelegated voting power that sort of hangs out there is a danger for Dows and we redistribute the protocol fees to Dow delegates so there's actually um oh I forgot the sentence there but basically there's a mechanism here that actually pays the delegates who do operate the da so if you're not interested in operating the Dow you can just run off you can earn your yield if you are interested in it you're actually paid so there's a

feedback mechanism here for good governance with this protocol Dallas can grow bigger be more valuable and pay delegates I talked a little bit about this we're dealing with the opportunity cost for token holders we're making reaking safe for protocol tokens because remember when they fight one another Dow Protocols are the ones that are going to lose here uh we allow Dows to create sane security parameters if you remember earlier the example of Unis swap now Unis swap can base their security parameters on their outstanding token Supply not on a guesstimated amount of participation and there's actually compliant mechanisms here for returning value to token holders I didn't get into it but there's some new legislation in the united states which allow Dows to actually register as Dows legally be

compliant and return value so we have test net of the protocol coming up this summer um probably uh Late July uh we invite all of you to come and participate and help out if you have any questions you can email me as well and I guess we have maybe two minutes if there's any questions of the audience thank you so much for a fantastic talk Round of Applause for Dennison please right you fine young ladies and gentlemen anyone got any questions yes please you the microphone will be with you in just a second hey thanks for the talk um I've been thinking about a problem um let's

say like a group of people here at the hackathon built a project and they want to carry on building it afterwards and they want to start on solid grounding with a good Dow framework for them um I haven't seen much Solutions around like that solves this kind of like that takes the contributors into into into the design from scratch it seems really stupid if those three or four people need to go raise set up a company raise some funds from VCS and then start a foundation and then that decentralize it through that it seems much more nicer if we can just start from scratch have you thought about this kind of area yeah yeah that's uh icos 2017 right you just create a token you

sell it to people and give it away unfortunately we can't do that right like Dows this is another problem I didn't speak to this but Dows actually can't return value directly to token holders right because some token holders do work but other token holders don't do work you can't return value to all of them at once because some of them will be benefiting off the work of others which makes it a security so Dows can't return value to token holders directly which makes this problem that I outlined even more extreme um that's why there's actually a staking layer that is being built in many Dows now where in exchange for working for the protocol voting doing delegation you can actually be paid for work right but you have to provide some sort of service um you can't just hold a token and and you know

be rewarded for that thank you very much any other questions please yes thank you the microphone is on its way go for it great talk thank you um I have one question about the redistribution of the voting power I just don't really understand how that would work basically like like the example in said like I will have my tokens on coinbase so I'm more like for the financial gain don't vote how M my voting power actually gets redistributed back and who has now the power yeah so the LST token holders get to decide how

they want to redistribute their voting power and there can be many strategies there the simplest would be just prata among delegated of token holders we're working with a number of different teams that actually have different ideas of how to reward delegates like based on you know their contributions elsewhere ZK stuff proofs of like how they participate uh we actually think that this is going to depend a lot on the community different communities are going to have different things that they care about but the LST holders are the ones that get to decide that so if you hold the LSD you can basically say hey let's redistribute our pool of voting power perata the people who hold the LST can go off and go okay I know my voting power distributed Pata if the Dow token holders that don't hold lsts disagree

with how that works because for example they could all delegate to one big delegate and make them a superdelegate right that superdelegate potentially pay people off to do that the underlying Dow token holders can at any time move into the LS St and change the parameters so this is why we say the LST is actually owned by the Dow it's not owned by the tally protocol the tally protocol allows you to create the LST but then it's actually the LST Dow token holders that control it itself so if they disagree with how the voting power is being redistributed they simply move into the LSD they change the parameters right so because you can move in and out of the LSD at any time right it's one1 although the LST actually earns yield so you know the longer you hold the LST that's the

incentive for having LSD right you get paid um you can move in and out it's it's it allows the Dow to um basically own it set those parameters so it's safe for them thank you thank you very much for the great questions and the great answers ladies and gentlemen one more round of applause please thank you thankk you by the way a piece of trivia it's actually really interesting that the average Dow size is around 200 people which also corresponds eerily closely to uh the dunar number which is the optimal size of Hunter and gather a tribal Society before they kind of Splinter and fall apart and stop functioning so you can see it's important to be interdisciplinary and collate Humanities with modern technological innovations right I will go and run away from this

stage not because I uh wouldn't like you guys but because I'm off to do those videos so remember videos if you want to be my Victim and show yourself off in your project in in terms of the uh humans of eat Prague then I'll be kind of loitering around that area outside of the rain in the main hall so I hope to see you there there we'll set up the camera and let you know um I'll be um now exchanged by a phenomenal moderator Mickey and we have three more talks ahead of us before the sad conclusion but don't worry there's an Afterparty coming as well there's plenty of food and booze outside so I think we've got a lot of fun yet to come on this rainy Sunday thank you ladies and gentlemen [Music]