The Power Dynamics of Liquid Restaking | S8 E3 | Sam, Krane, & Clayton

Transcript

hey everyone this episode is brought to you by Kinto the safety first L2 which is accelerating the transition to the onchain financial system they've got some very cool features like user owned kyc and Native account abstraction which solves a bunch of the onboarding and bottom back problems that many l2s suffer from so you're going to be hearing all about them later in the program but if you want to learn more and better if you want to join their launch program engine GN you can click the link at the bottom of this episode go check them out tell them I sent you all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-host 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 all right everyone welcome back to another episode of bell curve um this is the second interview episode of the reaking season and I'm joined here by my trusty co-host miles O'Neal we have got a veritable power panel uh here today we're going to be talking about liquid reaking we've got Clayton from Rio uh Sam from Skip and crane who is working on some Bitcoin stuff um so everyone uh welcome to the show Good to be here hello

hello hey um guys this is going to be a great episode and we've got a ton of material to work through so maybe just to you know it up here I thought we could just start by talking about the history and Rise of lrts to date so to speak so you know obviously very broad a lot of ways different ways that we could take this but crane maybe I could turn it over you give us a little bit of the the history here and talk to us about some of the market conditions that led to the current state of liquid reaking yeah so like maybe let's start with the idea of staking and daking in the first place and then sort of like how we get here So speaking in the ethereum context is just uh you providing your e security to to the network doing a set of

services for the network in exchange getting some yield and if you don't do the services well or if you're malicious you get slashed so you take on some risk for this yield reaking is basically just like uh a generalization of this concept where you can opt into doing more services for the network for the same eth so you can get more yield and in return what happens is um you can you take on more risk of slashing uh by doing this extra set of services that uh ier is calling avss doesn't really matter um and in the bare Market the only thing that was available to people was e staking yield so like lsts basically became super common what was

not available on ethereum back in back in 2022 was was any kind of Delegation system so so what happened was Lio provided the service where you could you could put your eth in Lio smart contracts and what Lio did for you was delegate the eth um to a bunch of operators these operators ran staking infrastructure and in return you got some yield the The Operators also like took a fees off of the yield that they were generating for you and this delegation system plus lios sste receipt voucher became like super common across all of D5 people started using it a bunch and it was sort of like the the risk free yield in def uh and people became super super

familiar with SD like there's no actual discount on S versus e so people sort of like assumed that lier was basically a no risk protocol or or like a very low lowrisk protocol and once like reaking happened reaking looks very similar to staking in the sense that people put their money in a contract and then it secures a bunch of networks and as soon as like this opportunity came to like basically secure more Networks more yield people started jumping on this like igl bandwagon and what igl didn't have as well was this delegation system where basically you could give the money to someone else and this someone else could like opt into avss for you run the

infrastructure for you like I also had like caps on the uh on the liquid staking tokens that you could put into the into the a contracts so what happened was uh some LST lrts started basically coming in with native staking uh n native reaking where they basically provided the infrastructure to run staking nodes for you so like I think Renzo's goto Market was this where they basically ran staking infrastructure for you and through that create a created a delegation system on top of igen so like you don't just get um you don't have to wait for the the Caps to be raised every single time igen lir like decides to do so what you can do is delegate to something like trenzo and then you get

um get this like EAS receipt voucher that looks very similar to Lio so like you had this like Market structure where uh Lio like basically became the delegation uh the delegation example on on the staking side uh on the on the reaking side like a lot of these lrts started basically um coming in uh with a GTM that basically became the delegation platform for uh for people to use um for people to use I there and and Clayton maybe I'll pick on you since um you know you're at at Rio now but you were at figment prior to that and I think crane you just did a great job of kind of like laying out a lot of the constraints

facing end users that um you know made lrts really attractive but I think there were also some you know I guess maybe even regulatory concerns for operators too that made lrts uh an attractive way to actually get delegations um and this is something you guys called out I think even like last June that you know might be a problem for operators um I'll let you will kind of like unpack the details but yeah um I I mean ever since uh Ian L's design was public uh and previously I pigment we were taking a look at it fairly heavily in in January of last year um but you know if you're looking at the relationship between staking

versus reaking uh you know just to simplify the the actors or or things that are in the system uh staking you have protocol validator token holder um validator and the token holder can be the same um you know the protocol can be any stake protocol uh reaking you have protocol validator token holder um a selection ABS is uh and then an ABS strategy um and currently uh the operator is effectively uh the strategy manager on iik layer um and you know most operators don't want that responsibility nor can they um legally probably have that responsibility if

they wanted to St in business so uh the LRT design was actually beneficial because um you know as as Ian L grew and and uh interest um these operators can uh kind of offset that strategy manager role uh to an LRT um and and that LRT you know has you know a bunch of different go to market strategies I I mean there's you know six or seven uh you know fairly large ones in the Market at this point in time um and they're you know effectively the distribution uh you know partner for these node operators um you know similar to Lio in that way right you know a lot of node operators are not going to be uh releasing a receipt token that's completely Bound By by them as well on the staking side um

so in that regard on the operator side uh lrts were uh very very important uh to to you know the initial um uh for for node operators to get stake on hen lir in a way that was uh at least at some capacity more compliant uh than than building your own uh reaking strategy in house right and that that points to uh both the selection of of the AVS is that you're reaking to or you're restak to on behalf of the end user and the capital allocation more importantly right which is really non-core for operators I think um but yeah yeah I mean I think to you know compared to staking ethereum

um obviously there's a lot you can do to change the reward rate um or or you know increase the security uh based off the infrastructure that you're running um but you're not really doing anything else with the asset um right like you can leverage some sort of you know Mev strategy or or have you know the flash poot side car in place you know have the nodes in certain locations Etc um but you're really not changing the risk reward profile of the stake position um every time you're adding an an ABS um you know someone can argue that you're doing that um on behalf of someone uh which does make it naturally more complex um which leads to the rise of of you know whether it becomes an LRT or something else um the role of a strategy

manager uh in any sort of re staking ecosystem versus uh a staking ecosystem and um its potential on being a very profitable business uh long term whether there's a token or not because you're effectively doing the risk framework uh for all of these uh positions and you know there's 156 billion dollars U staked on restak on igen layer right now maybe I could just add one small point that rounds out this kind of like rise of lrts which is during the bare Market um there obviously many protocols were struggling to um kind of find users Rays

Etc um so all the air was kind of sucked out of the room and uh many of the current uh LRT providers were LST providers that then saw an opportunity in reaking as kind of the a dominant narrative and similar similarly for abss which may have been defi protocols or infrastructure protocols that maybe uh kind of didn't get the timing right and now leaning into the ABS I mean one it there is I think real value provided there but uh it also is kind of a shelling point for the ability to raise and kind of plug into a capital base or user base so can we talk a little bit about these the actual um delegation vouchers

or receip themselves and that's actually a little bit of that exact phrase crane that I think that you used as a call back to the original liquid staking paper that Felix lutch um originally of chorus one wrote uh way back in the day um and miles and I have talked a little bit about this as well in the liquid staking season about this like very winter take most um Market structure for liquid staking tokens where they're trying to compete um against actually the underlying asset of the network so eth they're trying to compete in terms of um liquidity like money whatever that word means to you Etc and it's because um underneath what these validators are all doing is very homogeneous and pretty vanilla it's pretty different characteristics underneath the hood for

these other types of Delegation vouchers or receipts these liquid reaking receipts much more hetero uh heterogeneous under the hood um so can you guys just describe a little bit about the different Dynamics uh that you expect in between these liquid reaking tokens versus lsts I mean I I think the main difference is the amount of variability that uh these lrts can have in terms of reward rate and risk um really you know back to the point of not being able to do much with with the yield on on staking e um really the the goal I mean if you're going back all the way to Lio right um some folks were sing e for over a year and a half before withdrawals were

enabled um so that concept of liquidity was was super super um you know valuable uh in November of of 2021 um and but then you know once withdrawals are enabled uh you know the entry queue the exit que is is relatively low and and um you know time period uh really what you fight for on the LST side is is the moneyness and and you know how much it's integrated on the depi side and and where you can you know buy it sell it you know Etc um LRT is like the the variability um you know depending on how much people actually leverage I can lay for security could could range multiples from you know 5% to 15% to 20% uh always additional bells and whist whistles attached to them

right and so I I I don't know if it's going to be winner take most um in this market especially you know understanding that institutions and you know other risk averse people likely aren't here yet uh depositing significantly into igen layer um but you know there's probably going to be a handful of uh you know lowrisk moderate high-risk uh lrts that will gain dominance and and those three buckets yeah and I go ahead gr okay so like I think also just like because of these choices that the LRT protocols can make right so like the first choice is

which AVS is to stake to or restake to how much to restake to each AVS and then there's also this like third component which like I think goes back to cl's variability point is is the rewards right like you might get rewards in five different tokens if you're sticking to uh five separate avss and now what you do with the reward like changes the variability of the underlying um quite a bit right and like also changes the shape of what your LRT looks like the receipt voucher might just be made up of eeve if like the protocol just keeps on selling the um the rewards that it earns but then like avss might not like the protocol too much because um they keep on selling the the reward tokens that

they get and on the other hand if the if the LRT sort of holds these tokens then it looks a lot less like money right because if you have this like U receipt voucher that's backed by not just eth but like five other assets then the liquidity of the other assets determines the liquidity of the of the receipt voucher as well so like the the I think the receipt voucher term is more correct for like LRT protocols today to some extent mostly because I think like they don't all need to be liquid like liquid tokens they can be somewhat IL liquid and it and then the sort of like receipt token that you get is just a claim to the underly lying instead of like being being the same kind of money that lsds were attempting to be right and I guess

so what are the sort of implications of that um because we've already seen lrts started to be used in defi um I think a lot of them are going after the same Playbook as Lio in terms of finding like you know utility channels whether it's defi collateral or gas on L2 right I think like swell is the first one to come out with their own L2 that's using an LRT as gas or at least the bridge deposit token um and to me it feels you know I'm not sure how it's going to play out but it does feel like the network effects are lower um just given the you know the heterogeneity across these assets and also like what the end users

actually want right um because they're not all the same so you're not just going to be judging based off of you know how liquid is this how how many places can I use it right they're actually very different sort of value props depending on what they do and you know I think we've talked about this in a previous episode but I'm curious if you guys agree that like you this maybe this Market structure ends up looking a lot more fragmented um or at least at the the receipt token level right maybe not at the entity level yeah I would agree with that um the other component of this is just what do the avss do like what is the the technical capability that you get out of this and um what is it plugging into so is it a shared

sequencer that's like serving you know a specific uh rollup architecture or uh is it a pre-com system like the um there's an opportunity to create some kind of like technical superc composability that or like cluster of related Services um I don't think anybody really knows what that looks like yet but um you could imagine kind of sectors or specializations that lrts are um they have domain knowledge and just kind of a core set of assets that interact with each other in a in a favorable way um and they may have a specific customer

set an L2 or you know another chain um that that they're serving and it might be a distribution channel to to access um that specific customer base hi everyone this episode is brought to you by Kinto the safety first L2 with user own kyc and Native account abstraction that is accelerating the transition to the onchain financial system now we've been talking about Larry thinkink on this program and how he's been shouting the good word about tokenization to all of his buddies on Wall Street this is happening and the very cool part about Kinto is that they are built to accept a whole bunch of assets a whole bunch of users from the traditional Financial system which current l2s have done an okay job but there's a lot of room for

Improvement for onboarding so it features very nice things like user owned kyc and Native account abstraction that solve some of the biggest blockers around mainstream adoption namely security and user experience you can become a founding member at engine. kin. XYZ if you believe in this onchain financial system join Kino's launch program and thank me later cheers guys and the link bottom of this episode click it now what do you guys you know when you're when we're looking at the maybe the demand side of the market for liquid reaking what do you guys it sort of feels like on the supply side of the market this is a really easy story oh I can take my liquid staking token that I'm getting yield on dump it into a platform and get even more yield sign me up there's there's an enormous amount of

capital as as we know in crypto that's willing to do that the demand side of the market is very interesting to me and um maybe we could talk a little bit about there's there's sort of two sides of this uh Market which is kind of like exporting eth security um so the external part of that market um and then craning gave miles and I some some feedback on our first episode where we're rebranding endogenous uh to feature Edition so what we're saying is we're looking at the eth validator set saying hey these guys are doing you know some things as stipulated by the protocol maybe uh smaller quorums or subsets of those uh of those validators could opt into doing additional tasks and underneath the hood of this all this Capital that's pouring into the reaking

ecosystem there are both of those things happening so can we just for for folks who aren't as deep in the weeds and the overall size of this market like maybe could you know whoever wants to take this like how large I guess is both like sort of the external part of this market like how many avss what's like the order of magnitude of like lift of yield that we're going to see here for eth and then maybe we could talk a little bit about the market size for the feature Edition um part of the market as well yeah and maybe one thing I would call out is um we talk about this you know uh we're calling it feature Edition to to ethereum like pseudo feature additions when you have uh the operator set opting in to do additional jobs

outside of just proposing valid blocks um I think it as that tying that back to lrts LR moment take in a number of different assets right they take in lsts and they take in Native eth I think it's worth calling out that you need native eth staking in order to access any sort of you know Fe fut Edition like use case for for reaking right if you have a bunch of lsts as your collateral you actually don't you know you can't control what those validators are doing right if you have Ste that's really up to the Ste validators to decide um it's just an interesting call out and you know maybe maybe that's part of why over

time lrts will try to convert like a lot of the lsts that have been deposited into the protocol into native state um speculation but there's also the revenue component there right like if you are natively staking then you can take the 10% that Lio does off of the the E staking yield as well so there's like uh not just like technical reasons but also just completely business reasons to actually do do Native staking yourself yeah I if you look at it from the depositor side like I could see this thing turning into like a you know the difference between your like checking account and your savings

account in your bank like maybe there's a a intermediate entity that's like getting doing kind of risk adjusted yield in a relatively Safe Way and like literally everyone has it you know they have some money in their sa savings account um uh from the ABS side like how many abss could there be um uh I think there's just a nobody really knows the answer to that question like are there going to be a million chains like abss are are pretty much chains or like microservices at the end of the day like there could be a lot of them um a lot of them could just you know could produce almost no yield they're just kind of uh almost operating at at Cost

um I assume there will be some kind of um uh Power law there where there's like some pretty valuable um abss and at that point you know they might split off and become their own protocols um I mean I'm kind of coming from Cosmos so I think part of my my like base assumption is that there will be many chains and yeah some of them will absolutely be aps's there's kind of one further question is how many kind of aggregate to ethereum or Bitcoin or salana or whatever and um how I view that is uh it's kind of part of this like

alignment question which is really like a a integrating into the user base integrating into liquidity integrating into the the kind of marketing pipeline of these different projects I think looking at the the demand side specifically uh to uh in terms of engaging with these lrts um I I mean in the short term it does make getting security easier um you know like 70% of of market share on n layer is is done through lrts and and a majority of that is done through like three of them so you know if you want billions of dollars of Economic Security um you know whether whether you need it at this point or not

um or you know it's it's you know a good vanity metric to have or you know it's good to align with these you know burgeoning you know staking liquid reaking protocols um you know it it's easy to to go knock on three doors uh for billions of dollars of Economic Security um that is a fairly new thing uh that a protocol can do um you know I mean to Sam's Point of there being you know potentially 100 plus chains in the cosmos ecosystem bootstrapping a validator set in the cosmos um is will take months um you have to go Source you know 50 70 100 sophisticated operators and then find a way to get stake on them

uh you know whether they be through some sort of token distribution um uh moment to the community and then you know encouraging them to stay to the right people or you know some Foundation delegation program like an ABS can spend up right now and get five billions of dollar five billion dollars worth of eth by you know picking up the phone for for three lrts um that being said you know I I think this being a Marketplace um and this being you know a publicly viewable Marketplace and in the long run you wouldn't necessarily have to do that uh if the incentives are in place uh from from an ABS perspective uh when when looking for stake um you know if you're a protocol that's earning $10 million in

Revenue um and you're giving that to uh operators on igen layer on a yearly basis you're not going to have to call them right um you know there's just going to be you know some some risk Frameworks in place on a website uh there's going to be a place to you know start you know validating that abs and then the rewards are going to start entering your wallets your stakers wallet so um I think this phenomenon of like these LRT you know deals and stuff will likely go away although you know that being said there's still you know this is just an evolved concept when you know you announce uh coinbase cloud or or figment or you know a large node operator you know supporting your test

net in the early stages I I think you know having this LRT backing um will still be significant for for sems um you know especially abss that are you know potentially layer one or or roll up ecosystems that would love to you know partner with that on like that protocol on the liquidity side of things as well I'm not totally sure I agree you think that uh deal kind of structured deals are going to go away I think they'll become more more ingrained in the protocol but I I don't think they're going to go away I think they're GNA get more sophisticated um yeah I mean if there's like a time lock mechanic mechanism that you can do on chain or or something to

where this is maybe more public um I I think the issue with you know being a DA and and potentially not disclosing the information uh and then you you know reaking for for some benefit uh that part will go away um I I think a lot of these agreements on you know do we allocate 20% uh to to this ABS this ABS is going to reward us for XYZ for being there for a year that that that will continue um but it will be more public and then people will have knowledge over it and people will decide a vote on ends of the system Clayton I'm actually curious what is the incentive to make that more public I mean these just sound like sort of sensitive commercial agreements to me like why who's

incentivized to put that on chain or make that publicly available um I mean just thinking from an idealist perspective it it's you know these open systems that everyone should be participating in especially people that either have stake in the system um or people that plan to use the ABS right so like both of these have both sides of the market place will likely have onchain treasuries um Dows um ecosystem incentives Etc um you as a as a depositor on on the staking side or owner of the governance token or you know some consumer of an ABS would want to know how that's money money is being spent right so um I I think uh for better for worse in terms of like the

strategy for you know the people close to the protocol um in the long run a lot of this should be public yeah and it and it touches on a a a competitive Dynamic that exists in lrts that doesn't exist in regular staking which is that um you know there the abss want to cap the amount of security that they have they want a number that they think is um you know sufficient and it you basically satisfies what they need on the security side but it's also low enough like that they can pay what is required to satisfy the constraints of the operator side and the the lrts and so what could happen

and what we're already seeing happening is that there are some lrts that just are unable to deploy like the the uh assets that have been deposited to them to reaking because they're looking across the AVS landscape and saying okay well all the really high quality avss that we have relationships with they're kind of they've hit their cap already right and to be fair there's actually nothing really stopping these lrts from from depositing to those avss at the moment there's nothing onchain that's stopping them but it's more of a I think kind of a just good business practice not to do that um if you tell them that you're you know okay we got our like 50 million out of the billion that you said you wanted um and and that know could

lead to lrts you know with maybe more like thicker designs right if you have a bunch of deposits sitting around that are not being put to work because there are not like you know there's no availability within the highquality avss maybe you start looking at at other value added services or maybe you just throw them into compound right or some other sort of yield generating protocol and then this thing starts looking you know less and less like an LST and Sam I know you've thought a lot about this this and you had a great piece um around like what a we call it like a thick LRT design could look like one day um so maybe I'll let you expand on that yeah totally um I mean this kind of gets back

to the uh the age-old staking versus lending tradeoff here right like you the lrts are either going to lose that Capital because they're they're not paying out that depositor base or they need to do something with it like that's either attracting more abss or lending it some how so they could put it in compound like you said uh the the piece that I wrote um along with Max it was our suggestion was well there's actually some interesting things that you could do with this excess Capital if avss are going to launch a token you want initial liquidity on that token that's actually really important so so that if you're selling your token in order to pay the operators you're not just uh uh dumping the dumping the price

um so you could create initial liquidity pools um and then there's uh this just kind of opens up a design space of like okay well maybe we want to um create some way of servicing duration within the protocol so we can we can actually say hey we'll give you liquidity for you know six months and that's kind of the the initial duration of your abs contract uh maybe we'll also try to um create some breadcrumbs so that our depositors actually make it into your protocol if you're a defi ABS um so uh maybe we have some some additional Services you know we have

these abss that uh that could enhance your protocol in some way you know there's a there's a bridge ABS that we have that's just going to make it easier for users to get around um so I think that's the kind of thinking that some of these lrts are are going to end up having um is just trying to make like a a nice you know full-fledged ecosystem that allows abss to to deploy and have have all the facilities that they need um and it's just like very comfortable for someone to say yeah I want to deploy my my D5 protocol here I get you know all the bills and whistles and like this is just gonna be a good option for me yeah I I would say on on the the thick side as well I I mean just going

back to the comparison of Lio uh there's two buttons on the Leo website one is to to stake eth and and one is to stake madic pretty sure like 90 plus percent of people click the first one um so you know as a as a Staker on on Lio or or a governance token on holder on Lio um it would be safe to assume that you know they're they're focusing on one thing and and one thing only um with with these lrts um you know as they vertically integrate um which you know can be done in in a very positive way for the ecosystem um you have to start to question or you know is this D you know structure focusing on the staking side the reaking side the ABS strategy

side uh the yield generating side on the defi side you know all this stuff starts to come into play and you start to wonder you know what part of you know the ecosystem do you exist in as as maybe just a passive reaker who doesn't want to be participating in all these other you know auxiliary things that they're building um and and who comes first um in in that ecosystem um and so I think that's something that you definitely have to consider when when choosing an LRT um versus you know staking eth out of Lio yeah I think this has been mentioned on the podcast before but it's worth kind of reiterating that there not that many abss right now kind of all lrts are like saking on as many abss as they can um but we're very uh

very early in this the development of this Market structure um so I think there is going to be a lot of uh additional infrastructure built out ways of of kind of doing this ecosystem building or finding ways to find to get exclusivity on on abss that is just not not there yet yeah Sam I want to uh just call out this piece that you wrote um from your seat at time wave and we can link it in the show notes and I would encourage everyone to go read this it was was is really eye openening for me because you sort of started to tease apart some of the different uh value proposition of uh there's kind of this like economic security question which is B reh hypothecating the collateral from one

set of operators to maybe another and there is a discussion about whether or not that is a meme or not or how real that really is and and then there's almost this like lending component or protocol liquidity component or whatever and uh a clear example of where you can see this in the wild today is if you look at um some of the early examples of interchange security uh over in Cosmos between a protocol like stride and the cosmos Hub where there's obviously there's this sort of consumer chain relationship which looks more like reaking that we're talking about but then also stride uh it's it's not just about making the strd token liquid they actually have they liquid staking protocol and they want to be the

dominant uh staked atom deror so there's actually a really core strategic reason for why taking some of the atom on the treasury and making it liquid should be a part of that agreement so you know that just just from my perspective that's a very tangible real um you know sort of additional value proposition to everything that we're talking about and just worth underlining and highlighting the difference there totally um yeah I so I worked on the this atom 2 uh paper and one one kind kind of secret there is like I I was never like a huge fan of cosmos's like idea of reaking or just thought it was like a more or less

commoditized Market I still kind of think that in the you know in the at the limit um but I do think so my approach to that was like okay well we need to it's all about the value added Services actually and you either need this like technical superc composability or economic super composability like you need to and that is the the tldr of Adam 2 is like you can do shared sequencer type stuff or you can do stuff that we're doing time wave which is like protocol and liquidity um you can create uh base asset uh liquidity like immediately upon launch um you can just kind of grow this defi ecosystem and provide incentives

for um that are going to be really attractive to um to deploy new protocols into um and that just gives Founders I think a a lot of assurance that that they're going to have um a functional defi ecosystem like you need you need some assets there to begin with and there's going to be users there on day one um and you could potentially do it in a kind of cost effective way um with protocol and liquidity um and we yeah we just kind of uh watch this play out with interchange security um and particularly during the PA market like everyone was pretty desperate for uh for liquidity in Cosmos and then it was very easy to pattern

match in uh when Ian lay launched and be like okay well people are like talking about how you know how this is going to be some crazy yield uplift for eth stakers like yeah you're going to get a big air drought but that's actually just not true like the reason that that s's want to deploy into this is is not to just give away the same amount of yield they're going to want to do the they're want to get get security in a cost-effective way and then they're going to want to like this is their go to market actually they they want users marketing and liquidity um those are like the main reasons that ABS is want

to deploy into igen layer it's because igen layer is like in the news every day so if you can build tools that just directly give ABS as what they want you know liquidity uh Point systems that uh that lead users into the usage of the ABS uh and I'm quite sure there's going to be a lot of like co-marketing opportunities like those are things that uh directly serve uh protocol deployment um you know the the go to market for an ABS yeah like Sam initially mentioned uh uh a lot of lscs that didn't have a lot of market share turned into lrts

similarly like if you were a cosmos chain or a chain in another ecosystem maybe even a rollup depending on what you were you sort of started transitioning into an AVS because that became the better goto Market with I sort of like getting a ton of attention yeah it's it's I mean it's we've used this comparison on the show before but sort of this happened with rollups as well where you know I'm not a one I'm a e rollup and uh there was some narrative by there there was I think mechanically actually one of the things that's attractive about rollups is it's basically a a nice little bridge for eth and liquidity and so there are some some part mechanical actual advantages some part narrative sort of advantages but

you know one thing that we miles and I uh laid out as a theme for the season is to explore some previous iterations of shared security like polka dot and early attempts on Cosmos as well and try to get an understanding of what igen lay has done differently and I think there are definitely some like mechanical changes that Igan lay has made like polka dot uh they they didn't really understand the like the demand profile they um you know they made their their equivalent of as's pair chains lock up for like two years you know you couldn't reuse uh polka dots there were all these mechanical things um but also you just didn't have nearly as much of the underlying asset there wasn't as much dot at that time and you didn't have as

many maniacal holders and it feels like one of what's happened here with igen lay a little bit is you know they fixed some of the actual um economics of this shared security implementation they also just tried it on eth where there's a ton of liquidity and holders and all that kind of stuff but 100% also just leaving space in the protocol on both sides like you right it's open on both sides and creating competition on both sides I think really helps to yeah I mean all these points Farms like they are farming the igen token but they're also farming the LRT token and the the ABS token so you're uh you're really just sucking Capital into into that

system and with polka dot um you know you touched on the duration aspect right which was kind of set at the global level which is it maybe the mistake there but it is interesting that the demand side still duration requirements um and you know as I think about it if I'm a depositor um if I'm willing to keep my Capital locked up in an LRT for a year or two years that gives the LRT you know the ability to to satisfy those like demands on the AVS side I should get paid more right in terms of the like out of the proportional yield than the depositor that says you know I like this

but I want the ability to to withdraw at any point in time um and right now I think you know we've touched on this before but they these uh very soft sort of duration agreements have been made but there's nothing actually constraining them at the uh either on the LRT side or on the Igan layer side right there could be some sort of time lock you know contracts that are sort of canonical right to the marketplace but I'm curious does anybody have any strong opinions on really where those contracts or where those sort of requirements should live whether it's at like at the LRT side or if it's Global you know contract set and provided by Igan layer and do you guys have any strong opinions on I guess who should

like the level of opin from the user side right um because I think it's kind of hoping that nobody with everybody like doesn't withdraw at the same time right now but feels like there should be some optin if you know the lrts are going to go out and make these sort of uh you know commitments different levels of optin are I think signs of a mature market and I think the because the Market's growing so fast and it's like relatively unsophisticated I I think like if the lrts were to add complexity to their protocol today I think it would be worse for them in general because most people want to see it as a black box where they Park some money in and then they then

they get more money out right so I think overall like adding more complexity or more buttons right like Clon said um you st stay eth on Lio and that's it you don't really think too hard I think at least for now until the market matures and like users ask for it it seems like adding complexity uh makes the protocol harder to build makes the the go-to market more complicated for users as well and generally just seems like because the market is so young it doesn't matter over time I think we'll see some of these fixed duration things that look a lot more like VC deals where um VCS provide a scarce resources and capital to to protocols um maybe in the

future lrts provide a scar resour which is security to the protocol and they have some sort of lock up agreement where you put your ethn to the lrd protocol for a specific period of time and then they offer that to to new avss for that period of time right so like I think those things will happen over time it's just that the market is so young that I think it doesn't make sense to add the complexity today yeah tot I mean Mike this was actually your your main C I really appreciate it it there's just kind of a fundamental tension right now between like what's easy and what the the market wants and kind of how you should be building these things with it which is like if one side

of the market is asking for duration you need to be able to like provide that guarantee by expressing that in the protocol somehow um I would hope that we can kind of back into that later um we can you know we can create like tranching systems and it to the user it kind of looks the same but there's like underlying Machinery that the LRT is incorporating that allows you to um allows them to to manage that duration or liquidity risk more effectively um if that doesn't happen then just things are going to blow up like I I'm relatively concerned about that um so i' that was kind of the point of this piece is like

to to just like shop around that idea a little bit like put it into the world so that some some lrts maybe uh behind the scenes like plug that in somehow um yeah so um that this isn't uh just um specific to reaking protocols as well uh too I I mean I think in the early stages of any sort of network uh this concept the duration uh is pretty uh prevalent uh pretty much everywhere um you know there every single protocol has some sort of foundation delegation program um there are agreements that exists up chain for for validators to be on the network for XYZ number of years

um until the the network uh you know is is sufficiently decentralized and and you know kind of the marketplace Dynamics are pretty stable at that point um I think with the added complexity of of you know who you want this duration from whether it be you know the LRT the operator the strategy manager um the Staker right you know the operator is not you know controlling the stake um Etc so that complexity you would probably want it simplified in some way to where you know I I think the the best thing for i l to do is ask these abss like what sort of duration do you want and from What actors and then put some system in place and protocol where they can get it uh with you know still acknowledging the

fact that maybe lrts may have a specific system to them for their asset and their Community yeah you could also just put it in the ethereum base layer I mean the so the rainbow staking is kind of going in this direction a little bit it's not doing like bonds per se but um some of the work I'm doing with the Celestia team you you could hypothetically make commitments for specific durations just as like part of the Native staking commitment it's totally possible um having it lower level means that it's kind of accessible to to a wider set of Market participants um you could also potentially uh structure things a little

bit more be like oh these are the buckets of duration that we want um and like everybody's gonna g to kind of adhere to that um I would love to see more experimentation here so I I would say you know I know uh you know not to be like a little bit of a Debbie Downer on this but I think there's this is an unsolved problem in banking r large right this isn't like an early challenge that protocols faces this is the fundamental challenge of fractional Reserve banking which is a duration mismatch on on banks balance sheet so I would I think it's sort of important to go into these sorts of things eyes wide open and say it would be really nice if okay I don't I just don't think retail is ever going to

there might be some very small portion of retail liquid resters that opted into some sort of cfd type structure but I I would guess even in a really mature Market that's a really small percentage maybe some institutional component of the market comes in that's more willing to do that but even that I would guess even at the Final End state is still like a pretty small part of the market one thing that you you might um that you might be able to do is create some sort of uh incentive I think it's going to be a really hard sell ever to just get people to lock their Capital up that you cannot take it out for six months but you can start to tier the incentives to keep them staked uh during those six months so here's a way that it works at

like uh this is a very common product for businesses and Commercial Banks today you can do something called a sweep you can lock up uh like all large companies do this some small mediumsized businesses do this you can lock up a certain percentage of your bank account in um in Bas in short-term treasuries and you can take that out at any given point but if you do you lose access to whatever the like four you know whatever it is now four or five% that you'd be getting so again it's not locked up but the incentive is to keep it locked for that whatever period of time you guaranteed and so that feels realistic to me but I don't think we're ever going to get some sort of full lock I mean ethereum already manages duration on the

validator side there is an exit Q so it true like these things do exist and obviously it's for institutional player but um that is a relatively simple way to um modulate duration in protocol guys maybe we want to transition to some of the leverage that lrts have so something that again miles and I have talked about actually over various season various seasons is the leverage that whatever part of the stack has direct access to the user or the customer and you know in a certain sense won layer as the dominant reaking platform has a lot of Leverage through the amount of deposits

that they control but lrts are sort of sliding in as this layer in between igen layer and and users and now lrts also have direct relationships with abss as well so maybe we could just talk about this leverage that liquid reaking platforms have in this ecosystem yeah and I might add just a one quick thing to that so yeah you know I would say totally agree they lrts have a huge point of Leverage by owning basically the relationships with each end of the marketplace um and you know to the like to igen layer they see a deposit come in from a LRT they actually don't know who

that end user is right they have to go and like ask these lrts hey can you give us like the addresses of the depositors um you know that's I would say like part of why you know they were not part of airdrop season one right so you've completely kind of like blinded them to to the end user relationship and at the same time we have uh more reaking competitors emerging right now right and if the relationship is really with a Renzo or an ether fi um if I'm Ian layer and I'm seeing you know symbiotic and Babylon and you know even the cosmos Hub sort of emerging um I'm probably getting a little bit worried that they're looking basically looking to become an

aggregator right um the AVS can get better probably better deals right if they are looking across if they're working with an LRT that has you know access to reaking from all of these different reaking protocols right and so it is an interesting moment in time because that hasn't quite happened yet and we we kind of assume that these lrts are going to be or most of them will be agnostic um but yeah I don't know if you guys have any thoughts on that and like if you were in the shoes of aan lay you know how how opinionated should you be how worried should you be um and and what do you do about it yeah I I mean I I think you know the thing that every single

protocol does have you know as a weapon or a tool um is is this token that they're going to release right so um symbiotic will likely release one Babylon will will likely release one to to incentivize uh the state to stay on um so there there is a giant lever that IG Lair will be able to pull um you know and likely you know one sees networks are live and there is a market for it it's I think it's safe to assume that I lay will be the largest um you know at at launch in terms of valuation and then you know and result how much you know incentives they can give up by inflating their token uh not an extreme amount um I will say like on the LRT

side though specifically I I mean maybe this is just me living in the US or you know previously working at an Institutional staking provider um but the marketing that all of these lrts had over the past year was I layer I layer I layer I layer um and you know you do have these depositors that have been here uh you know with the assumption that I put this eth in because you are going to manage my reaking positions on Nik layer um so potentially moving any of that stake off at least the stuff that they have currently um but I I think there's just some legal considerations there I don't know you know if there is a problem there uh but you know I would definitely want to you know think about that as someone that's you know effectively managing uh people's assets because I I

mean I think a good example is you know when unop went from B2 to B3 the user had to move it over um so I I I feel like you would have to at least have some sort of button you know in the system to be able to like accept uh this new risk reward framework um but it it could get done yeah I mean if I were IG lay I would definitely be thinking about it for sure um I kind of mentioned this before but I I think there's there's really like this Technical composability and economic composability that you have to work with like you can integrate the igen token into your ecosystem in a meaningful way uh you can deploy igen liquidity into your ecosystem um you can integrate uh specific technical architectures I mean

I da for instance if there's some kind of additional composability that you get by using igen layer and IG da and um that that could be attractive for folks um but I me this is why I'm doing this uh protocol in liquidity deployment system with time wave I think that's like a major lever you're going to want to deploy your token into this ecosystem in order to to kind of create like a liquidity Alliance kind of thing the does also this component of of centralization to yield so if ianl can can attract the top five avss right um even if lrts wanted to move off of off

of igl um to another another reaking platform there'd just be no incentive to do it right um so there is this component of if you can get the best AVS is uh through whatever means then it makes sense for the lrgs to continue supporting IG there on the other hand if like the best avss are somewhat um fragmented across different reaking platforms then I think this role of um the lrts as strategy managers becomes even more important because then like almost no user wants to like take their e split it in half and then move like half to symbiotic half to ion there and then like keep on monitoring these

things over time so if like there is some fragmentation then the lrts become even more powerful and I think like um they hold even more leverage over the reaking platforms because they're sort of like holding the E and and like we also mentioned previously right that like because I has a limited number of avss the the eth doesn't have something to do the whole time so like if now symbiotic comes in with their own set of avss then that that e will probably also go there instead of like just becoming liquidity for I avss so there's like a lot of levers here that like different parties can pull obviously like the best lever to pull is basically getting the best avss to come and work with you if you do that I think there's like

basically no no option but for lrts to support you for the most part I think there's there's another Dynamic here which is um I mean Lio and symbiotic already have this kind of some kind of relationship with each other I TBD on what exactly it looks like but many lrts are also trying to create relationships with L2 treasuries or defi treasuries to get deposits from those protocols um so you know this is a very different deposit base these are folks that maybe want um you know they do have demand for something over a larger duration uh they have larger uh Capital base that they're working with and maybe

they actually want specific ABS functionality out of the you know out of the LRT so they could they kind of work with them to to give them the the capabilities that they need um so I can definitely imagine um some kind of supply chain being created there between um uh yeah applications lrts and the the abss that that they're working with there's this other component of incentives as well uh Clayton mentioned that like all of these protocols probably will have tokens and they can be used as incentives um it'll be interesting to see if um any reaking platform themselves try to form

relationships uh exclusive relationships for these lrts the lrts have the user relationship AVS relationship and also the tvl right so like if you're one of the upand cominging ones maybe it makes sense to try to like get some tvl uh off of fan L onto your platform through like an exclusive relationship for either a part of the tvl on a on a liquid reaking platform or or all of the tvl there so like there's also incentives that can play out not directly to users but like incentives that go to these protocols potentially and maybe a percentage of those incentives flow back to users so that can be interesting obviously that has like legal implications of like Clon mentioned but I I I feel like um that is something that at least the the up

incoming reaking platforms will explore if not go ahead with yeah I I mean that's that's an important thing to mention in terms of how different appreciated these lrts can be as well right it's like you know some lrts have mentioned that they want to give these abs rewards and I.E the native token to you know the wallet addresses of these depositors um you know that's interesting for a lot of reasons but um you know if I'm uh holding an LRT uh and in a custodian or raking you know without an LRT and a custodian uh you have to hope that that custodian supports all of those assets or those things are just not going to enter your wallet um so this sort of abstraction layer in the

form of an LRT that you know I I put eth in I get the LRT I want to get rid of the LRT I get eth back um makes you know the use case for LRT is on on the institutional side or or you know anyone that's you know staking out a custody even more interesting than than LSD as well how big do you think the institutional part of the LRT Market is out of curiosity uh zero right now well not not zero um but you know I I mean I think there's a it's good to dis distinguish between you know us-based institutions and and you know large asset managers and institutions

and and APAC in Europe um but I I think at least in America there there's a lot of caution because um you know this is just naturally complex and like a lot of this stuff isn't laid out to where you know what's the reward rate what's the risk um these are like very very simple Baseline questions that if you don't know the answer to no you know institution in the US is going to deposit into um also the the tax implications of this uh becomes complicated as well right it's like if I'm receiving all these abs rewards and they just enter my wallet willy-nilly like you know it's taxable on receipt but if I can't sell it because my custodian doesn't support it um you know I could be effectively paying more taxes than you know the amount of money that

I'm selling these tokens for so I I mean it it's very very simple questions that these folks would be asking but but none of these questions have been answered yet um but on the LRT side if you know this concept of a strategy manager or like this strategy manager without a receipt token does become very very important in terms of managing the reward rate um th those people are going to go to the strategy manager uh in Trust of the strategy manager is working with reputable node operators and you know has uh relationships with custodians and Market Etc I mean there is also like the the blast kind of route right like you you kind of vertically integrate the L2 staking token raking and it's then

you're just by depositing into the L2 you're you're in their full ABS world you know that it's reaking the the shared sequencer for that for that chain and you're getting a little bit extra yield for that and in that case I would assume that the institutions just supported out of the box yeah the reason I was just asking about the institutions is sometimes that that word means different things to different people that could mean like us-based Blue Chip large funds uh you know realistically at this point that funds that are out like you know you're not going to get like a pension fund or something like that that's looking towards this like realistically you're talking about Kind of Blue Chip

like the poly chains or the paradigms or something like that I think another large group of this Market that probably is probably like earlier product Market Market fit too or just kind like whales maybe like internationally based whales like those 70 guys that live in China that used to be miners you know um that's like realistically the you know quote institutional segment of this Market um because it just it's hard for me to yeah it's hard for me to see a lot of this getting through compliance teams on the US side of it definitely will eventually but it's just going to take a long time yeah I mean it's been moving um but yeah as someone who worked at an Institutional staking provider I think what we when we Ed the term institution uh it was uh any entity that was

obligated to be in qualified custody um so then it's like making sure that that function is integrated on the qualified custodian side um and so if you can't get those folks comfortable with it you you are going to um you know For Better or For Worse depending on who you're talking to uh not going to have those folks as Network participants I mean but stride that they are a consumer chain on the cosmos Hub liquid staking is the application that they provide they are an LRT technically because the Hub is a reaking platform and you know gri I imagine has a path to getting institutional integration from

custodians and whatnot um so you you can kind of backd door it a little bit yeah I I I think the it's it's one of the value propositions of of I lay being on ethereum uh as well to be honest because uh you know if you want to cut the integration cost and the integration um you know time uh by you know four or 5x uh you release an rc20 token um compared to like a new layer one protocol guys maybe in our yeah we can start to wind down here and touch on this last topic of multi-asset um reaking and so I think a lot of people had built their mental models for reaking and liquid reaking purely off of

the existing Market structure of igen layer and restak eth and now that we're seeing the proliferation of other re or like very early days right but eventually we know other reaking platforms are coming to Market some of them are eth ecosystem based some of them are going to be salana or you know theoretically Celestia based and and KAC has come out and said we want to support all these different assets so I'm I'm just curious you know when you think about the introduction of being able to um use other assets outside of stake to eth I mean how does that ultimately end up changing things I think having multiple assets just like expands the the overall Capital base so the the most naive answer would be it probably takes down

cost for avss in terms of yield right if you have both Bitcoin and and E and all all other things remaining equal now you have access to like whatever like 1.8 billion 1.8 trillion in in in assets so like some holder base will be happy to like give you the the their tokens for security for like 4% yield versus like maybe with eth it was like6 so like for an AVS it seems like it would be strictly better uh assuming security is sort of the same across everything technologically and um maybe given assets that are more stable and like less risky to hold the the yield requirement is also lower

right like if you have BTC then like I'm assuming because Bitcoin has like less like or like no real yield on chain like BTC holders are likely to like demand less yield overall and also just because like they're happy to hold their Bitcoin for a long time um they they're just like okay we're taking a small amount of yield on their on their Bitcoin versus like e holders who might want slightly more uh because they're already getting like 3% on their on the eaking actually is a multi-asset reaking protocol on the market today which is tera's Alliance module um probably don't know about it or talk

about it that much but like it's quite cool um basically takes liquid staked assets which can be transported across chain and Cosmos and brings them into the Terra Alliance module um off uh it prices those assets kind of says I want to attract this much capital and I'm uh going to taper off my rewards and once I get close to that that level so it's much more of like a liquidity platform um but there is precedent for it today um yeah I do think it looks much different um we were discussing kind of prior to to the call here like the the financial asset that you get out

of it if you're going to to oriz that looks quite different I mean it's not indexed on one asset it's more of this uh amalgam between uh the different lsts that you're putting in it um but uh for specific use cases if you're just interested in in attracting the capital and using it more for these liquidity purposes uh or you're really trying to do it in a capital efficient way it it could be quite interesting yeah I I I mean I think the it will be interesting to see what what happens on on Babylon specifically for Bitcoin um I I mean like less than a% of the market

cap of Bitcoin uh is in WRA Bitcoin or any other you know derivative of Bitcoin on ethereum um but you know it's also concept between you know store value versus money and and you know does anyone want to be in the market of Burning Gold um I don't know like some people are in the market of burning money um or redistributing money but um there is a lot of Bitcoin sitting on the sideline that has likely been looking for some sort of um onchain yield solution where you know most of that market is offchain and and you do have to you know trust a counterparty etc so um but but you know to to Crane's Point uh it has no natural yield which you would then argue that this this vertical integration or or thickness on you know

making relationships with Bitcoin l2s or bridging that over um you know and creating a more unified product with the idea of like the base layer product being restak and that actually makes it more valuable than just non-st e non-state Bitcoin um could could be you know an attractive product to be offering to to you know ecosystems it's an interesting thing to Muse and reason about how depositors or potential rakers might actually feel about the underlying asset like I just realized a lot of my mental model for this was how I feel about my eth bag but crane you just made a really interesting point actually that I mean I've kind of had this forever bag of Bitcoin that I just was never really planning on

touching and I actually feel pretty differently about my Bitcoin than I feel about my like just as a hypothetical scenario a potential reaker has equal bags of usdc Bitcoin and eth and they have the opportunity to uh you know restake that in whichever way they see fit how are there the way that they conceptualize each one of these bags going to impact that and you know Bitcoin had this thing working against it for a long time I always thought in Bitcoin defi it's why I was never particularly excited about it is you know the the montra for Bitcoin is hle your Bitcoin never spend it you know if you live a good life and you're buried uh next to your cold your cold storage wallet like that was a life well-lived you know from the bitcoiners perspective and that actually is a good fit with

reaking in a sense um like now you can have your cake and eat it too because you can opt into these other ecosystems while maintaining that forever bag of Bitcoin so I don't know I hadn't really thought about it from that angle before but that's that's something that's interesting to consider I mean the inter thing with Babylon is that it does stay on the native Bitcoin Network right you really I mean you still do have to trust the protocol um but but yeah I mean I I guess the the question to ask is you know how many people are going to not do anything with their Bitcoin at all ever um but even if that's 75% you know you have $300

billion worth of an asset that can be rest I mean I could also see I'm I am GNA lock up my Bitcoin for a year I want it forever I'll lock it up for a year and I'll just get a voucher for like I'm not going to get a a liquid token I'll just get a deposit receipt that could work yeah there's some evidence the bitcoiners love blockfi there's I mean there are little bits of evidence that suggest bitcoiners left blockfi ordinals have been relatively successful I bet that number is higher than you'd think I bet it's higher than 25% but you know to your point even 25% is almost the entire market cap of ethereum so there you go guys I think we've got to uh wind

down here this was a phenomenal discussion uh from my standpoint thank you so much uh each of you for coming on and walking us through this uh Clayton Sam crane um what is the best way for folks to either follow you stay in touch with the work you're doing um anything like that everyone's always Sam you us I'm on Twitter HX RTS and you can find uh Skip and time wave through that so I'd encourage you to look there you can find me on zerx crane K uh also on Twitter I am uh menel Clayton which is my name in

Reverse um and you can find me at Rio uh and figment Capital which are both linked in my bio excellent guys this was a phenomenal discussion um really appreciate all of you coming on and yeah we'll have to do something like this again sometime soon yeah thanks for having us cheers guys than guys see you