Is Liquid Staking Winner Take All? | Hasu

Transcript

all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-hosts today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode [Music] all right everyone welcome back to another episode of bell curb this is the first interview episode of season five the end game for liquid staking today we're going to be joined by hatsu hasu is a special guest on bell curve at this point it's fun call back for those of you who watch the Mev season where has it was my co-host today we're going to

get him on the other side of the mic talking about one of his other favorite topics outside of Mev which is liquid staking hasu's been acting as a strategic advisor for Lido for a period of time and not only has great sort of high level framings on the space for liquid staking but in this conversation we got to get into some of the nitty-gritty with him so in the kickoff episode of this season miles and I introduced some of the big themes that we want to get a sense of this season which is how is the market structure for liquid staking going to develop what are haasu's thoughts around the self-limiting debate which is this idea that if a protocol like lidoc it's a very dominant percentage of the market share should it actually cap itself we also talked about the impact of restaking and how that intersects in

this sort of Co-operative coopetition uh relationship in between protocols like Lido and protocols like eigenlayer now not only did we get some great high-level Frameworks for how we should think about this and also went deep into the history of Lido and how it developed from a first principle standpoint we also got into some of the more nitty-gritty sort of tactical ways that these protocols actually develop and think about things in particular I want you guys to pay attention to the section where we discussed the role of decentralization and how it actually acts as an offensive tool for protocols like Lido so this was a really really great conversation I hope you guys enjoy it as much as miles and I did all right everyone welcome back to another episode of bell curve if you got me and my co-host miles here and today we're joined by haasu it's a special guest I

think of bell curve at this point got him back on the other side of the mic Aussie welcome back hey Mike it's uh it's good to be back it's been a while so this is going to be a ton of fun hatsu we're gonna be uh last season we talked about Mev which is a subject that I know is near and dear to your heart and then I think we're going to be going down the road here on another subject that's near and dear to your heart which is liquid staking so we're recording this on July 6th uh we're deep in the heart of a bear market and it seems like liquid staking is one of the few areas in crypto which is really taking off as of today I'm looking at the tvl of Lido which is just eclipsed 14 billion that's more than maker and Ave the next two

largest by TBL on ethereum combined so I think we could just start at a high level for this talk and just what is behind the rapid growth and Adoption of liquid staking and then maybe we can get into kind of a state of the union and how to carve out what are the major buckets of different types of providers sure so um I think the reason that liquid sticking protocols have risen to the top of the TVA leaderboard if you will um I think it's in the past um Landing markets used to occupy that position because it's a place where people Park their Assets in order to get some additional rewards on their assets from lending them for example

um but we are seeing in the bear Market not very much demand to borrow and so not very much uh interest that you can earn from putting your assets into landing markets frankly and so um that's why I think overall the TV out of lending markets has been on the decline we are seeing that in Mecca Dao in particular so dire outstanding has gone down from 10 billion to 4 point something billion um the tvl Insight maker has declined even more so now a lot more the diode outstanding is backed by stable coins or other forms of stable collaterals such as treasury bids

um that I had in off chat trusts and on the other hand we have seen the rise of proof of stake so obviously ethereum went from proof of work to proof of stake and that allowed users to now secure the network by staking the if um and um we are seeing an increasing demand to participate in that so for one users can run inflation rewards from ethereum but they can also earn Mev and transaction fees and in spite of the bear Market these rewards have actually been quite consistent um much more so than what you can get from from lending your coins the other thing

that I would point out is that withdrawals have now been enabled um from the beginning chain so proof of stake in general has been de-risked quite a lot so my thesis has been for a while that we would see more and more Eve being staked as a result of that because it's as close to I don't want to say risk-free because it's not risk-free but it's it's as close as it gets basically to to the kind of risk-free rate of crypto which is just staking your Eve which is kind of the most secure and most decentralized asset um on the protocol layer in order to to secure the network and if you run your

own node and you do a good job or if you delegate that to a staking pool or staking protocol then yeah you generally have um that's a pretty good kind of it's a low return kind of low risk way of fusing that asset one thing I'd be curious to get your perspective on hasu is this sort of recursive leverage trade that people run using a liquid staking token like Steve so the idea being that you know you stake your eth you get Steve in return you turn around to a borrow lending protocol like Ave you borrow more Ethan you kind of rinse and repeat and in that way sort of lever yourself up I guess there's kind of a spectrum of healthy sort of capital efficiency and

wanting to not you know take lose too much opportunity cost by staking maybe that's the really healthy way of doing it and then you've got this extremely recursive leverage trade that you can run being on the not so healthy way of doing it so I guess how much is Part like how much of the market is driven by that more Degen sort of activity and where do you sort of fall on the spectrum of you know not to you know put some sort of value on trading but is this a particularly good use of liquid staking versus maybe uh you know it's excess speculation kind of so the first thing that I would say is that um this kind of looping is not no longer possible today because um you can no longer borrow if on lending markets for cheaper than you can stake it for

um and that's what you would expect in an efficient market so there's kind of zero Arbitrage um anymore um that used to be different in the past in particular before it was possible to to uh withdraw actually from from the beginning chain and so someone who was uh holding um stake if um or some other liquid sticking token they were incurring basically like a risk on you know the price of that moving against um their Eve in in some form um and um they could get liquidated on their position right if they if they were using um the liquid second token as a collateral to borrow if and then the

liquid statement token Falls in value then obviously you can be liquidated um and uh because people were like looping a lot of times the leverage was very high and so there was definitely a concern of kind of discuscating liquidations there um you are asking whether this is a useful feature of liquid sticking tokens I mean I would definitely say so we can go into how liquid staking is different from other forms of staking in a moment but the ability for users to get liquidity on their tokens and to use that liquidity for whatever they want is definitely a feature of the

system and likewise I think it's good for people who put their Eve into lending markets because as a result of this the the the rate of uh that they could earn on the if was driven up to the staking rate basically of what they could have earned from staking as well and so you could say people who are not comfortable may be staking their Eve but only putting in the landing market so they were participating just the same from the staking here in that way which it basically further democratized access to staking through lending markets so let's get into I'd love to get your perspective on what is a state of the union of liquid staking providers look

like and maybe we could actually we talked quite a bit about Lido in the first episode actually but I realized that we never really gave quite an overview of the history of the protocol and how it functions today and I know you act as a strategic advisor to the protocol so maybe we could actually start with sort of Lido and get your sense of the overview of maybe wherever you want to start either the history of the protocol or what you're sort of focused on today and then maybe we can go and sort of carve out the existing state of the market structure and then try to poke at guesses at how it's going to develop um yeah sure so smart I I'm an advisor to the Dao student which is the the union of the the talking with us that basically vote on decisions

um for uh what the protocol should should do um so Lido uh the protocol uh was conceived a few years ago before the beginning chain was even live and back then there was only one form of staking I would say um really known from uh from other blockchains which is you delegate your either you stake yourself or you delegate your coins to a professional node operator some blockchains had in protocol forms of Delegation that kind of made it cheaper more accessible and also more

secure because the node operator didn't have custody of the coins but ethereum shows a different route um in particular um they were going with this kind of isolated blockchain that would run in Canada which was quite a beacon chain right and that kind of ran its own uh you could call it an incentivized test net for for multiple years um before it eventually the the uh you know the proof of work kind of consensus was then stripped out for this Beacon chain consensus layer and that's still how it works and I would still say this is one of the most impressive um technical Feats in kind of the history of technology to where that the

engine of this plane was kind of swapped in mid flight I still like this analogy very much because it's so fitting I mean if you didn't miss any blocks as a result of this and it's the an absolute technical map you know the way that this worked so when it was clear that ethereum would move to proof of stake then of course there it was obvious that users would want to stake and they would want to participate in securing the protocol and um however you you had several problems in ethereum one was um in order to run a validator you needed 32ef there was the minimum at the time

it had already been lowered from I don't know what the number was before maybe in a tune of to several hundred Eve that was when ethereum was cheap as the you know much cheaper than it is today and they lowered it to 32 East but um even at the time you know when the vegan chain came out that that was maybe you know sixty thousand dollars or something um so it was a very substantial amount and not many people had um so needing to stake in increments of 32 if was one big problem um the second big problem was that people had to lock up their stick uh on the beaking chain and the beacon chain was expected to run for at least two to three years maybe longer

um before with Joyce would eventually be enabled and as we saw that um estimate turned out to be pretty accurate so I think it took around three years between launch of the beacon chain and withdrawals going live so I'm not 100 sure um but it was also clear that people would want liquidity on their stake so either two outcomes either people could not get liquidity and then the the number of people would would be willing to stake would be much smaller basically only people who don't would be comfortable locking up the Eve for many years with an uncertain outcome if they will ever get it back or um people can receive uh we sometimes

call it a voucher you know for that represents and this ethertastic uh on the beating chain and then they can find another seller sorry they can find another buyer for that and then they can sell it yeah and we now call it a liquid staking token and um the third thing the third problem was that that ethereum did not have this native ability that we talked about to delegate um to to a not operator so you could find if you did have one feature it had separate separate validator key and withdrawal key so the party you could withdraw the tokens could be different from the party who was using the the coins with their validator on the beginning chain but

it wasn't trustless um basically you needed to find someone you know sign a legal contract uh needed to do kind of your own sourcing and so on and there wasn't any way to yeah to just like select someone from a list of not operators or say I want to withdraw my tokens now and so you you had these multiple problems and I think it became pretty clear that there would be a new form like that a protocol that would solve all of these problems would be quite dominant over anything that that existed at the time right um so when I look now where the kind of differential differentiation

lines let's call them like call them that are drawn then you still have this what we know now called liquid staking versus non-liquid staking so liquid staking is just when you um when you receive a voucher that represents um this Eve that is being staked by a note operator and you can take it and you can use it somewhere you can trade out of it you can use it in Ave and maker and so on um and the non non liquid ones are just if you give for example your money to an exchange um and they stake it for you and they put rewards in your wallet every month this is another very common form I think

coinbase has a double digit market share using using that model in in staking right now because it's very easy um so that's the other big category then I think uh custodial versus non-custodial is is a pretty big one I think there's a pretty big overlap I would say between like liquid and non-custodial and non-liquid and custodial because they fit very well um and then finally there's retail versus institutional so it's more about which customer segments um are you speaking to right so um

I think that uh Lido the protocol initially I think it's value proposition it spoke particularly to um to to to kind of ethereum native users right who wanted to save custody because it was a non-custodial protocol who wanted to use their coins uh in uh in in D5 because it was Liquid right um and who weren't institutions right because institutions weren't in D5 at the time so I think that's that's where Lido got it start um uh but we have over time also seen other protocols come around that focus

more on for example ease of use so I like the Royal custodia liquid staking like its big benefit is that Deeds don't have to self-custody right so if I'm a user most users in crypto never leave their centralized exchange account right they never withdraw coin to the ethereum uh still and so there's a huge number of users who you only reach if you have a custodial offering and you make it like one click from the existing exchange wallet so uh it was very natural I think for coinbase for cracking for binance and these other platforms to roll out their own staking offerings

in a custodial way and I think I still remember that there was actually a I had a huge concern personally that these exchanges would capture most of the stake by the time that withdrawals would even go alive why because it's um like a custodial is taking is so much simpler than non-custodial is taking for users um but um the main reason was kind of the liquidity because if you're on an exchange then you can very easily make staking liquid in the sense that you you know allow users to trade out of these fake validators and I really

expected exchangers to go very heavy on liquid staking because they could make it yeah you know they could allow people to trade out of it they could allow you know it to be used as collateral and it didn't really happen that way which kind of made me very very surprised so finance that is taking derivative coinbase for the longest time didn't cracking didn't I would still have to talk to an exchange executive and understand why they didn't do it what was the exact concern but it would have been I mean I expected them to do it and I think it would have been the right play and had they done it then I don't know where we would be today frankly because

um it would have been such a compelling offering I think that um yeah it basically becomes a very big risk that eventually kind of a 60 70 80 percent of ethereum validators are run by like two to three large exchanges so I think into that concern then leider was born to prevent present basically a counterweight like a a non-custodial uh staking protocol that that has some of the same benefits uh which is it's very easy to use and it's liquid so that people don't have to stick with exchanges I think that makes sense and I think you kind of were pointing out three different user personas here

um you know the first being you know maybe an Institutional user or somebody on an exchange that either wants the convenience of one click from an exchange or they want you know the compliance regular requirements of of uh you know an institution then you have basically everybody in the middle that uses Lido and then on the other end of the spectrum you might have you know self-stakers that that meant you know uh rocket police right um and how do you view the growth of those you know I guess the first bucket and the third bucket um relative to lydo's core users right now and then how do you think about extending support for those types of users you know from your seat in Lido that's a very good question I mean I

think where is do you know where exactly they are in terms of uh market share right now in terms of broad size kind of the more institution yeah so you know CBE which is interesting because it is retail only um you know as as grown I think to roughly about 10 market share of of liquid staking um I believe rocketball is kind of around the same same range um in CBE you know it's notable that they've done this in the face of you know 2.5 x the fee rate right the Lido charges um so definitely tells you something about the users there in their in their preferences

um and I'm just yeah I'm curious to know how you guys are thinking about you know positioning Lido Ulta to capture some of that market maybe this is you know users that were previously you know sticking with Kraken right traditionally um and now I've withdrawn or maybe their users that were just waiting for withdrawals right to come off the sidelines um and I'm curious to just hear how you think about the gross growth prospects of of either side of the market yeah so I think in I if I'm totally honest I don't strongly understand who uses CBE because as you were saying it's so much more expensive but you still have to self-custody if you want to use it right so I don't know like do what are all the assets on chain

like I don't actually think you have to self-custody you can mint it and then hold it in your coinbase account oh okay so people just hold it as a stand-in for like regular coin based taking so it was basically okay so it's almost like they cannibalize the existing products in a way and just call it CPU okay that would make sense oh um because if if all of the CBE was held on chain then I would actually argue that Lido is already kind of a superset of that functionality but if um if you have to cast it yet then I would have to say uh I think the the way to to access this Market would be by offering alternative custodial products

um a uh by existing exchanges uh listing stake Eve so people can you know buy stake Eve and hold it on an exchange or a wallet I think that would be one and the second would be through more traditional uh you know Asset Management channels okay so if I can hold stake Ethan my fidelity account and my Vanguard account and so on then um that is probably a competitive Channel kind of to these existing exchanges that speaks to a very similar uh maybe even a little less sophisticated group of of users but that is again bigger than the previous so

yeah um that's what I would say about that um in terms of Rocket pool uh I think um that solo stickers so individuals who run their own notes and let's say who who kind of run fewer than I don't know 100 validate us I I think that they are really important backbone of ethereum decentralization um and Rocket poor two-day credit has been around uh much longer than later as well so they were they launched um later than later was the the first

protocol to Market by I think a decent margin um but the you know rocket pool has an idea and kind of the team behind it had been at work for a long time and I think the reason that they were launching uh later was because they were set on a very specific model where um users can basically like solo node readers can divide their stake and you know they can put 50 of their own stake and they can borrow 50 of the user stake and then um they can stack that together and they secure that in addition with uh uh and our rocket pool token Bond um or kind of a collateral I think is is

a better term right um and this has uh uh the benefit that it's actually trustless like it's it's at least more trustless so there are some caveats that we don't have to go into but um it is it is definitely more trustless than other protocols that um exist today and so it's very important for ethereum that the solo it's it's it's almost like leveraging kind of this Backbone in order to you know give them more stake in a sense right um and um this makes definitely ethereum more uh decentralized

um and this is you know the same values that that Lido has as well I think the two protocols had different uh yeah different priorities if you will right because slido um focused on this or the light would dial focused on what they saw as a huge and it possibly existential risk for ethereum which is um you know a small number of exchanges capturing a majority of the ATM stake by the time the proof of stake would go live and I think that was a very rare and very big risk and it is still a big risk today even though

many people don't want to talk about it uh I was looking actually last year and we will get into this I think it was last year when there was the self-limiting debate about Lido and there was a lot of Lido had a one month where that was very bad like a series of very bad kind of consecutive press um where there was so the three arrows um kind of fast selling their you know stack of stake Eve and then Celsius and um there was Terra Luna and at the same time there were kind of people on social media arguing Lido is getting too big and they should think about self-limiting right and at that time Lido had almost no new inflow of steak

uh also because the stake if was trading at a discount uh it was a bit cheaper than Eve right and so somebody wanted to stay they were just buying from the market instead of staking and you could see that over 90 percent of people who were staking people were still staking but over 90 percent of it was going to co-invest in finance you know into the custodial Pockets you know and um it was a kind of it and these were entities are not transparent at all you know about um how much share they have in staking and what is their infrastructure like uh

where is it located and you know they don't care about client diversity or um you know decentralization and so on so I thought that was interesting anyway I think the reason why I talked about why why we got sidetracked to this so Lido and rocketpool I think are ideologically very very similar protocols that are starting from slightly different points and I think they were they are moving towards the same point which is in the case of Lido um there was recently a version two of Lido that included the idea of a staking router which is a a more modular architecture for

um adding basically different uh staking modules that that represent kind of different um lists of node operators or kind of or different configurations of node operators and what this allows is for Lido to not just distribute the stake to a permission list of node operators but for anyone to write new modules um and send them to the Dao to consider and then the dial approves same way that Mecca da or Ave for example approves a new form of collateral then Lido dial can approve a new stacking module and that

can and will include things like permissionless taking that has a collateral attached to it for example uh was taking um that is you know uses distributed validator technology where for example professional node operators and individual node operators are working side by side you know and have this kind of consensus protocol overlay and are working together to make blocks on the beaten chain um and so I think I would expect in the next year uh Lido to move from currently I think 35 North operators to hundreds if not thousands of node operators as a

result of this infrastructure and what at the same time you're seeing rocket pool has long kind of Hit the scaling limit of their approach which is if you need all of the noted with us to over collateralize uh any customer if that they take both with their own Eve but also with an additional and I think it used to be something I don't want to say something wrong in the range of like 10 additional collateral in the form of the RPL token then this is very expensive you know and it doesn't scare and so I think they hit the scaling limit and

what they are doing now is they are trying to reduce this collateral and they are also white listing entities that is allowed to stake without a collateral and so um such as coinbase um by the way which is interesting and so thank you I think uh that over the next year or two I think you can expect these protocols to move more towards you know look more and more alike in that sense yeah so I think a rocker pool uh it will have more permission note operators who are professional and to have a off-chain reputation at stake and so on uh and uh that's a that will allow them

to meet more of the user demand and Lido at the same time it will have more waste also to support permission is taking and that is the group you were talking about right yeah um the the solo operator who's really passionate you know about running their own uh their own hardware and to you know just wants to get you know form of Leverage basically on that um or the user who wants to stake but they want to stake specifically with uh you know a solo operator and not with a professor I because I want to dig deeply into this with yuhasu but before we do I just want to book in the the conversation about Market structure and maybe add one tiny bit of context there

and then ask you a specific question before we get into this which is you know to your I thought you made a really great point about it at the height it was May of last year uh actually when this debate started started taking off and vastly made his post in the Forum and actually vitalik right so it's not just you know random people on Twitter this was vitalik himself proposing some sort of limit to lydo's growth and the reason why you know the the uh the sort of paradox that you pointed out was very interesting that at the same time this debate was kicking off it was actually coinbase and binance that we're getting inflows and originally part of the reason why if Lido was so supported was because I think like you many were concerned that these centralized custodial-based offerings would take up enormous amount of the stake in ethereum

would lose some of its sovereignty so to speak but I think the reason why people are a little bit concerned about Lido today and we can get into whether or not that's valid is because of this perceived Dynamic of a a winner take all market for liquid staking or staking in general and I think I I want to kind of just ask you the question directly about how you see this Market structure evolving do you agree that it's a winner take all or winner take most Market structure and maybe if you could get into some of the Dynamics that make this liquid staking in particular you know what are some of the returns to scale we talked a little bit about this offline but if you could explicitly outline what those are and then say say whether or not you agree with that and then we can

kind of get into this self-limiting debate yeah so I would say I'm definitely in the camp who thinks that liquid staking and by extension staking in general is has a very large Network effect and return to scale and so it's very likely in my opinion that the outcome will be very centralized or I think centralized is the wrong word but it will be more it will be concentrated um why is that the case so first of all I think liquid staking is a much much Superior Solution to regular staking because it's basically the superset of that right so you can have uh you know

liquid stickings like regular staking but you also have liquidity which is purely beneficial and then it is in addition to that also non-custodial and that allows it to be held in different ways right so the non-custodial asset you can hold in custody but a custodial asset you cannot hold in self-custody right so in many ways it's it's it's purely better in every Dimension right because you can turn a non-custodial asset into custodial in one if you want um and for that reason I think that the market chair of liquid staking over regular staking will approach 100 of uh you know long enough period of time and so we only have to think about liquid

staking so liquid staking in general I mean what is so special about liquid shaking it is that you get um this voucher that represents the if that is being staked and you can use it you get liquidity and as we know um liquidity begets liquidity um and people want to use or they get the most value out of using the staking token that has already the most exact acceptance that they can use in the most places such as lending markets exchanges that has the deepest liquidity and that has

the highest brand recognition and so on right it is really like to the degree that a token is used as money it behaves like money it has the same network effects as money right and so if if we are talking about kind of a liquid second protocol for a token that's not used as money then these effects will be much lower right because then if people hold it anyway and they don't use the liquidity effect then it doesn't matter but for a token like if that people use very actively and many people treat it as a form of Internet money then the network effect is as a result uh very big so that would be the first point and one

thing maybe to add back last year people were actually saying look at stable coins as an example for why this network effect is not actually that big and look what happened one year later um all of this like tether is exploding in size and all of the other stable coins are collapsing um I think this is a good example I think why people shouldn't judge prematurely kind of what the like outcome will be of a particular Market um because at the end of the day Network effect almost always wins you know it they can be part of dependency and it can take a few years but um

I think that when it comes to money then Network effect is just super strong and you know at the any end it will you know succeed um so that's one network effect I think brand I mean we touched on this Society I think brand is just extremely important I think as a user most people are inclined to stake with what is already the largest provider and the oldest Provider by the way and so if you if you're both then that's that's pretty big position pretty good position to be in um because staking is something that requires a lot of trust you are basically putting your money

into a box and you are living it there for years if not decades um and um this yeah this this requires um you know basically a lot of a lot of trust in the operator and that's exactly what a brand gives you right a brand is basically um like it reduces uncertainty about the future and so um that's that's so important and then there's this idea that um running or like getting a um when there's already some established kind of staking protocols liquid

sticking protocols that have been it this these Integrations and this liquidity so that's almost like a minimum that you need to get to a minimum size that you need to get to to be even anywhere near you know in the conversation and so um in the beginning you I think you can think about these in terms of fixed costs so if you wanted to break into liquid sticking today you have to spend multiple billion of billions of dollars like probably in that range right and so I think um it is it is just very hard to to spend that amount of money as a as a smaller protocol and so the bigger you are the the less kind of the effect of the you know fixed costs

um is hurting um the revenue and there's one one final thing that I would say actually this is a a thought that's kind of more new in my mind I haven't really verbalized it before but all of the criticism not all of the criticisms but many of the criticism against lidoor is completely correct like the concern that um you know they can go things can go wrong if most of the eve would be in one protocol and that protocol is not part of the ethereum core protocol and it has some governance layer for example and Lido is taking you know aggressive steps to decentralize the

protocol and the governance um and one of them is is this idea of dual governance where so Danny Ryan and we will get this he has basically voiced the concern yes Lidos is not one entity it consists of many entities but under extreme under extreme you know conditions the incentives could play out in a way that these many entities behave as one entity and then they do something that's bad for the users of ethereum so that is his his concern right and what Lido can do or is doing about that is introducing the idea of dual governance which basically says for anything that lighter wants to change that lighter

down wants to change about the light of the protocol by voting on it the stake effort does can actually just veto the change right and so you get this filter where bad changes can no longer pass through because they would not be in the interest of the state e folders right and I think the more the bigger the protocol the more stake e-folders basically have to be convinced that a particular change is good for the protocol so that it can pass right and so you actually get this hurt immunity from being in a bigger protocol where there's more people watching the

governance and more people have to vote uh have to kind of be in favor of any changes for these changes to come into effect and so for me this is definitely an argument for for why I would use um a protocol where in the small checks and balances and yeah kind of the the bigger the more people use it the more people can spot anything um you know that goes wrong it's a it's a really good point and I I agree with you on on all of that stuff and the reason why I just wanted to to interject that is I think many people agree with that point of view that it's a winner take all protocol so people get a little bit worried about the amount of influence that a protocol like Lido has

because the general thinking is this protocol seems pretty Unstoppable at this point and just to get more specific you know to go back if we rewind the clock to to May of last year you know I kind of mentioned that it wasn't just the some random pushback on Twitter it was you know it was originally kicked off by superfizz who openly wondered about the first staking provider to public commit themselves to not limiting their their uh whether basically keeping their stake to lower than 20 22 of validators on chain vitalik retweeted that and said speculative take we should legitimize price gouging by top stake pool providers like if a stake pool controls greater than 15 it should be accepted and even expected for the pool

to keep increasing its fee rate until it goes back down below 50 uh 15 that all led to an actual uh governance proposal in Lido that was initiated by Vasily one of the co-founders basically voicing the idea should we should we effectively self-limit and eventually it was voted that they shouldn't do that but I would love to get your perspective on the self-limiting debate anyway it's kind of an interesting philosophical question which is maybe a cousin of the should billionaires exist question which is getting bandied around outside of our corners but is it a good thing to be from frankly just a capitalist encouraging entrepreneur's standpoint is a good thing to to limit the growth of

some of these protocols and then maybe we can get into some of the specific ways that Lido is choosing to limit itself what you were just alluding to the staking router and dual governance a really good question and I think last year it was a very pivoted time um for the second Market in general and and for later as well so I think or first of all I have to say that many of the concerns um that people like super Fizz and Dany and vitalik um have had and missed the whole today about one staking protocol growing um you know to a particular size that these are definitely warranted and so

um for example uh you know Lido um by governance for example and so governance could vote for example um to you know change something about the smart contracts um to the point that it would be detrimental for Steakhouse or for node operators um or foreign and so that is that is definitely a concern there could also be bugs in uh one of these smart contracts that could have a negative effect for

example if could be frozen so I don't know how it would happen I'm not you know super technical but uh I think that in general when someone says well if there's a huge amount of tvl in one protocol and it's like doing one of the core functions of ethereum which is moving the beaten chain forward um then you know this could have a spillover effect on the security of the world system I think they are completely right so that's the one perspective the other perspective is what do you think is the structural outcome of competition in the liquid staking Market and I am

also I mean I am starting from the position that you know size is dangerous and has responsibility in order to manage all the risks that come with it but I'm also coming from the perspective that exchanges are were and still are in the best position to capture a lot of stake and become very influential players in the staking Market um and that the Dynamics of liquid sticking Drive towards the winner take most outcome and when you combine these things then you kind of get into the mindset that

you can't really you know choose for there to be 10 second protocols that all have ten percent I mean you can dream about it but it's not going to happen and if you and you like you have to be pragmatic and what being pragmatic means is you try to make the best liquid second protocol win and you make that most you know as decentralized and as aligned with the underlying base protocol as it can possibly be and so I would say that is the summary of my position um I started from the point that I thought you know this is the liquid

staking industry this is very clearly going to have one big winner and there's nothing that can be done about this you can tweet as much as you want you won't change that outcome I didn't even know all of the players involved and I just thought well what is what can we do from here like how can we Salvage this situation and I saw Lido being I saw Lido as a protocol that was in a good position to fight the exchanges and that I also saw as like culturally very aligned with ethereum having much of the same values and goals and having a very clear commitment to transparency

and to decentralization and to constant self-improvement and I thought yeah this is something that I want to support with my time and you know with my uh yeah with my money as well um and that was the position that I was in um and when the self-limiting debate came up which I mean I thought yeah this is definitely going to be kind of a problem at some point so it wasn't exactly a surprise um then Lido has a grants committee that's called Lego and so it has a budget and people can give grants and

um the way that lighter protocol works is um it there's the dial you know and the dial basically decides the direction and the strategy of the protocol right and so um it turns out that you know whether lighter should save limit or not is a pretty big part of what the strategy should be and so it was very clear that this decision cannot be made without asking the Dao for their opinion and so facility that um what I think is exactly the right thing so as a member of Lego he looked for someone who can write um what we call a Swiss booklet

because in Switzerland they have these ideas of the referendum right and people can vote it's kind of that form of direct democracy right and people can vote and they publish these small booklets that that basically say if you believe in like if you believe in these things then you should be in favor and if you believe in like these things then you should be in favor of the other option and they are written by an independent committee usually of experts on the topic um and they are basically a form of voter education and in lowering the cost for them to come to a decision that would be good for for everyone right and so I um and um

there was someone um in in the cosmos system we had in the past written such booklets for governance decisions in Cosmos and um I believe a silly thought that this would be a great thing to also try an idol and then you know he's out and he uh he asked um you know Sasha is is the name of of the author of that post um and uh he uh yeah he he agreed and he didn't hold any ldo at the time I don't know if he does now um uh but yeah he wrote this unbiased analysis um and it had I thought actually it was it was it almost reminded me of italics

writing style um because vitalik is like incredibly good at representing both views of an argument for example when he wrote this first um about you know the Bitcoin maximalist argument um that he published on April 1st and out of the maximalists were saying you know this is an endorsement of Bitcoin maximalism um so it almost reminded me of that in a sense because it really had you know a full list of arguments for why you should be in favor of self-limiting and why you should be against self-limiting and I could read this and say yeah this is like why we shouldn't self-limit and somebody was in favor can read this and

say yeah this is exactly why we should save limit because exactly like it isolates the assumptions that different people have and the different lenses to which they view reality that then lead them to you know come to voting A or B at the end of the day right and so I thought that this was actually a pivotal moment for lighter governance because it illustrates how the dial should work right when there's a major decision then um you know you should ask token holders for what to do and you should try to make the decision for them as easy as possible and um yeah so light of talking with us did end up voting against self-limiting

um because I I think at the end of the day I mean of course there's a safe interest but also I think they were swayed more by the arguments against because I I think people working on naido uh or investing in Lido I think they are kind of you know in a sense agreeing with the idea that the staking Market has these Tendencies of being when I take most and um that it is very important for a decentralized protocol to win and so on and yeah so that's why we saw I think the outcome that we did um and that is the yeah that is the the track that the Tao um has been on since then yeah I think that's a great overview and um you know

it strikes me that I think a lot of folks on either side of the argument are actually very aligned at different stages but a lot of this comes down to sequencing right and there were I think everybody was more or less aligned that Lido needed training wheels in the early days in order to create a compete an offering that was competitive to the centralized exchanges right and I think everybody can somewhat agree or most people can agree that if a winner if there is a winner take all um you know winner take all winner liquid snake and protocol then it should be uh more or less as hard to change as ethereum itself um and you know the ability to stay with it should be as you know permissionless

as as staking with you know with Native staking right um and I think the the disagreement here really came down to like where Lido should be at its stage of growth um and it you know it almost had you know in the eyes of some folks in the ethereum community had already mitigated this risk of of centralized exchange capture but yet hadn't gone so far enough to take off the training wheels right and I'm curious to just here if you agree with that sort of overview and also curious to hear where you think Lido is today you know it with things like you know dual governance coming in the staking router coming in and in early conversations

about you know ossifying parts of the protocol so that governance cannot upgrade them yeah I think this is a mice this is a really good I I think observation um the I can't speak for everybody who's on the side of you know light or should self-limit but I think a fair amount of people would say that if lidoor had you know descent like was much even more decentralized than it is today then they would feel comfortable with the higher market share for example and so they can point to particular things and say you know that's why I'm in favor oh self-limiting today but I may not be in the future I was I was missing like a bit of nuance on that topic I think also

like it was very it felt very tribal which is never good um because then it's it's it felt more like I'm supporting like rival protocol X and that's why I'm actually like making the stink against lighter but but anyway um so you're totally right like Lido in the past year had even more training wheels on than it does today so in particular um not I believe at the time so I don't know when it happened but I believe at the time at least like uh part of the validators was the uh controlled by the original

multi-sec uh committee and that was simply for you know because it wasn't like back when Lido started it wasn't possible for a smart contract to control a valdeta on the beaten chain and so you had to control it with an eoa and the way that you did this was with Emoji stick that was the only way to do it and when it became possible Lido switch to a Smart contract custody that was controlled and the smart contract was controlled by Aragon governance um so when it was possible and light was switched they rotated you know or the the eoa control keys and then the voltastic has been retired since then so they have made uh you know further steps um towards decentralization

um however there are the the degree to which um like we think we call it ossification right to the degree to which this is possible is not just limited by the amount of you know like how much lighter that wants to work on this or um uh like how much resources it can allocate but it's also severely constrained by the underlying base layer and so for example while the ethereum for example you know withdrawals wasn't finalized from the beacon chain it was actually impossible for Lido to make any ossifying steps on in the protocol side

um so I think these are definitely like these these timing concerns I think what I'm driving in is this is very very nuanced like um you you need to unlock certain ossification on the layer below so you can unlock ossification on the layer above which is the staking layer and at the same time what you cannot control is the demand for staking that that comes in which is actually like Unbound from this and um when you say that for example a decentralized protocol and I use like decentralized now here as it's not it's not where it wants to be

but it's way more decentralized than you know let's say coinbase and binance and and you say Well it can't grow above let's say 20 because it doesn't have feature XYZ and then you look at you know the top two exchanges and they don't have any of the same constraint it just doesn't make any sense um and so yes I think that decentralization is incredibly important um a lot of the roadmap that the live dial has laid out uh for the future of the protocol is centered around decentralization um and it has been for now for a long time and that is because decentralization for many systems it can be seen as a form of sacrifice

right like in unisog for example you know uh you you sacrifice a lot by having to run your system on ethereum your smart contract you know very inefficient kind of curved design and like the cost of liquidity is very high and if you if you could do you know essential limit order book then you could support professional market makers and it would be way better right so something around these slides yeah but in in staking protocols this does not apply you know the thing that it does is very simple and the more decentralized you can make it the better it gets because it's so much about neutrality and Trust

um and this is why for Lido decentralization is not a sacrifice of anything it's extremely good and it says for that it's a number one priority in in the sense that like it's not a defensive move like like decentralization for Lido is offense if you will um so that's why it is the number one priority and um so I I'm planning to post um some uh suggestions over um the next month so that that lays out some of my thinking and my role as strategic advisor and for um what the dial should should do and

that includes uh two things in particular uh one is uh you know taking steps to decentralize the governance very specific steps so I personally see uh dual governance shipping that I I see that as the number one priority uh because that already de-risks so much about what can go wrong in governance um and the second thing is getting the staking router going so basically increasing the note operator set because when you have a permissionless staking module and you have a DVT module and you can get the node operator set

from 35 to 350 I think that also alleviates I think a lot of concerns and it's it's not just that these two things were make an impact on their own it's very similar to you know how in ethereum if you go back a few years there was a general attitude you know they will never ship proof of stake they will never ship scaling and so on right it's just like a project that just you know makes a 200 promises and doesn't deliver anything and with Lido it's not at all like that but I think there's always an element of the more of your roadmap you have

already shipped the higher the confidence and the momentum that like the rest of the roadmap will be delivered as well and I think this trust is just very important and so yeah I think for that reason I think that's where Lido stands right now in terms of um the uh decentralization roadmap and um I think those are the things that you know the Dao should do next yeah that's that's a great overview and I think so yeah with the staking router and DVT you're moving towards permissionless validator sets right um with dual governments you're

basically have an interim solution to mitigate governance attack risks before these contracts can actually be made you know immutable or ossified um I am curious to get your opinion on in the hypothetical end state where you know this is the ideal end state where the happy path for Lido um where it is winner take all Market structure and you have executed on this decentralization roadmap you know what which functions will be left you know will be impossible for the doubt you know not to ossify completely um and I think about whether it's you know how to distribute deposits across these different validator sets I think about fees um as well as you know it's going to be a tough decision you

know to ossify a contract like withdrawals where if you you know maybe ossify too soon you could have a catastrophic situation um and so I'm curious to hear in that end State you know what will be left for the Dow to really control and and in particular will will they get will there be pressure to ossify fees yeah so I think the question like what is going to be left is a little similar in spirit to a question that I sometimes also hear like in order for you like what should ethereum do about liquid staking and should they make like in protocol liquid sticking solution and like if you squint the two questions are actually the same because we're also

asking well how can Lido be ossified so much that it basically becomes a part of the ethereum protocol and you realize that there is actually like let's say ethereum would put liquid staking into the protocol today you know and there's two problems still remaining one is the steak is not fundable so every validator would create its own uh liquid staking token and you know you don't have any of the liquidity aggregation effect that actually makes liquid staking so effective and the second thing is if you want to have the liquidity aggregation then somebody needs to

pick who what node operators are receiving the stick and if you want to be very simple about this then you can say well just let the steakhouse decide and you know then there's a list and you know people sorted by the name that they trust or the amount of uh Revenue that they can generate you know doing that I think then basically what happens is the you know the competition between note operators it becomes concentrated in one at most two dimensions and that is actually extremely

centralizing for the underlying node operator set um because basically the state goes to the uh the parties that have the best brand uh it goes to the parties that take the most risk or it goes to the parties that have the lowest cost of capital and or and or kind of where the stake is secured in like the safest jurisdiction right and um proof of work is a good example what happens if you let the kind of free market quote-unquote for validation play out um it used to be mining used to be entirely in China because that's where the the hardware makers were and the

energy was the cheapest and now it's almost entirely in the US because all of the mining companies are now public because that's what gives you the lowest cost of capital you know so um you would get basically a very similar outcome um in staking if you just follow the incentives and that is why actually I think one of the huge values that Lido has or the Dao has for ethereum today is exerting some amount of governance over what a good node operator set should look like so for example Lido has quotas for

geographical decentralization for what amount of stake is allowed to be in any on any particular continent in any particular jurisdiction how much is allowed to be controlled by one legal entity how much is allowed to be run with a particular combination of different clients in order to drive client diversity um how much is allowed to be run in in a cloud hosted setup versus an on-premise setup and different things like that and so due to this governance over the node operator set um

ethereum today has actually a much in many ways better node operator said then it would have otherwise and so I think what this answer kind of hints to is that some amount of governance over the node operator set will always be necessary because you need to match the demand for delegating stake with the demand for staking uh you know actually like running these validators and you need to do this in a way that that satisfies the under the objectives of the underlying Network which is ethereum and so at the very minimum I think the Dow

has to vote and it can do this very infrequently but it has to vote on the objective functions of the node operator set and I think beyond that you can you know ossify almost everything but I think this particular part um will probably always require some amount of fine tuning uh it can be infrequent and it should have the full buy-in of the stakers um and so I I think this is a realistic place for a Lido to get to I want to under just draw a line under the point that you made before about decentralization not anting

antithetically to the product but actually being offense it's a core part of the value proposition of the product and I would sort of draw a comparison in between Lido and a cup ethereum is very picky about what it takes into the actual protocol right it doesn't like to have an opinion about a lot of stuff and it outsources actually very critical functionality of the protocol Lido could be an example of that flashbots could actually be an example of that right ethereum outsources its block building and I think actually eigenlayer or restaking protocols have the potential to be that as well and I think it just Bears repeating that that hadn't really made that connection until you just until you just said what you said but

those are very interesting those are very interesting group of protocols that do very core functionality for ethereum and the example might be miles is what we talked about in our first episode but it could be something like utilities it could be something like the banking system or health things that are very close to the metal or the social contract or infrastructure of life and and uh what I want to make sure that we've at least got time to touch on a little bit is this idea of restaking and I know you have a little bit mixed feelings on restaking we're going to be talking to to sriram later in the season as well and sort of hear from the horse's mouth but one one of the ideas that I wanted to because I've heard you talk about the

principal agent problem and that definitely plays when it comes to liquid staking in general and I think you might add on an additional layer or potential risk of principal agent problem when it comes to restaking so can you just give us the high level of how you think about the interaction or intersection in between restaking and liquid staking that we can poke out in a bit so restaking is the idea that ethereum's validator set is an important asset or like a valuable asset in itself and by and you can Leverage The set to perform other activities by having these validators opt into additional slashing

conditions uh rather they opt into performing addition activities and they can then be held accountable by opting also into additional slashing conditions and so if you use cases for that have been put forward um I think they go from you can run kind of protocols like data available like ethereum validators also providing data availability for example also sequencing layer 2 Roll-Ups they could provide oracles you know bring prices on chain um I think these are just three examples um of of what you could do with this

um I think it definitely has its place in terms of narrative it feels just a little overheated right now and I think you can basically see this in when eigenlayer launched you know the contracts filled up with stake right away but there's no one on the other side who actually wants to use these Services um and would pay for it and I think we're quite a bit away from actually uh seeing any Revenue generating activities uh from this um and yeah I think um when it does of course it will become

important um but I think yeah we will have to see and on the other side of that we talked about the competition between staking protocols so definitely oil staking protocols compete on providing Rewards to the user and you don't have to be the best one like I think you can always boost your rewards by taking more risk which is not desirable so it's about you know having a good ratio of risk and reward but to the degree that liquid that um that restaking will drive rewards to node operators then the stakeouts will want to participate in these rewards and the protocol that uses restaking

um it will improve its differentiation in the staking Market very clearly so I can tell you restaking is something that all of the staking protocols uh I definitely have on their radar right um today there are two ways of doing it I think one is eigen layer can you know they can take what is already kind of a staking protocol a staking token and you know stake that um and uh and then kind of use that for the staking pool itself they can run they can implement eigenlayer or another risk taking

protocol right and so I think this is another strategic questions that you know the dials Behind These broader the operating companies Behind These liquid stacking protocols have to have to think about um in terms of timeline if I have to my personal time that is it's probably between like one and two years away of becoming like a serious differentiator in the staking market so that's why I'm personally more focused on executing the decentralization roadmap uh I think that's more important today um than um anything that that can boost the rewards for sneakers so in terms you were just laid out a really interesting

relationship in between there's sort of a co-op petition relationship between something like Lido and something like eigenlayer right and I think a big question of that is who is ultimately Upstream of whom and who has the relationship with the user is that roughly how you view it as well or maybe talk a little bit about about that Dynamic and if they have the potential to be more friendly and complementary or if it ends up being a struggle to who has the user relationship I think that's a good way of thinking about it um they they I mean today they are clearly very complementary right yes because yeah um liquid staking protocols want higher rewards and

um what uh a protocol like Ein layer wants is access to note operators and users and this is what the liquid second protocols have so it's a it's a perfect match in many ways assuming that there's demand to use the liquid sticking protocol and that's I think that that's where it hinges us today yeah so I think they've been incredibly successful at you know bootstrapping the meme that there will be a lot of demand but whether there will also be real demand to fill that expectation I think that's to be seen um to the degree that they can I think the relationship can be very complementary

um I I think it is possible um that every second protocol will eventually also look into uh how can we integrate vertically and like run our start running our own staking protocol or a staking protocol might eventually say well why don't we internalize some of the restaking but I'm not so constructive on these moves personally and that's for a few reasons I think one is that protocols in general and this actually goes to what you said about fee smiles and I realized now that I didn't answer your question directly

um protocols I think the thing about protocol decentralized protocols is they can get much bigger than anyone thinks they do and if you think you know how big they can get they can get 10 times bigger that's my perspective and they will probably have very small margins yeah so um and when you have a situation like that you you have a protocol that has very slow emergence there's very little to gain from internalizing that and vertically integrating you're better off just collaborating um especially if it's in a market where kind of customization user like you

don't need to control the whole user experience and I I think like crypto is actually a pretty good example of that you can have a pretty good user experience just from composing with other smart contracts um and the second thing is it is related to the particular strategy that light or Dao has or operates and and that is to become a neutral middleware I.E kind of a very very thin protocol like actually like the the things that Lido Dao should do should be minimized as much as possible and so the protocol must have an incredibly small what I would call

management surface you know um so because that surface is what then the Dow ultimately has to manage right and that's why I as a an advisor of lidoor I'm very very against any form of vertical integration and when somebody says shouldn't we do x y and like no forget about it like don't do vertical integration it is not right for Lido like Lido should be as thin as possible and as neutral as possible you don't want to manage anything you don't want any complexity and that's how you need to play in the staking Market if you want to survive and

it's not even about winning because if you don't win then you don't survive like that is the nature of the staking Market because I don't think there's an equilibrium where you can have 20 market share but 30 market share right this is why I'm like so against self-limiting because if Lido doesn't keep growing then it first stagnate and then it will die and I think this is true for all liquid sticking protocols and so that's why I'm very Pro collaboration um and trusted interfaces between these protocols I'm very anti vertical integration and that's why I'm also very Pro and now we finally get to the fee question so I would be very I don't I don't think that

one concern that people have um about uh protocols that get very big or companies that get very big that have that again outsized bargaining power over their users over their suppliers and then what happens is they start increasing the prices right like apple taking 30 fee from the app store which you can argue today it's clearly okay for them to do it because you know people can still not leave and get the same value Elsewhere for cheaper but I think one promise from decentralized protocols is that they cannot behave

in this way that the um value that they can extract that they can capture is actually Limited at a much smaller size so I think definitely fees should be kept I'm not even sure that there should be subject to management at all I think Lido could have an internal fee Market the same way that ethereum has an internal fee market today ethereum is not opinionated about how much gas should cost on a given day right it only defines um what is the supply of it for example right that is allowed and I think lyro will

get to a similar point where the fee that the users pay and that the note operators receive is simply set by supply and demand and as long as the node operators adhere to the objective function that is very very infrequently set by the Dao for what the notor beta set should look like then the price Discovery between these two parties can be left to the free market basically and the dial should have no ability to jack up the prices you know and say this is how much users should pay and this is how much snow the weather should

receive I don't think it should have that ability at all I think that um the fee that they think that they can get that they can take um it should be small and it should be fixed because this is what gets both visas and note operators and all of the protocols and Integrations and so on that are building on top it gives them uh all of the confidence that they need to treat this as really kind of long-term reliable and immutable infrastructure yeah and I think that makes sense and I think there is an you know an obvious concern about you know the demand side fees and you know Lido's ability to to Rack those up to you know Apple Store like

um rates once it has a monopoly but I do think experimentation on the supply side you know fee split between the protocol and you know and its validators could could actually be interesting to explore in making the protocol healthier you know I my gut sense is that the largest validators of the Lido set right now you know the the chorus ones of the world uh p2bs would actually take a smaller commission than five percent in order to receive larger deposits but you know as you're trying to bootstrap say these permissionless you know validator sets via the staking router they're going to need more than five percent potentially or maybe you know whatever that Revenue that you you know higher rank for the

largest validators could be used to you know bootstrap their collateral right so I am thinking of you know from your strategy seat how do you how do you view like you know because that that's an example of maybe not being super thin right you can be very active but towards a you know a healthier outcome that's why I think a staking module should have the ability to set their own fees basically right and then that there can be competition between different modules so um you're totally right I think um especially like if you imagine from here that the price of ethereum increases by 10x it's not impossible right and then what is the margin of the average note

operator like 97 maybe uh so the cost for them of actually running the hardware and the infrastructure is very small compared to the fee that they are then getting and it's very clear that this is not you know the market equilibrium noise and optimal uh for users or for Lido and so um I think in that case it's very good for the protocol to have a price discovery on what is actually the cost of providing the service of running validators and it can also work in the other direction right so if if Lido goes you know if if where to go again to like a hundred dollars then Lido must also be

secure right and it can all of a sudden be that notabrators are not incentivized anymore to perform their services because there is a fixed cost to running you know to providing these not operators and maybe if Eve is 10 then you know the equilibrium for not operators on the beacon chain is actually like two percent of the network like I don't know it's possible in either case it should be possible that notable does also can increase their fees um if their cost goes up um or their revenue goes down and um another example of this would be like a bonded note operator who's permissionless and who puts up some of their own collateral but doesn't have a reputation at least at first they should

say um what's some I mean I I will participate in Lido but someone needs to pay me for this cost of capital that I'm incurring because otherwise I couldn't be competitive this would not be profitable for me and so they should you know ask for a higher fee um and so I think it's very important for that reason and I think it's part of the vision also for the staking router the different modules can set their own fees and then there's competition between modules and there's price discovery on um yeah what the best supply side fee uh should be also unfortunately yeah we could keep talking for that's the mark of a good conversation that we had about five topics we didn't even get to here we

could keep going on for forever here but you've already been really generous with your time and just really appreciate you having me back on bell curve here so obviously this has been a ton of fun you've given us a lot to think about and really teed up a lot of the questions that we wanted to ask for for this entire season yeah hopefully not the last time I'm really looking forward towards the rest of the season I think uh you have a definitely a knack for topic selection um first you know F chains and then Mev and then liquid staking I think you definitely at the frontier where it's most interesting thanks sir I appreciate that all right well miles and I'll try to do the subject Justice and uh yeah thanks again for your time all right miles what an episode there so many

great thoughts from hasu it's almost tough to digest and figure out where to start I know I know I think we you know did a covered a lot of what we covered on the first uh intro pod but just a click deeper and you know really interesting to hear the perspective of somebody's you know sitting in a seat as the Strategic advisor the Lido doubt yeah I agree with you I think one of my one of my takeaways the the question of Market structure was in my opinion answered about as directly as you're ever going to get it done I think haasu explained a lot of the ways and he was thinking about some of the the network effects and returns to scale of a liquid stake and token issuer similarly to to how we were so I I really I thought the discussion started to get really

interesting when we started to talk about you know he thought about it exactly the same way that we did which was he drew out these these two sort of principles frankly of dows and decentralization that we talked about a couple of seasons ago but it's kind of these these two ideas which is one you know Lido sits in this very interesting Camp of Dows where it's very close to the base metal infrastructure of ethereum it's basically ethereum deciding to Outsource a core function of the ethereum protocol itself and so decentralization is I love the way he phrased it as being offense instead of defense and then the other thing that is on the roadmap for Lido and sort of indicative of how they think about it is limiting the surface area of

what the Dow does I thought that was fascinating so and there are a couple of ways to go about this part of it is ossifying uh core parts of the core parts of the protocol but then it's sort of a mentality of limiting limiting itself to whether that be operating on ethereum or you know not vertically integrating or whatever it is it's just a very interesting perspective I don't know what what takeaways you had from that I couldn't agree more I think it's you know we kind of went back the clock to you know before Lido existed um and just thinking from first principles you know his conclusion was that there will be a winner take all of this market and so the best thing we can be doing right now is making sure that

whatever the winner is is you know as decentralized as as possible and the best version and the healthiest version of the network as possible um and you know I think the sequencing of of the decentrals decentralizing the protocol is very important right because those training wheels were necessary to to compete with the centralized exchanges but you know to your point now decentralization is now a growth unlock for them right whereas with more typical protocol of dows uh that in our building more applications user-facing applications rather than something that could be considered infrastructure of the of ethereum itself right um you know that same sort of

decentralization actually is a growth hindrance at times um and so now you know it's at the stage of okay we have gotten the early lead now it's time to execute on the you know decentralization roadmap as a growth unlock right what's going to get Lido from 30 market share to 70 market share well it's going to be getting the entire all the stakeholders of the network comfortable with their winner take all you know uh Market position and to do that you need to basically start making the protocol is hard to change as ethereum itself but being very strategic in in just in your decisions um and and maybe even interim Solutions like this you know dual governance

Dynamic yeah we didn't get too deep into dual governance and Steve our next episode we're going to be diving into the nitty-gritty of how that all works I did think one core idea to call out was you know if I've always thought one of the most elegant parts of ethereum's design is how it's tackled fee fee markets I thought I think the way that it works in ethereum is a really elegant solution you're starting to see Solana where there was a fixed fee potentially move in the more in the direction a few markets I had never really thought of the staking module for Lido introducing the possibility of a local liquid staking sort of fee Market I thought that was such an interesting takeaway and it hadn't even that hadn't even occurred to me so I thought that's a very cool Point yeah I think um

it's interesting to hear that you know the last part of the protocol that probably will always be need some sort of Dao um you know involvement is the curation of these of these validator sets and also you know how deposits are distributed across them um I thought his point around okay well what if you just let the stakers decide wouldn't that be the best possible way for the network well problem with that is that it actually would end up with a less decentralized set because staker's natural incentive is to go with you know the validators that they know well they're not going to lose their their stake right um and so again this curation is something that

you know Lido's been criticized for but turning it on its head going forward once there is permissionless sets you know that curation is going to be necessary in order to actually bootstrap you know deposits for those steps you need permissionless sets yeah it was a super interesting point it kind of got me thinking miles I I didn't want to ask I never liked asking about questions like what you know what's the uh the potential return you know for something like this but I'm increasingly starting to see this connection in between to use let me use a really high level non-specific metaphor but then try to get a little bit more concrete with it is these sort of levels of different corporations in America and the function

they do and how critical it is to sort of human Fabric in the social contract so initially you know utilities was the example that we used but I think you could largely actually lump defense you could lump banking services you could lump Health Care these things that you can't really just leave totally to the free market there has to be some degree of Regulation and then the impact that has on returns of those various Industries and highly regulated Industries they tend to be more predictable there's less upside because you couldn't for instance for the example that you used you couldn't Implement fee you know surge pricing for heat for instance that would be an extremely unpopular thing to do but it's because it's regulated it's it's much more dependable and

predictable and hatsu the way he described this primitive of Lido is a liquid staking provider it almost takes it one step further and you're isolating by limiting the surface area and making so much of this just ossified smart contracts you are limiting the surface area you're increasing the Tam but you are decreasing probably the rake that you take there as well so all in all I think what this ends up looking like is kind of an annuity something like an annuity right a very large a total addressable Market winner take most with non-punitive fees so what

you're left with is sort of this stream of income and then I guess it just depends on how much that income stream of income is bit up or down but there's you could sort of look back at historical periods of time even in the U.S at various times annuities have been in they've been out but that's that is large that's kind of the framework that I'm starting to look at a lot of these protocols as I'm curious what you think for me it's still a we'll see um because I you know as I was kind of alluding to I think that you know if you were to take a Super Active you know role in trying to drive Revenue to these protocols you could actually do so in a way that you could increase the rake without

you know necessarily increasing the rate in the from the perspective of the user right so you could right now basically Lido fees are set at 10 for the user and that 10 is split between you know equally between the Dow and its validators um and I think there's some very interesting you know kind of auction Dynamics or market dynamics you could introduce to how that 10 is split up among validators in the Dow um and I think that you know the protocol could actually increase its rake if it wanted to um by taking a higher cut and giving the largest validators a lower cut um and that you know is more of a kind of a capitalist sort of approach here

right um it is but but just not to interrupt but I mean how much can you really do that you know it's five percent or something right now you could move that what you could move that a couple hundred basis points when you know there's there's no opportunity to go from a 30 to a 50 sort of gross margin at the point I was just trying to make is that there's there's the opportunity you know to exert some some influent leverage on your supply side and maybe you can increase your rake a couple hundred basis points but there's no opportunity to the the sort of flip side of not vertically integrating not trying to reinvest those gains and trying to be a very small surface area sort of flat incredibly neutral protocol is you don't have any opportunity to go from a 30 to

50 gross margin kind of thing or invest in all these new and exciting business lines I think that's the the flip side of that sort of point I was trying to illustrate I think that's fair um I do think that there the returns could look a lot better than an annuity if we end up with these you know this small margins but in a winner take all you know and struck and Market structure I mean it's going to be very very valuable right um yeah but I I in general agree I think it's definitely a very different you know approach than a typical business um given you know what Dynamics are required to kind of you know get that winner take all market

share and actually to that point I think Austin was absolutely right in just saying that everyone tends to understate the market size here if I'm not 100 sold on the idea of ethereum as money but it might just be uh one of those things where reasoning by analogy is inherently imperfect people use ethereum for money like things today they probably will in the future I increasingly think a a helpful metaphor to understand the relationship between ethereum and Steve for instance is you know dollars and State dollars which is bonds and if you look at the the global market size for US Dollars versus U.S treasuries it actually is about one to one and the the market for treasuries is larger than the market for dollars because there's more

there's more demand for yield bearing money compared to non-yield bearing money so it's it's a very fair point we could we are probably drastically underestimating how big this Market's ultimately going to be yeah yeah and you know despite uh treasuries not being necessarily fungible um you know there's plenty of liquidity for those markets and ETFs um you know maybe they'll only Counterpoint there that I could make is that you know Steve right is completely fungible um whereas a lot of U.S treasuries are not and so maybe it's more it's you know a stronger Network effect there and it's you know you know maybe less than one to one and more swings in the way of the the yield bearing asset but I think you could be right as well you never know

it's it's tough to really gauge this stuff out and then last thing we we sort of ended the talk talking about restaking Posse was not super bullish on that I think his primary uh point there was just that was just that there's not an enormous amount of demand for on the demand side of a two-sided Marketplace like eigenlayer there's actually an enormous amount of people that want to restate their their state but there's not an enormous amount of node operators that want to run hardware for XYZ random chain and for that reason he wasn't super bullish on it I did think it was interesting to call out the sort of Cobe coopetition dynamic in between Lido and eigenlayer and I do think it goes back to our

original app chain thesis point of who has the relationship with the customer and who's Upstream of who because you know it's kind of a natural there's a natural push to vertically integrate there between those two providers yeah I think that's interesting I think there's kind of two parts of the supply side for restaking it's the stakers who's on you know especially liquid stickers or not running Hardware then there's you know the validators that they've delegated their stake to and I think the stake workers would love this idea of additional yield the validators are saying well actually you know that marginal yield comes at a significant additional cost for me whereas for the stakers it's no additional cost right um but what will be interesting to see

is just how much you know demand there is from these Roll-Ups sequencer sets oracles Bridges um you know and at what point like this is secure enough to to get some of the larger players here and not just the ones that are looking for you know a narrative to kind of latch onto right it was it was interesting I think we'll we'll have to one the one thing it's almost a philosophical answer and I'm glad some of our some of our responses were more tactically oriented in sort of history of liquid staking but I I think it's a question worth posing of is it a good thing to limit like ethereum and I you know I would I would at this point be more in the camp of I think there are more Creative Solutions

to implement than some sort of cap I don't think it's a great message to send to entrepreneurs there's there's actually a sort of a rich history of monopolies frankly we could do a whole podcast on the histories of monopolies and antitrust and things like that but starting with Rockefeller probably even before there's this Rich history of entrepreneurs coming into an early stage very Wily up and down sort of market and actually helping to tame it with the form of Monopoly and then they're they're a sort of natural undermining effects that that lead to more diversification later on the John Rockefeller and what he did with standard oil is actually a really good example of that where it was a boom bust industry that was impossible to make any returns in he came in standardized everything and then the Monopoly it you

know sort of gave birth to one of the largest Industries in the world and there there may be some you know something that we could learn in crypto from doing that so I think so all right miles this next episode is going to be really good we we've mentioned this a couple of times now but we're actually going to be talking to Izzy from the Lido team who's in charge of their node operations so he's the perfect guy to be talking to about Nitty Gritty questions around the staking module dual governance and how they think about decentralizing themselves I mean you all could tell today that that's an enormous part not just of kind of a technicality of trying to align and seem decentralized it's actually a core part of the value proposition for these liquid staking protocols and it's how they go on offense so I think that'll be

a great conversation yeah really looking forward to it and uh it was a blast chatting today thank you [Music]