The State of Liquid Staking, GOOSE-2, and Lido v3 | Hasu

Transcript

I think probably by that time, or like very, very, very likely by that time, you know, there would be more in force about Lido V3. It is the the staking votes, but it's also more than that. It's I think it's a very, very compelling and synergistic vision that turns Lido from basically just being staked ETH to this platform where anyone can create staking products on top of Lido infrastructure that also benefit from staked ETH liquidity and integrations. Hey everyone, this episode is brought to you by Uniswap Labs, who's launching the largest bug bounty program in the entire history of crypto. It's a 15.5 million-dollar program. This is aiming to be the most rigorously reviewed

codebase ever deployed to Ethereum. So, if you want more eligibility on the scope rewards payouts etc. just click the link in the bottom of the show notes tell them that I sent you. You'll be hearing all about Uniswap Labs later in the program. Hey everyone, quick disclaimer before we get into today's episode. Nothing said on Bell Curve is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guests and I may hold positions in the companies, funds, or projects discussed. All right, everyone, welcome back to another episode of Bell Curve. Today, I'm joined by friend of the pod, Hasu.

Hasu, how are you, my friend? Hi Mike. Doing very good. Thanks for having me. It's actually it's Christmas Eve, right? So, um very special episode. Yeah. Look at us, so dedicated. Just not resting, giving the people giving the people the content they want even on Christmas Eve. Um Nice. Recording from uh our parents' houses respectively. Very unusual, but Yeah, exactly. So, neither So, we're not on our So, we've caviated this episode already going in. We're we're not on our usual game. We're at our parents' house, so uh you know, lower your expectations here for the audience. It's Christmas Eve, but actually I'm really looking forward to this episode because this is paving the way for another episode that you and I are going to do in one or two months on Lido V3 um which I'm very

interested to unpack the details there, but thought it would be good to just do a review of the liquid staking uh ecosystem in Ethereum today and just do a review of Goose um and Goose 2. And I want to give you guys credit here. I think I know you are the leader of the Goose uh set of objectives within Lido and I think it's one of the I think more uh you know, better kind of strategic Yeah, just formal kind of goal setting objectives that I've ever seen completed in a DAO. And so maybe we could start from a high level actually and before we get into Goose and Goose 2 and some of the details about what Lido is working on, could you just give us a state of the union of the liquid staking ecosystem in Ethereum today?

Yeah, so um the liquid staking ecosystem in Ethereum. So I would say that um I think things played out a little bit different than people expected. So I think uh couple of years ago uh there was this assumption that liquid staking was just a better form of staking in general and it would be relatively smooth sailing from 0% market share a couple of years ago to you know, 60, 70, 80% until eventually all the stake would be liquefied.

And I think you can see why many people, me included, were believing that because at the time every every staking setup was basically looking the same. Right? So if you go back a few years, there was, you know, it was before the merge, the was the beacon chain was live, but you couldn't withdraw. There were initially only consensus layer rewards. And you know, there was no no way to differentiate on staking at all, right? And so um you had a very kind of homogeneous demand demand for what people wanted to get out and like a very homogeneous supply for how to satisfy that demand.

And in a market like that, staking is a commodity. And in a in a market that is a like a commodity market, if you can't differentiate on the product, then it's extremely hard to beat you, right? And so, the liquid staking tokens basically gave users access to liquidity and integrations at a time when that was extremely valuable. Um and then things gradually started to change, but not that much actually for a long time, right? So, the merge happened, then executioner rewards came live, which drove more rewards, being like overall like a de-risked staking and made it more profitable, so more

people started doing it. There were large inflows. Uh then MEV happened, but um due to proposal builder separation, so um you know, this effectively this other project that you know, I'm working on um with Flashbots in collaboration with the Ethereum Foundation and now many other people, the MEV rewards also were democratized, right? So, there was uh also no way to differentiate uh from an MEV perspective, either, right? So, even though some staking providers tried to do that, they were saying, you know, um uh you know, I I'm using a different MEV strategy, I'm somehow making more money, but none of this actually started to play out, which is a a testament to how well MEV boost works. That it was never

really possible at scale to get a bigger MEV reward than just connecting to the permissionless open MEV boost. So, I would say that's a huge success in that sense. But uh over time, uh I think things started to change a little bit, especially with the uh I think due to two factors, I think uh the first is the rise of re-staking. So, re-staking just the idea that um, you know, you have a staking set up, but you're basically like double pledging the stake to some other uh, activity.

Um, and and getting extra rewards for that, right? And um, you know, there was uh, EigenLayer uh, in particular and they basically allowed people to lock up um, their stake um, and EigenLayer did something that was very very smart. Uh, they didn't launch uh, a liquid re-staking token themselves. And now you could ask, "Okay, why did they not do that?" I think they really saw the potential to make and like, pardon my French, but to make like a super sandwich of like protocol incentives, right? Like, the idea that okay, if EigenLayer does the re-staking, but they also do

the LRT, they can only pay like incentives once on that. Um, but if they don't do the LRT and they have like, you know, almost, you know, there's like three, four different uh, LRT protocols working on top, then these are also going to launch their own tokens and like pay extra incentives on top and you have this huge like sandwich of points that people can farm. And that is exactly what played out, right? Like, people were effectively locking up and like we have to say, this was all like way before I mean, now today actually I saw that uh, you know, slashing was is is going to go live soon, right? So, there are no rewards or anything for re-staking,

right? It's basically it was like crypto's biggest point farm for about 1 year, right? Like, people just lock up uh, stake in a contract and they get points from EigenLayer and they get points from Ether.fi, you know, they get points from Renzo, they get points from uh, Puffer and whatever, like all of these LRTs. And so, you know, it led to basically, you know, people wanting to use their stake for different activities that did not necessarily require LSTs.

I'd say the other part of it is fragment like further fragmentation from the demand side. In particular on the like a little bit on the institutional side, I would say. So, like you always had, I think you always had exchanges, for example, that were you know, just had their own setups because they can they can really, you know, charge. Their users were very price insensitive and so they could charge much higher fees. And these users, they never had like an incentive to withdraw from the exchange itself. And so, if if centralized exchanges are strong, then that's always in favor of like centralized. That's always a a tailwind

for centralized staking against liquid staking. And so, that I think that there we saw like a bit of a resurgence there. And then in institutional segment, I think you had a bunch of players that were basically saying you know, you you're not allowed you can't use like a a decentralized LST. You can't use DeFi. You know, you need to use something that has this or that license. You need to use something that you know, is you know, has all of the KYC providers inside the US. And I think that is a narrative that worked somewhat well for a time. And it's one that is very dangerous right?

I would say, I mean, it's basically an attempt to to kind of capture demand through like regulatory regulatory capture. I like just trying to to meme a narrative into existence that that says, you know, there you need to follow all of these rules that only we can follow in order basically to to give yourself a leg up against more decentralized protocols. Mhm. Okay, so if I had to sum everything up there then you know, rewinding the clock back up a couple of years and I I want to get your your take on what the temperature is around just Lido and staking centralization in general because I feel like at various times, when Lido first launched, there was a very a positive push towards it because it

was seen as a potential counter countervailing force to centralization from staking operators like Coinbase, right? It It was this big concern that the uh the exchanges were going to be just the largest um stakers on networks like Ethereum. And then, you know, because of the product market fit that Lido found when the merge, like pre-merge, when there was a beacon chain and a separate proof of work chain that was operating and there was this huge gap in terms of when you uh staked your Ethereum and when you could actually get it out, you know, Lido was eating a lot of market share and then kind of some members from the Ethereum Foundation started to get a little bit worried about Lido, right?

There was kind of like the Lido threat. Um and now it's interesting that there's a new uh segment moving into the market, which is a more institutional segment. There's, you know, we're all There's obviously been a huge shift in terms of the regulatory regime in the US and people are starting to ask, when are we going to get an Ethereum ETF that has staking, right? And then which um LSD are we ultimately going to end up using here? And so, it seems like there was kind of the initial product market fit of staked ETH Lido. Since then, there are new entrants that have moved into the market that have fragmented it quite a bit. There's an institutional segment, there's a restaking segment. So, I think Lido's market share is down relative to where it was even a year ago.

Right. And then there's this there's this interesting looming question of a more institutional presence within uh staking. So, may- maybe we could actually start from the institutional side of things and yeah, I would love to get your take. I mean, do you have any predictions or, you know, any any any thoughts on when we might actually get a an ETH staking ETF and then maybe we could talk a little bit more about what this institutional customer looks like in the world of staking. Yeah, it's a it's a very good question. So I am I don't have any inside track on like when a staking ETF is going to launch, but I think it's clear that it will because it's it's just a better product, right? Like between holding ETH and holding staked ETH like holding staked ETH is just you know

it's basically that like higher yielding. Like it's it's almost like you know very very low risk like yield on on top of that, right? And so I think the the line is probably going to blur anyway because when you look at ETFs today where you know you have this you know S&P 500 ETF, but under the hood it's also trying to generate some extra yield on on those holdings you know that it has on the underlying for example by lending it to short sellers, right? That would be one thing that I think all of the physically held ETFs do or most of them. And the the reason is just that they it allows them

by making a little bit extra yield on the back end it allows them to lower their total expense ratio on the front end to customers and thus get more inflows. And so all of the ETFs actually compete on providing like ETFs really really compete on on price, right? They they really compete on like the the cheapest fees that you can offer to users without putting them at risk. And so the ETFs themselves are very very strongly incentivized to push for staking itself because it it just gives them an advantage like something else to differentiate on and make make more money.

And so one thing to understand about these ETFs is the the fund currencies always in US dollar. So, when you go, you know, and you buy, you know, ETF with a million dollars, then they go out and actually buy ETH or like buy staked ETH to to back that. And when you sell the ETF, they actually uh you know, need to take back the shares and then they need to sell the underlying in order to give you your US dollar back, right? And so, what we are seeing here is when you have staking happening uh in an ETF, then the size of the door actually matters a lot.

Right? So, if you if you're if you don't use an LST, using regular ETH, then you have to unstake from the beacon chain every time. And depending on the size of the queue, it can take a sizable amount of time. And you know, you need to satisfy these withdrawal requests as they come in. And so, what do you end up doing? You end up staking a very low percentage of your overall ETH in the fund. And so, what what LSTs are doing for these ETFs is they increase the size of the door.

So, you can stake a higher amount of ETH from the fund. And thus generate more rewards and offer lower fees for your users. And so, that is why I think, you know, LSTs and ETFs are actually a perfect match. Okay so I completely agree with that. That's really interesting. bit of nuance. We're jumping the gun a little bit on some of the later parts of the conversation where we get into the weeds, but could you describe, you know, my memory is we did this liquid staking season about a year ago with with Miles.

By the way, if folks haven't listened to the episode that that you and I did together, definitely go back and listen to that. I can link it in the show notes, but my my memory is that based on the way that the staking router is constructed today, it makes it a little bit difficult from an institutional perspective to actually stake with an LSD and you know, we're going to get into the goose two right up that you did but I know there's a there's a concern from your end there's definitely some advantage that some of these more centralized custody solutions have a little bit of a leg up in terms of winning the the market for an East staking ETF. So he used to describe for listeners so they have a little bit of a the understanding of what the staking router actually is in its current construction today. Why

is that maybe not ideal from an institutional setup and how could that like change going to the future? Right. So the the staking setup the staking router you know, when eth is coming in and it's sitting in the in the buffer then you know, basically what the staking router is doing it's saying you know, where should the this eth be staked with what module? Okay. So the staking router the way that it works when there is you know, money coming in by someone staking with Lido then the staking router decides where that money is is going to and right now there are three of these so-called modules in Lido. So there's the curated set which is the OG set that Lido launched with these are all

basically you know, permissioned professional node operators. Then you have the DVT module and so that's a module that that uses this new decent distributed valid um validator technology that basically allows you to split a validator across many parties and operate it like a multi-sig. So that one is is I think this one's become going to become like table stakes in the future and like this technology just allows you to really reduce the slashing risk and improve kind of the operating performance of your um of your validators.

And then the third one is the community staking module and so if you you know, if you Do you like rocket pool and in the I think in the beginning we were talking a lot about Lido versus Rocket Pool like Lido being kind of the the more scalable like permissionless operator set LST and then Rocket Pool being the like more permissionless one where you know you were like node operators had to post a bond then they can you know get basically delegation on top of that bond to run more than one node validator, right? And so what the DVT is doing um it's doing uh you know our our spin on it that that in our mind

like is improving on some of the the problems um that that other staking systems like like that have permissionless staking systems. Um and yeah you can like already today you can see that it's I think it's at 1% or 1/2% and it will be was just voted to like increase it to 2 or 2 and 1/2% and uh yeah um so the idea is just that you like anyone can become a node operator in Lido, right? So like as long as you have some bond of ETH yourself and like we don't care where you get that from, right? Like you can

borrow it from someone uh as long as you have um some ETH yourself you can get really high leverage on that by getting more ETH delegated from Lido. You don't need to hold any extra tokens. And you you only need ETH. You don't need to hold any LDO or any other token and like right now the participants in the DVT set uh I think making like 6 to 7% on the stake. Right? So the the regular staking percentage the staking API I think is like 2 and 1/2%.

So they're making more more than twice that because of all the extra ETH that that they're getting. And um they're also enjoying the like all of the benefits of of, you know, like reward smoothing and MEV smoothing from really like their rewards being paid out of a like a much bigger set of operators rather than, you know, only building a blocks maybe every, you know, once every couple of weeks or months or like depending on how big your setup is. So, yeah, anyway, so the staking router is like the thing that connects all of these modules together. And similarly also on, you know, when when someone is withdrawing then the staking router would say, "Okay, like who do we need to like request the withdrawal from? Like which which of these modules, right?" And so,

basically the staking router can be programmed to be opinionated about what the node operator set should look like. Like right now, uh, there is an ex- strategic imperative to increase the size of the DVT set because it's making Lido and Ethereum more decentralized. And so, when there's a withdrawal, it would come from the curated set. And if there's a deposit, it would go to the DVT set, right? And so, another DVT that's CSM. And so, um, yeah, that's, uh, that's how that works today. I Sorry, I forgot like where you were Yeah, the original So, the the original question was the institutional angle here. And by the way, uh, just as a point of clarification for the audience here, I think also that the

reward smoothing that you were talking about is this is one of the benefits of pooling stake. So, if you are if you were a solo a solo staker or something like that, the chance that you get, you know, some big like MEV, uh, you know, execution layer reward is is very low. But when you combine that with a bunch of other stakers and you uh, you kind of you kind of average it out and and divvy it up to everyone, then on average everyone sort of ends up winning, which is part of the part of the incentive to do run staking pools in general. Uh, so I just make sure the audience understands that. But my the the reason I think this intersects with and this is kind of my question to you and I only easily remember this is that from an institutional perspective, there's an

imperative for to know who your the validator that you're staking to is. And the way the staking router works today, right, is some amount of ETH comes in, there's like almost a higher level allocation, which is this percent goes to the the white-listed module, this percent goes to the DVT module, the community module, etc. And then it just based on some sort of um you know, predetermined uh set of rules, it just gets divvied up to the white-listed set, right? And so, you don't necessarily know if from an institutional perspective who which specific validator you're actually staking to, which could be problematic.

And that's also why, you know, I think there was a concern from your from your perspective in Goose 2 that some of these more centralized setups might actually win the institutional audience. Am I remembering that correctly? Yeah, I I yeah, you are. Yeah, even in the original Goose, there was a proposal that was called BYOB BYOB, which stood for bring your own validator. So, the idea that like you can uh you know, you can stake with Lido, and you can you know, decide who you want your validator to be. Um although I would I would say I think um like we would see there's a lot of connection between Lido V3 and this original idea behind the BYOB the BYOB.

Mhm. Um but at the same time, uh I think staked staked ETH as it exists today is already a perfectly fine product for institutions. And we are getting a lot of validation on that. So, I think it's always like important to separate a bit of like what is fact and what is fiction Yeah. because there are so many incentives to basically uh like create a narrative, for example, that like oh, you need to know who your validator is. Like your validator must be KYC'd, right? Mhm.

if that actually catches on, I think it is it it's terrible for Ethereum, right? Because then, you know, there's so there's going to be so much ETH staked from the US and the EU is probably not going to be very far behind in terms of regulation. Um and then having all that behind like a KYC wall, I I think that that would be really really bad, I think for ETH. And so, fortunately, that's not actually what we are seeing. And so, um the the estimates that I have seen is that 25% of staked ETH users are actually already institutions.

Hm, so yeah, uh yeah, so you have you know, you have crypto funds, obviously. Uh you have now increasingly structured products um that are being issued uh on top of staked ETH. Uh especially in Europe. Um you have uh you have regulated banks um that use it. And uh you know, because Lido's now supported by at least one qualified custodian. And so, you know, all of these have basically done their own risk analysis, like their their own legal analysis, and and and said, you know, stake staked ETH is is perfectly fine as it is. That's why we feel like very comfortable using it.

And what we uh I think what we are seeing instead is that um what matters way more is having the best liquidity and having the lowest counterparty risk. And um yeah, that is exactly where I think uh the could decentralized LST can shine. So, I'm going to give a uh little bit of a uh shameless self-shill here, but Blockworks actually did a a Blockworks Research did a a survey of institutional stakers. Uh so, this was unlocked by Obel and the Liquid Collective, but also supported by our mutual friends at Steak House. So, shout out Steak House, but I'll link it in the show notes. And and and you can go and it's unlocked and you

can go and peruse, but yeah, we basically just surveyed a bunch of institutional stakers and found exactly what you just described, liquidity, kind of party risk as being um you know big drivers for where institutions are deciding where to stake. Yeah. I I want to make sure I I want to get into this this last point on the broader LSD and sort of Ethereum ecosystem scape before we get into goose two. And one of the the the last thing that you outlined in in goose two here as as a big environmental factor which has changed for Lido is this kind of issuance debate that's gone on. And you know I don't want to get too far into the weeds on it. You got you and you and John did a really great episode on uncommon core with Ansgar and Casper on this. We

talked about it on this show many times. I personally hosted a couple of debates on this. But basically there's this big debate around the Ethereum issuance end game and should we cap stake and you know it kind of ETH money-ness versus stETH and all of that type of thing. And so could you just give a really quick overview? We'll link some of the other episodes in the show notes so people can go and go deeper if they're unfamiliar with this. But Yeah. Um could you just give a quick overview of that debate? And then honestly who is winning? You know where where are we shaking out here? What are the ultimate timelines? Like when are we going to hear a decision? What's this what's the state of this big debate that we've been hearing about for over a year now?

Yeah, it's a good question. I think uh I think that ETH issuance debate basically is about like what should Ethereum's issuance be and are any changes needed to it? Like are we on a good track or are we on a bad track? I think that's roughly like the motivating questions for this. Um when you look right now, you know 25% ETH is staked and like at the time when Ethereum's issuance policy was set like 2 years before the merge uh folks were very concerned about like how do we even get people to stake at all?

You know like are we are even got enough people going to stake in order to um to basically like secure the network. And you know it was it was it was a different time. I I think people outside of the protocol design were having like a more realistic take on this. Um I think like it was also like I mean with LSTs it was the same thing, right? Like the fact that you had the beacon chain launch uh you know, more than a year before the merge. And uh it was like it was forcing people to lock up their stake.

Many have warned about the like that this was would create a huge incentive basically for, you know, people to stake through exchanges, like centralized exchanges, right? And they would soak up a ton of ETH in this like you're basically giving a free handout to centralized exchanges because they can hold they can hold the validators on their balance sheet and still, you know, allow users to trade with it and to collateralize it, etc. And I I I think that that was like a huge blunder that like we'll have to say fortunately didn't hurt end up hurting Ethereum very much.

And it was I I I would still insist it was due to like in large part due to Lido. I think creating a decentralized alternative at this time that I think a disaster for Ethereum was prevented. But back to the issuance debate. So I think there is uh you know, the same way that that for example like Georgios and I thought um that, you know, there would would be more like smooth sailing in terms of like one LS like LSTs the most dominant form of staking the best form of staking and like would crowd out other forms eventually.

I think that uh this argument was quite convincing to um a lot of Ethereum researchers as well. And they started to see uh they started to see, you know, both like high staking rates as a problem in general um because it creates this additional dependency for the Ethereum network and if the asset and also like particular I think LSTs within that context. You know, that that that like if if one entity like was to handle a lot of the staking for Ethereum and that can create additional uh centralization risk.

I think on the other side of the debate uh you have more um I mean you have I think more like industry folks, I think from the staking industry who are very familiar I think with like the incentives and the cost structure and like interestingly they will tell you the opposite, right? Like whereas maybe the proponents of issuance change will tell you if we don't uh lower the issuance and like cap it somewhere then the uh staking outcome will be very centralized. And you know, the industry people will more tell you no, if you if you low if you like cap it too low then the outcome will be very centralized. And their argument is um the argument is that when you cap

staking very low then basically you will like really magnify the competition on price. Make like a really small staking market. um And you know, it's uh and then the the more centralized lower cost providers will really crowd out the more decentralized providers and it would be a very bad outcome for the validator set. And I think it's very hard. Like I see myself as more in the middle of this debate. So I I'm neither like very strongly pro nor against doing it. Uh I think because I see myself in the middle, that's why I'm you know, it's interesting because like I don't really care if it's changed or not.

But because I don't care I have to argue against it because I think things like in in public blockchains like uncontrol like these kind of big controversial changes should be very rare. So I wouldn't be mad if it happened, but I think the fact that it's not like it doesn't seem like a very important thing or very like good thing or clear thing to do, uh that makes me want to not do it because I think it's just yeah, creates a very a lot of like unnecessary uh friction.

And a lot of people have pointed out that it's you know, I think when John and yeah, we can talk about this because it's a super interesting topic, but the idea that like when when when, you know, people like Max Resnick and John and others were putting this Ethereum Northstar debate, uh they were making this very popular. I think a lot of people started to make the connection to issuance, which is why we keep going in circles about issuance. And you have basically industry people asking, "So, what are you trying to achieve?" And like, you know, like, you know, some EF researchers, you know, asking, "Okay, like, why don't we try this curve?" And like, "Okay, but what's the goal?" You know? Like, what are you trying to achieve? Because if you can agree on the

goal is, then we can have a better debate about how to get there. And I think people started to connect this to this Ethereum Northstar debate more, and they started to realize, "Hey, we don't really know where we are going with Ethereum." And when we talk about issuance changes, are we doing this for the asset? Are we doing this for the network? Because these things, you know, they would have very different implications like one way or the other. Yeah, there's you know, that's such an interesting debate, and I know there've been a lot of podcasts and debate on Twitter and back and forth, and I want to I want to end the episode and diving a little bit deeper into this with you.

There was a So, I was actually there at Devcon when Justin Drake gave his talk about Beam Chain, and I can like I took a photo of it. Uh I'm not going to be able to find out cuz it's on my phone, but there was a where he sort of outlined the priorities of Ethereum. And it was it was super interesting because, you know, he kind of did P0, P1, P2 uh across three different categories. And at the bottom of each of those categories were, you know, I just remember at the top of one of the categories was adjusting the issuance policy. And at the bottom was uh single slot finality or just incre- not even single slot finality, it was just, you know, decreasing time to finality.

And it was the same thing for, you know, the one of the other P2s was, you know, going to 4-second block times as opposed to 12. Right. And, you know, I remember everyone was all up in arms about the 5-year timeline, which is actually a 4-year timeline and whatever. Okay, that's long, but I don't actually think it was about the timeline, at least from my perspective. It was The reason I would trace it back to this North Star debate is I think people would have been fine with a longer timeline if the priorities had just been flipped almost. Um and I know everyone wouldn't necessarily agree with that, but that's why I think there's this North Star debate that's that's raging because people are people aren't really debating the same thing.

It feels a lot like ships passing in the night, which is Yeah. in a debate extremely frustrating, which is why I think everyone's frustrated. Um but uh Hasu, give give me your your sense on, you know, on this issuance policy because this is something that's been talked about quite a bit. Where are like if you had to if you had to guess, which side do you ultimately see winning this this debate? And then when do you think we get a resolution here one way or the other? Yeah, I think um I first of all completely agree. Like it's very weird to see these things up there without having like some kind of debate about well, what what is the goal? And so I'm very happy, like very thankful, like some people realized this and were, you know, like someone like John is like taking the

time to write this up and basically verbalizing what a lot of people may be feeling like subconsciously. Like why does it feel like the other side is not listening to me? Right. This feeling. And, you know, it's because we have we don't we don't have the common ground established that you need to have that you need to have an actual like productive debate about something, right? Like we have different goals and so we're each proposing different initiatives, different changes to Ethereum that like they are going in different directions. And then how do you even compare these things, right? How do you decide what goes into the next hard fork or what we should prioritize on a one-year timeline or like a three-year timeline? It's not possible, right? It becomes a basically like a beauty contest. And I think people have this feeling that, you know,

if uh governance can be a bit of a a beauty contest. And it's because, you know, that you lack basically like the comparability of proposals. Because there's no common dimension to compare them on. And so, do I think that an issuance change is going to happen? I think it's very hard to say. Uh I think I'm more leaning no because in order to make such a big change, you need a lot of activation energy. Yeah. And it doesn't look like uh that energy is is there. Like it it There are folks who are very in favor, but they all work at the Ethereum Foundation. Like not everyone at the Ethereum Foundation is in favor of changing the issuance, but pretty much everybody who was in favor

is working at the Ethereum Foundation. Mhm. Um and I think the community reception has not been good. You know, not maybe, you know, it's like I don't oppose the change on the basis that it's it's a bad change, but it's just not maybe the right priority. Um and I really like more, I think, the energy that we have been seeing the last couple of weeks um about I mean, there was a really good presentation on, you know, uh what are the low-hanging fruits to improve Ethereum's execution layer, for example, right? And I think that is that is what I I really love to see. It's the idea of like, you know, these a lot of

these changes that you should basically be you know, be able to trace them back to how does this improve user outcomes? Right? And I mean, I I get it that Ethereum is very like gung-ho about solo staking. I mean, solo staking is very important to protect Ethereum censorship resistance. Um but solo stakers are not the main users of Ethereum, right? It's it's one stakeholder, basically, that you need to manage.

Um but like most of the things that Ethereum is working on, they should be you know, you should be able to trace them back to like very real things that improve like on the ground for users of Ethereum and application developers on Ethereum. And I think in these two areas, we have seen just way too little like thinking about what these groups want. Um and how we can make their life better uh on on if layer one, right? And I think that's uh there's a there's an opportunity here, right? So, Konstantin Lomashuk, uh one of the founders of Lido and um founder of CyberFund, he was he's been tweeting a lot recently, which I love to see, but one

of his tweets was, you know, maybe there's room for a second Ethereum foundation. And this foundation actually is like more application-focused, right? Because there is a lot that you can learn from what actually are the main use cases on Ethereum that people want to use, and what like what do those apps need? Like almost like an oil core dev score, but for the application layer. And I think that's a fantastic idea, right? Like I I just to to source these ideas and like put them on the table and like make people feel heard and like talk to them and and understand what they need. Um and I think there is a really growing understanding that like 95% of TVL on Ethereum and like 99% of the transaction activity

is actually related to DeFi in some shape or form. And like this is really the killer use case. And which is something that I think um maybe Ethereum leadership has been a little bit like uh like you know head head in the sand kind of vibes about, right? As in like this is not maybe the kind of use case that we want. Although even I don't disagree with that at all because I think there's very few ways to like make the world better than by strengthening property rights and like improve the way for people to trade uh and engage in like, you know, trustless trustless cooperation you know, at this kind of value layer. So, I

think DeFi is extremely world-changing. And John was saying in a in some other podcast the other day, but I remember the quote because I really agreed with it just that somebody you were I think was asking like has DeFi why has DeFi like become so boring or something like that and it's like what's what's boring about it? Like the there's only, you know, there may only be like a few kind of primitives. And you don't like invent a new primitive every year. Right? There's only like so many primitives that exist outside of DeFi in in like in TradFi and so on. And just the way that like the economy works. But there's so much room to make these better and like, you know, they are each

one of their own is like trillion dollar value like trillion dollar outcomes, right? And there's so much here to like improve and refine and and master and like so many dimensions. I feel like this is more the mind mindset that people should have. You know, like people see Uniswap and Uniswap is like on top of the like DEX leaderboard for a long time. And somehow they think uh you know, you can't disrupt Uniswap. Like, you know, like um like DEX trading is done. Like what what is there to improve?

There's so many things to improve, right? And then they're then they're surprised and like, you know, two years two years later you know, stuff is releasing like, you know, a new version and and it's it's making like very big improvements. Now like, okay, why was this not invented by someone else, right? So I think people have Yeah, I think it's a mindset problem in a lot of ways. So okay, I was going to talk about this with you at the end, but now I'm just you brought up a bunch of questions that I have. So okay, on the where do you think, you know, so we just talked about activation energy for the issuance debate and your take would be probably not, right? Because there's some amount of natural inertia that happens and it's just very difficult to overcome. Where do you see this whole Ethereum North

Star debate shaking out and you know, if I had to broadly categorize the two sides, there is the, you know, John Charbonneau and maybe Max Resnick, not 100% aligned, but I think Yeah, effective there is to basically move some amount of activity back to L1. And maybe we could even say, like I've been thinking a lot about how much really of the pie here is actually DeFi and especially like how much how much high margin fees does DeFi generate relative to other categories? I think is an interesting debate to unpack as well.

But there's kind of this push to I think John's perspective would be just make some advancements to, you know, credibly signal that you're interested in scaling the L1, which is also beneficial to L2s. So there's this new pump the gas way that validators can signal that they want a higher gas limit. We're trying to go to 36 million way right now from 30 million. And just credibly signal that we want shorter block times overall. We're not going to go to two second block times overnight, but say go down to eight seconds or something like that. Maybe in And then the other perspective is we should almost go the other way. And actually there there were I think there were actually are still people that have this perspective of wanting to elongate Ethereum's block times and actually make it even more difficult to do transactions on the L1 to incentivize

people to move to layer twos. Where do you see this ultimate debate getting shaken out? Like where do you think we end up in a year or two? Right. Okay. Well, I have a few I think I actually I feel pretty confident here. Okay. In in my takes. Um so, I think layer twos benefit tremendously from having a strong layer one. Uh like you would not be launching your layer two on Ethereum if that like there weren't a ton of assets on ETH layer one.

Yes. Uh that you can get through the trustless bridge, right? Like there's no reason to make a trust like a validating bridge to Ethereum uh if you don't if you can't tap in like Ethereum's user base and like Ethereum's TVL. It's just like nobody cares otherwise, right? So, it's those two things that people really want. And so, first of all, like the layer twos should be heavily incentivized for the layer one to improve because the layer one is in a lot of ways the the source of a lot of their activity. And this may change, right? So, I think it would be interesting. I haven't actually seen the numbers like how much of the assets is like coming from ETH layer one versus it's maybe natively issued on on

layer two plus like, you know, related activity. Someone should look into that. I think that would be very interesting. Yeah. Um so, that said, like I'm a DeFi user and I I'm using the Ethereum layer one like most of the time. I'm not really using ETH layer two very much. Why? Because it's not like for the the amounts of money that I'm using for the transactions that I'm making, layer two's not secure enough. It's not liquid enough. Like those two things, right? So, and they are very related, right? Like if layer one has this like insane like security and liveness uh from it, and for me, it doesn't matter that my block time, you know, is maybe 1

second instead of 12 seconds. Like 12 seconds feels plenty fine when you're like I don't know, making a trade or borrowing money or or something like that, right? Or just moving assets between like different yield uh opportunities and so on. Um Okay. So, yeah, I I just see no alternative to E flare one. I think a lot of people see like think very similar, right? So, I think uh high-value DeFi has has had a very tough time, honestly, like getting to layer two, right? And I think you see you see very little of this moving from the layer one to the layer two because

of these demands that users have about the security of the chain. I think most of the TVL or the DeFi activity and the DeFi TVL that the layer twos are capturing are like net new activities that were not actually possible on the layer one. And so, I mean, if you if you look at uh I don't know, exchanges. I mean, what was the um exchange the perp exchange that that did really well on um on Arbitrum before there was Hyperliquid? Um GMX. GMX, yeah, exactly. So, I mean, there was GMX and I mean, that I think that that kind of LP strategy couldn't really work uh uh on E flare one.

Um Uh and then you had Hyperliquid and like I mean, it I think you have um these breakout use cases that I think really start like really strongly require you to customize more of your stack, have faster block time, and those things. Um and then you have like net new use cases. I think base in particular, you have the the meme coin trading, which yeah, like UX matters a lot here. Balances are really small. Um So, and that cost matters, right? Like this is kind of, you know, speed, cost, and and not a very high security demand, so it's very perfect to do it on base.

Um and then the AI use cases, I think, like similar-ish, right? So, I think I think a division of labor like that is actually very perfect. I think like for Ethereum to handle like the high-value use cases. Um and then for layer twos to have like, you know, a mix of like DeFi that is net new that is only made possible through much lower cost and or much better UX. Plus like these very like net new activities that are most of them pretty like UX {slash} cost sensitive because they are all targeting a more retail-y audience.

Um so, I think that's that's that's great, but it would be long-term more difficult for these layer twos if Ethereum layer one wasn't improving in lockstep and was also doing stuff to like attract more TVL and more usage to the ecosystem, then you would see way more chains just straight up like make their own layer ones or maybe go to I don't know, make a trustless bridge somewhere else, I think. Um And yeah, I mean, how can Ethereum layer one do that? I think I'm in a proposal to increase block time in my mind is pretty crazy. Like I would not support that.

Uh it's like I don't know, like I mean like why did we want that? I mean I think it the the main reason there was like if you increase the block time, well, you can finalize the blocks faster. Like you can like arrange the the like duties in a in like somewhat different way. But um that's like that's not something if you go back to like tell me how your proposal improves real user outcomes. It's not even on the chart. Like I don't know. I don't know how it improves that, right? But, it would make the chain less usable. So, that's clear, right? Like, I think with latency, the thing is if you make latency too high, the chain

becomes very unusable, and then it doesn't matter that it's more maybe more decentralized or something. If you make it extremely low, then yeah, the system you will not be able to decentralize it. And so, there's a sweet spot here where you want the chain to be fast enough so that it can be a good user experience, but not so fast that um it becomes very, very geographically centralizing. Um because all the things are happening so fast that there's this very big advantage to co-location. Uh but, I mean, definitely we have a lot of empirical data from MEV that like 12 seconds, like we can go much faster.

Like, you could you could probably increase uh like, you could you could lower the block time to something like 4 seconds and probably still do all of the things that we're doing right now in 12 seconds just by arranging them in a different order. So, yeah, I'm pretty optimistic that over the course of maybe 3 to 4 years, uh a change like that would be possible if the um if the if the political will, I would say, is is there. Mhm. Okay, so if I had to sum up Huh? Mhm.

Oh, no, go ahead. So, if I had to sum up basically your perspective here is you think there's going to be some incremental amount of scaling on the L1, which is going to improve the environment for L2s in general, and that would be potentially shorter block times, but also I might be paraphrasing or editorializing a little bit myself here, but a shorter time to finality. Um and that's going to leave some amount of DeFi activity on the L1, and then maybe some of the Sounds like you view it as almost two different customer segments where there's kind of like the high value use cases that stay on D5 L1 and then maybe lower latency or um uh or just like lower amount sort of trading moves up to L2s in general. Is

that a rough summary? Yeah, absolutely. Yeah. And I think you there's more you can do, right? It's not just about speed. I think there's plenty of low-hanging improvements for the layer one that you can do. Like there's a lot around the account model. Like the way that transactions work. I mean, to me it's it's crazy that in EIP-1559, it's still not possible for the block builder to pay the base fee for the entire block. It's I mean, it's like such a low-hanging fruit change. Yeah. Uh it's like it makes gas would make gas sponsoring so easy for folks. Like you don't no longer need gas like even your account and stuff.

And um sometimes I wonder if like if you're like you know, making more friction in the UX deliberately because you know, some people want to maybe boost ETH the asset. Like oh like yeah, we want people to hold ETH and use it for fees and so on. Like I I don't think it's a motivation for many people, but maybe some. So like I would I think um And this is like I mean, you understand these if you just talk to application developers. Like what challenges do they have and to use us? Like what are the things that they struggle with on Ethereum and you you will you'll hear a lot about like UX issues, I think. Um like um smart accounts are very expensive to use on Ethereum layer one. And people and they have you know, some drawbacks. Like

people want to keep using EOAs, but there's a lot of things you can't do with EOAs. So if you if you can make EOAs more programmable and give them some of the benefits of smart accounts, I think that's another area, right? I think um Yeah, I think these these would be two low-hanging fruits that I think we can realistically do uh in like a I don't know, like maybe less than two years. Okay. Also, I've got a follow-up question for you here and then I want to return back to liquid staking and goose too cuz we wandered a little bit, but this is just very interesting cuz I just want to keep getting your opinion here. So, I actually wanted to What do you So, my understanding of the trade-off here

and why this makes sense from a roll-up centric roadmap standpoint is that Ethereum is comfortable forgoing some of the execution sort of fear like ordering fees, right? That's going to happen at the L2 layer. And in exchange what ETH Ethereum the network, but more so ETH the asset gets for that is more people on the layer twos where there's, you know, theoretically net new activity that wouldn't be occurring before are using ETH and so ETH the asset gets some sort of monetary premium liquidity network effect, whatever you want to call it.

And so, you know, my question to you is, do you think that that's ultimately going to play out and come to fruition? And you know, we were you were just sort of I I actually thought it'd be interesting to walk through This is from L2 Beat. And there we're looking at Arbitrum Arbitrum here. So, Arbitrum one the um in chain and you can actually see for natively minted value. So, probably think about this as kind of net new value and exclude arb here, right? Probably just look at USDC. Right. far more USDC that's being natively minted here on Arbitrum than anything else. And then there's a funny amount of externally bridged value, which this is kind of Arbitrum specific and most other roll-ups it's not this high. And then the canonically bridged, as you would imagine, it's mostly ETH. But if you

look at the amount of ETH which has been bridged up from main chain, it's 3.5 billion versus Yeah, it's almost actually exactly the same though? I I wonder if we're like counting this correctly in the sense that like if I bridge I mean if I bridge USDC from ETH to Arbitrum, is it is it going to be only counted in like the externally bridged or is it actually it like is there like a message sent to USDC that destroys the the USDC on Ethereum and just natively mints it on Arbitrum. I think that's probably the case, right?

Mhm. Like, how how else does like 5 billion of like USDC get to Arbitrum? Like, by what flow? What is the user flow here? Yeah, I'm not 100% sure, either. Um so way more value is externally bridged than I think what this chart is implying. Okay. Um, well, either way, I mean, I'm I'm curious the Yeah. I I think the point still stands in general, and this is something that actually like Cosmos is a great example of maybe an ecosystem that ignored path dependency and really tried to skip to the end, and I think got a lot of stuff right about the about the end game.

And one of the things that that they were had a strong philosophy on from day one, and maybe it's not even a philosophy, it's just a very different um sense of who their customer is, is they leaned into USDC and stablecoins from day one. So, right? So, they had no lock-in for Atom or anything like that. They just allowed their had that perspective of, "Hey, we're app developers. We want to meet our customers and users where they're at, and our customers and users mostly hold dollars, not Atom. And so, we want to satisfy them." And I would guess it's this a similar incentive for L2s as well. Especially, you know, I'm showing Arbitrum here, but this would be heightened on a chain like Base, where obviously Coinbase has a large profit incentive around USDC, and so, I'm sure they're going to make the UX for USDC

much easier on that chain in general. So, how do you think about that kind of trade-off? Like, if we had to zoom 5 years into the future, and you had to guess the amount of USDC or even, you know, things like Biddle, uh tokenized treasuries that are held on L2s versus ETH, how do you think that shakes out? Yeah, I mean, I think that uh the more you move from layer one to layer two, I think the more you want to think in this application mindset that you're describing, right? And I think forcing people to hold some kind of token that they don't want to hold, I think that's crazy uh from a UX perspective.

Uh like in the future people won't care about I mean, we keep reiterating this maybe it's my like we're on like year three where I say this on a podcast, but Yeah. at some point apps uh like users will only interact with apps and they don't even know you know, what blockchain they're using under the hood and they won't care. You know, they have a job to be done and the app is doing the job for them and you know, if you make the job more complicated than necessary, I'm going to go to your competitor. So, um yeah, I mean, so of course like people want to hold stable coins like I mean, most of us hold yeah, I mean, we don't really have like a like we in our main account or spending

account like we have dollars or euros or whatever. Um and then maybe we have like a crypto portfolio that we manage, right? But spending that is you know, can be more tricky, right? You always have to think about taxes and whatever um and I think that's probably not going to change. So, yeah, there is a less friction I think involved with with like stable coins and I mean, to your at the beginning of your question you said something very interesting which is that like ETH is giving up some kind of fees from these apps like happening on layer two and I I I I think that's the actually the wrong mindset because ETH is not giving up anything. Um

like these transactions are only happening many of them are only happening because they're on layer two. Mhm. And they're on layer two and they're packaged and they're posted as blobs to Ethereum layer one. And like this is like a I mean, I see them as use cases that Ethereum can only satisfy in the form of blobs, but not in the form of blocks. Does that make sense? So, like you need like layer twos are basically repackaging Ethereum layer one block space. Uh they're they're repackaging it in a in a way that that that opens up new that new use cases.

Uh, and if it wasn't a net new use case, like if it wasn't differentiated from Ethereum, people wouldn't use it, right? Because these chains have a lot of security overhang. They have less liquidity. Uh, you know, it requires people to switch their chains and like like chain ID and like you know, it is still a very cumbersome experience, right? If it wasn't if I didn't have a strong reason to go to layer two, I wouldn't do it. So, I I agree with that, but let me let me push back on your push back a little bit because I think that Ethereum isn't there there are even though you might be creating net new use cases, like those users that are generating fees up on base or Arbitrum wouldn't be using Ethereum anyway.

That is true, uh, potentially. Although, what you've now introduced as well in this ultimate, you know, like the fees that get generated, you know, between the L2 and the L1 is you've introduced a new set of actors that need to take a cut. And I guess one thing that I've been curious about in general is, you know, which part of those, you know, which part of the supply chain is going to get to extract more fees. Right. And and I think that it That's why I sort of think the ordering, whoever gets to do the ordering ultimately, I think there might be a little bit more value there as opposed to uh, maybe the maybe the value that Ethereum gets to extract, uh, right now is kind of like the at the base of that layer, which is the kind of like the

settlement DA part of that. Um, if it gets DA, you're competing with the Celestias of the world. And ultimately, I don't know. There's a there's a strong case that maybe that doesn't actually ultimately end up mattering. I think I might place a little bit more emphasis because I have this perspective that yield is going to ultimately be very important in terms of the L1 value proposition on a really long 10 to 20 year time horizon. I think people are going to look mostly at L1s as almost the equivalent of treasuries or sovereign bonds as being okay this is deep very liquid asset there's some small amount of yield on top that looks kind of like a coupon. Maybe I get a little bit of capital appreciation maybe it's just yield. Whatever it is um And so I I realized that I might be waiting that a little bit more but

that's why I think it's um it's just interesting to to try to to try to guess at where the value get extract gets extracted. Um and I do I'm just last closing point sorry I know I'm monologuing here but I've noticed there's been a little bit of a subtle shift I think in terms of how the roll-up centric road map has gotten framed which is that I would be a little bit more sympathetic to this if after we introduced blobs and layer twos the net amount of fees that were being generated for Ethereum was higher right? Like that would be that would be a win-win for everyone which would be all right we've got all these layer twos there's this new market for blobs but the the total amount of fees that are being for generate generated for Ethereum are higher than what it used to

be but the fees per transaction are much lower. But that's not really what we're seeing in practice today so sorry that was a bit of a ramble but that would be I'd push back on your on your push back. Yeah I mean the way I see the value going to be extracted I mean it might sound like a joke but I hope on the user layer right? Uh I think I hope that you know crypto will have a lot of thin layers and most of the value will go to the user be be expected by the user in the form of like more value new products that didn't exist before.

Uh I mean that said I think you know good framework is obviously like which layer is the hardest to replace like which is the hardest to switch between. I think ultimately the apps are going to capture most of the value like I have very little doubt about that um I think some absolutely gigantic businesses will be built on top of crypto some may already exist some might you know yet to be built. Um and then you know the infrastructure, it's honestly hard to say. Uh I think, you know, both for uh you know, the different jobs to be done, right? Like sequencing, data, proving, consensus.

Um and like what type of bundling will prove to be optimal. Like I I'm leaning in the direction that there uh different apps will favor very different combinations of those things. So, different permutations of those things. And um like we've yet to see, you know, what are the dominant apps going to be and like what do they most benefit from? Uh like what is what is kind of the optimal solution for them? And I mean, I think without really looking at the apps that have a lot of traction and looking at like their value chain, like how they create that value for the user, I think it's more it's harder to make predictions about like how Okay, how does the you know, how does the the value chain that

actually satisfies that use case, how will that evolve? So, I'm constantly looking at how that's changing and I think it's very interesting. Um but yeah, I think it's in some ways like too early to say and uh yeah, I think it's I The one thing that I do know is that like you know, you want to own the apps. I agree. Yeah, completely agree. I It is it's definitely too early and Sam Hart came on this podcast about a year ago and said something which has always resonated with me, which is it's always interesting to try to guess at where value gets created and extracted, but ultimately we're still in the building phase here and that's a little bit of a luxury debate to even have, which there's so much that we're still trying to get to just work. Um I will say though that I I did an episode of

Expansion actually with Terry from the Eclipse team who laid out pretty succinctly what I I I thought it was interesting the way that he was thinking about this, which is he's also on your page that the apps are going to extract most of the value and that's going to end up being this like ordering at the ordering layer. And then if you look at L2s, if you look at L2s today, they have three sources of revenue or three buckets of revenue the way they generate there's the there's a kind of a priority fee layer, which is basically ordering. Then there's congestion, which is you know, what's the amount of compute that users are demanding versus the amount of compute that can get used so there there's a congestion fee.

Right. And then there's an L1 pass through. And L1 pass through is like the least it's I mean it's revenue, but the the margin is 0%. It's literally a pass through cost what the L1 is charging. Then there's the congestion layer and then there's the ordering layer and his perspective was that apps are largely going to take the ordering layer there and then the congestion layer is going to be left for L2s, which is I don't know. I hadn't heard someone articulate it like that that Mhm. still just a guess framework on the long-term time horizon, but Yeah, I mean I I wouldn't work at Flashbots if I didn't think that the ordering of transactions was going to be a very important job. Um before I you know, different uh parts of the stack. Um

so yeah, I obviously do believe that there is I mean it's both good and bad, right? It's bad in the sense that um there are a lot of economies to scale. Um and uh network effects in ordering and I mean we have seen only some of them so far Yeah. uh play out, but there there will be more that will kind of show their head in the future. Um and it's good if you can build something decentralized here. Um and uh yeah, it says a potential I like trillion-dollar uh protocol or network or something I think to be created here, right? And I think that's at least why I'm personally very interested in this uh in this problem because I think it's one of the biggest problems that exist.

All right, everyone, listen up. Like I said at the top of the episode, Uniswap Labs is rolling out the red carpet and launching a 15.5 million-dollar bug bounty. This is the largest bug bounty in the entire history of crypto to anyone that can find a critical bug with the Uniswap V4 protocol. This bug bounty aims to make it the most rigorously reviewed code base ever deployed to Ethereum. Now, the Uniswap name is basically just synonymous with security. 2.4 trillion dollars in cumulative volume has passed through Uniswap V2 and V3 without a single hack. So, Uniswap V4 is dedicated to bringing that same level of security and transparency to the V4 protocol. So, if you want more information or

eligibility or scope or rewards or payout or any of that good stuff, there is a link in the bottom of the show notes. I highly recommend that you stop listening right now, go to the show notes, click the link, head over, and tell them that I sent you. Start earning money today. All right, should we get into This has been very interesting. Let's get into Goose 2 here. So, all right, Hasu, this has been this has been great. Uh I I want to um refocus us a little bit and move back on to the original purpose of this podcast, which is to discuss Goose 2. So, can you just give us an overview really quick actually of Goose in general? What is that within the context of Lido? Give us a quick overview of the first iteration of Goose, and then let's spend most of our

time here discussing Goose 2. Yeah, it's uh it's interesting that we talked about uh Ethereum's no start debate. Uh so, the idea is uh not to have, you know, I mean, it's How do I frame this? Um I think uh you know, there's a bit of a context in Goose, which is uh you know, I've been for a very long time I think one of the biggest skeptics on DAOs and decentralized governance. Mhm. Um like it's like saying how it's very hard to make decisions in a group and like execute efficiently, and that DAOs will just be outcompeted by like more lean and kind of streamlined organizations.

Um and I think uh Goose is the idea of basically threading the needle between the decentralization and and kind of having a streamlined direction that everybody can follow. And so it's a process that's currently one once per year. That basically determines what and why the um the Lido core contributors should should work on or should work towards, right? And so it's it's laying out a general direction and then the contributors can make can go and and kind of determine how they want to do that with their much better kind of experience and like local knowledge about the market, right?

And um Lido has um Lido has a basically a vision and mission statement that is enshrined in in the DAO. And so I mean it's uh Lido's purpose is to keep Ethereum I'm reading this out. Um Lido's purpose is to keep Ethereum decentralized, accessible to all, and resistant to censorship. And its mission is to make staking simple, secure, and decentralized. To make to create a world in which Ethereum is the coordination value layer of the internet, you know?

Um so um But I okay, how do you if that's the goal, like how do you actually how do you actually get there, right? And in the very first goose um the idea was basically okay, let's focus on staked ETH. Uh let's let's focus on making staked ETH as the singular product that we talked about in the beginning that was like I think like in our mind like um the right thing for like a very large amount of the market. Let's focus very singularly on that, but make let's make it as decentralized as possible.

Uh and so this decentralization was you know, to kind of reflected across multiple different dimensions. So it was the governance making like moving as much governance as possible from uh the Lido protocol like really removing like the elements that um the Lido DAO actually needs to govern, but also the node operator set. So, like how how an like new node operators added to the set, and is it is it possible to permissionlessly um uh participate here, and like how are they distributed around the world and across different setups and all of those things. So, like decentralized node operator set, decentralized governance, and like and

and make staked ETH uh you know, as as good and as widely used as possible. Um I would say then about a year later, we kind of can talk about uh we in the beginning talked about the rise of of restaking, kind of like increasing at this time increasing fragmentation of the staking layer. And um you know, what we did there was basically say, you know, is it's it is too late to launch like an LRT, and it's it would undermine the value proposition of staked ETH.

Uh and I I think you can actually uh you know, the right play is still to stay an LST, but seek to become the number one collateral used in restaking. So, uh staked ETH is would play an important part in restaking, but not as a kind of top line asset, but rather as like a collateral that is then restaked, and it can be used, you know, either to create LRTs or to like don't create LRTs, because not all of the restaking category is actually liquid. And we can talk about some of the intricacies of that later as well.

But, so now um we are kind of getting to goose two, and um in the beginning I think uh we discussed a lot of like what led to this, which is basically an like an increasing I think it's I mean, you can frame it in a bunch of different ways, right? So, it's you could say it's a market saturation of the LST category. Because Lido like staked ETH has a 90% market share in the LST category. And it sounds extremely dominant and it is. There's no better LST.

Um but both uh you know LRTs have kind of has gained uh prominence as a new category that didn't exist before. And the category size of the liquid category. So LST plus LRT also has not grown surprisingly, right? So like LRTs have eaten a little bit into LST market share. But the category itself, like liquid assets versus non-liquid assets, has not actually changed for over 2 and 1/2 years now, right? So basically some of the assumptions that we had about the market, like what the users want out of their staking setup, I think this is uh has has basically proven to be wrong

and instead we're seeing like a fragmentation and now across different setups. Um fueled by restaking, fueled in part by uh kind of more institutional market. Um yeah. And so what is needed is basically um is uh is a change um in the strategy. And goose two lays out lays out basically three uh three goals that that map also to to the three um yeah, kind of value streams that that exist in uh in the Lido DAO.

Kind of the contributors. So um one on the node operator set side of things um Let me take a step back. On the staked ETH side of things, and this is really I think the biggest one, is uh the acknowledgement that you know, just kind of staked ETH in itself is not enough to satisfy kind of this growing fragmented like demand that users have about what they want their staking set up to look like, right? And so, it's the understanding that one product staking is not going to take us to the next stage here.

And instead, you you want to create a kind of setup where you can have different staking products that satisfy different users in different use cases. But they all benefit from the same liquidity. They all benefit from, you know, the same underlying infrastructure and implementations and so on. And we can unpack that much more in a bit. Uh on the node operator set side of things, um there's the idea to create a market for validators. And, you know, it's it's very synergistic with the first goal because when you have, you know, different staking setups, um then you basically have a very efficient way of

distributing stake across these. Um and you also want to make sure that the way that the stake is distributed is both aligned with the goals that the Lido DAO has for what the node operator set setup like should look like. Uh for example, in terms of, you know, distribution and like what kind of setups is is used, etc. But also on the cost because we have already seen in the in the curated set, Lido's paying 5% to the node operators. Um I think in the CSM, it's paying around like 6 to 7%. Why?

Because there is a different like it's it's this is this type of setup is just more expensive to run for the operators because they have a higher operating cost, right? And so, uh there's this kind of rising acknowledgement that different setups are um you know, have different costs to run. And, uh you know, some have also a lower cost to run than is you know, maybe uh being compensated right now, right? So, the idea that I think some of the more professional node operators also uh have a you know, you know, maybe there are some of them that have a you know, much higher cost, but like the more professional ones um you could actually also pay um pay less over time and in in

the competition on price uh between different providers, like uh Lido must become more flexible as well. And then on the governance side of things, um yeah, so there is the uh I would say the idea that um there's a social contract here between um there's like both a social contract and like an economic link um between uh LDO, the token, um and the way that I think the you know, the protocol works and also the governance works. And I think it's good to ex- start exploring that a little bit more in 2025.

Um so, you know, for example, uh LDO secures um the governance in Lido DAO like um the the ability to you know, make good decisions in governance, to get quorums, to defend against governance attacks. And um yeah, I think this uh it's it's kind of good to start activating uh more LDO uh and start kind of getting people uh more engaged and uh you know, I think when you are a DAO, then it's just uh like everything is already decided by LDO, right? Um when you know, every every single change to the protocol has to be passed by LDO holders, you know,

so whether it's through a snapshot for more off-chain related things or it's through Aragon vote for anything that is on-chain related, uh you know, it's just the the that I think the DAO is the LDO holders, right? And so, I think it's it's you can strengthen here the social contract more to make sure to to basically show that, you know, Lido is a project that is thinking very long-term and that, you know, is very like worth uh spending like time and capital on and mindshare and like we can together grow this into something that um will be like really, really big and valuable in the future.

Okay, that was a really helpful overview there. I've got specific questions on each of those three prongs. So, I like the way that you phrased this in goose two of uh you know, let's focus on the Steve component there first, which is transitioning from a product to a product line for the staking ecosystem. So, and maybe this is where we can, you know, I'm going to ask you to tease a little bit about, you know, V3 that's coming up. But, how you know, how it my my understanding of that is, you know, we're trying to remedy here these new or some of the saturation of new customers coming in. So, there's the restaking segment, there's the institutional segment. So, what is the plan of attack for, you know, as the liquid staking ecosystem has evolved from a very homogeneous customer set to a much more

heterogeneous customer set with different sets of needs? What is the plan for reaching out and grabbing the restaking segment, the institutional segment? You also talked about like the leverage seekers, the loopers, if you will. Yeah, so um the, you know, some of the the restaking, of course, we're already addressing by becoming like making staked ETH much more used in as a collateral in restaking. But, kind of taking a step back, I think there's a few uh problems here, right? So, that I think uh would be would be good to solve. And so, the the biggest one is probably that in in in Lido today, you have very low flexibility on the setup that's being

used. So, you cannot uh you cannot decide uh you know, if for example, if uh if if you are particular setup that you're using, you know, if that's being re-staked or if that's being looped. Uh and there's always like ways to do this kind of other protocol, but not really in the protocol itself. Um and when you do like you can like, you know, you can create let's say an LRT um and you can also use like you know, stake ETH under the hood, but then you lose the ability to like have liquidity on top and like have uh it all of these integrations, right?

Like you either you you give up on the customizability or you give up on the liquidity. And you can't really have both right now at the same time. And the other problem is it is not that easy today for businesses and for other protocols to work with Lido. So, let's say you have customers yourself, like you can drive um you have you have users, you have customers like you that you can drive to staking, like you want to offer staking to them in in what way? Whatever way, right? Like using a customized setup. It is very like it's not possible

effectively to do that today with Lido. Like you can negotiate a revenue share, which like a lot of projects have that. Um but then you are still bound to like the this this one setup that basically Lido's Lido offers today, right? Like you get like this one-size-fits-all um setup from it. And so, what we can actually say uh is and this is kind of getting to, you know, the new um the new platform that Lido contributors are working on is called uh staking vaults.

And so, yeah, the idea is um to like you can use the Lido infrastructure for a highly personalized staking setup while also tapping into staked ETH liquidity and integrations. Uh like so you can have you can have your own setup and then you can mint if you want to you can mint staked ETH against it. But how much staked ETH you can mint basically depends on setup that you're using. And so what this does is basically it evolves um it evolves Lido into something that various types of organizations, you know, like various types of parties, you

know, businesses, node operators, other protocols, custodia custodians, banks can use to create entirely new stake-based products that can still benefit from staked ETH liquidity under the hood. And I'll pause here um for any questions. So actually my um you know what I found myself thinking about, you know, when you were describing that is actually a little bit more of a question related to the node operator market that Lido is trying to curate. And I So it's very interesting So one of the things that I think Lido doesn't get enough credit for and deserves more credit for is actually

being a potential There's a lot of natural um economic incentives for staking to be centralized, right? And so what you what I think uh staking operators like Lido can actually do is be a countervailing force there to decentralize um the overall staking of the network and that's what you see in these different modules. So there's the white listed white listed set which is mostly institutional stakers, but then there's also the community set, there's DVT, and I'm very curious, you know, you talked about in in the Goose 2 write-up that you would programmatically reward different modules based on not only their like efficiency, but also potentially like a contribution to the decentralization of Ethereum the network. And I'm I'm curious how you

would think about waiting that. And I actually one of the things I was thinking about when you were describing the different cost structures of different stakers is it almost seems like there's a little bit of a funny incentive there as well, right? Because obviously the large institutional stakers that have economies of scale can stake for a lower rate. But then you're also what's the incentive for them to continue to push down the cost of staking because then they're going to get less rewards from their share of the pool. And so isn't that a little bit of a perverse incentive? It's like the more efficient I make my business and my setup the less margin I'm going to get.

So I'm just curious in general like what is the sort of internal algorithm you know that you're thinking about in terms of how to reward these different modules and different stakers within the Lido marketplace. Right. Yeah, so for votes for the staking votes in general so these basically would allow you to bring your own customers. Right? So this is basically if if the idea of like revenue share like you you you have the idea of revenue share today like if you bring users to to that Lido protocol then you can get a share of the revenue from the DAO.

This is kind of supercharging that like times 10. Because here every business can basically use the Lido protocol to create their own staking product. And then they can sell that, right? And like you can have in theory like you can maybe have a circularity here where Lido itself is like driving stake to that. But it's mostly a way to actually tap into kind of the uh the marketing and the the business development and like the customers of uh a lot of other market participants who don't have the infrastructure to create

their own staking setups and uh who can really benefit from all of these integrations. Um and the yeah, the deepest liquidity of any staking token in the market. Mhm. You know, there's a we did a we did an episode a couple of weeks ago with Paul Frambo of Morpho and he was describing the different way the ways that he views uh protocols and there are some DeFi protocols which look more like managed products and there are some protocols which look more like neutral infrastructure. And it's kind of interesting to me that Lido is in a sense both here that stETH has has historically been a pretty managed product, but now you're modularizing it

and actually, you know, basically selling or allowing customers to interface with the the infrastructure that allowed you guys to eventually to create stETH, which is pretty fascinating as a Yeah, I mean, it's like it's effectively platformizing like the Lido protocol and like right now there's there's three modules that can mint stETH. Yeah. Like against effectively their validators and here you can you know you know way more uh parties can start minting um in like a very kind of risk-controlled way um against that and um yeah, it basically uh you know, allows uh

like new new new uh products um to be built on top of this and uh you know, in a way that really aligns also the incentives between um you know, stETH holders uh and the new uh vault operators basically because they uh they would pay a you know an a fee that would then you know, go to stake defiers. Um okay, Hass, I've got a question for you. And this was actually, now I'm remembering this, Miles and I speculated a little bit on this on the LSD season about whether or not when you're looking at the staking router, is this going to be a world of seven vaults where there's an institutional vault, a whitelisted vault, community DVT, whatever, or is this a world of a thousand vaults where

you have a Maker vault, a uh you know, Aave vault, etc.? And it sounds like what you're describing is the world of maybe not a thousand, but you know, many more customized vaults. Would Would Lido ever consider, do you think, an option to whitelist for a project to whitelist its own LSD, use the the staking router not as an opportunity to necessarily mint stETH, but mint some other more customized whitelisted LSD? It's a good question. I would need to think uh kind of more about the incentives of that. Like uh I mean, you what you're describing is basically where you're using some of the Lido infrastructure.

Yeah. But you don't you're not using the token, right? And I think uh I mean, we don't uh like the Lido protocol can't really control that, right? Like you can just uh make the vault using Lido, but then you can just mint your own token on top. Um so, I think that seems possible to me. Yeah. Interesting. Okay, final question for you on the token front, the LDO token front. So, you know, this is one of those I feel like this is a question which is coming up more and more because there is this you know regime change in the US and there's this everyone's all pulled up on American Dynasty, American DeFi, etc. and you're starting to see protocols turn on the

fee switch. So, you have a proposal of I think Wintermute put through a proposal to turn on the fee switch for Aave. Right. For staked USD sUSD holders. Um there's been a lot of speculation for a long time about whether Uniswap is ever going to turn on their fee switch, and I think what's been holding some of these protocols back is fear of being labeled a security US based regulation. And so, I would be curious just how you think generally about the role of LDO within the Lido protocol. And then, you know, I would love to get your thoughts even before we get to how LDO is going to evolve past just being a governance token, you know, what your thought is on returning capital to token holders in general via fee switch. I know we've talked about this in the past

before but just from almost from a higher level zooming out, like what do you think about that as a concept? Yeah, so I have a a few high-level points on that. When you when you have a protocol that is when you have a DAO, when you have a protocol that's governed by a DAO, which is governed by token holders, it's it's very clear that there's some kind of social contract here, all right, where the the uh the token holders basically should uh you know, make decisions that are in the long-term interest of the protocol.

Uh but, you know, at the at the same time they need to be like rewarded for that in in some way because you want to attract like protocols that like that like align the incentives of their token holders with like the incentives of the protocol and its users just going to be more successful uh in the long-term, right? And when you have the governance component, and this is something that you don't really have maybe as much in outside of crypto, but these systems are like really really decentralized in the way that like whatever is voted on chain is actually law. There's nothing that you can do to prevent that, right? And we can talk about how dual governance

changes this equation in a very positive way but still um the LDO token holders have the power to change contracts in in the Lido protocol, right? And it's a very important duty. And, um, so I think it's good to to kind of strengthen that that bond here and make sure that, like, people feel very long-term aligned. So, that would be the first thing, right? So, you like this kind of linkage is is generally good and you want to attract people who take like a very kind of long-term view on the protocol.

So, the second thing is, um, can you actually do something? Like, what what actually are options for like aligning these incentives? And like regulation plays a role here, for sure. I think we've seen that in discussions, uh, in many other protocols. Um, and it's I think it's generally good to have, well, more options here. I think, uh, it would be better for for investors, it would be better for protocols and the users if it was possible to have Yeah, to to like not, uh, not be able to do certain things, um, just because maybe it it makes it like

tough um in terms of regulation. And that that kind of brings us to the third point, which is like you know, you you should be aligning the incentives and you're legally allowed to do it, but like how exactly do we do it? Like, do you like share revenue, you know, do you share profit? At what timing do you do it? And I think I'm a big kind of subscriber in the idea that, uh, like you should first be thinking about growing the pie before you think about like how to divide it. And uh and like the idea of like returning money to token holders, like giving it to token holders, should generally be what you do when your like you kind of your your

options for reinvesting that capital to to growing the protocol and strengthen it and making it better they are all depleted, right? Like you have so much money that you don't really know what to do with it and you think that growing the business growing um growing like your use base your use cases is not really an option. And so you're looking at this maybe as a cash cow where you know this is going to be disrupted on some timeline. And you know, it's we can keep it steady, but we can't really grow it or anything.

Um and that would be the time when you want to think about returning this money, right? But when you look at not just at Lido, but at all of these protocols is it like if you kind of apply it this more like classical lens of capital allocation to it, is it the right time for any of them to return capital? Like the answer would be obviously no, right? Crypto is growing at such a big speed. Uh like the market is changing all the time. They have really big costs uh like fixed costs of like constantly shipping like a new version of the protocol uh because the market is changing and

the tech is changing. And if you're not changing with it, then you know, you're going to get left behind, right? The idea that whether underlying I mean like underlying blockchain is changing you know, and like all the time you have new ways basically of making the system better, which is like we all agree that the infrastructure and like the tech is is not yet mature. But it is maturing every year. So I like so you need to somehow pass these improvements on to users and give them new options, right? So you have you have very high costs. Uh these protocols are very young.

They're growing very rapidly. Crypto itself is growing very rapidly. There's constantly new types of users coming in that maybe you're not already surveying or like you know like what the user wants is changing. And it's just very clear that like you should be thinking about reinvesting and kind of growing um growing the pie and not think about about how can we um how can we really uh you know like extract the maximum amount of money over like 2 years, right? That's that would be suicide. But like like why do I think people are still why is this such a big topic at all for folks?

And I think there is this social contract that I was touching on in the beginning. I think a lot of people don't really feel that it exists. Right? It's They've They They you know it's this meme where you're going to the ATM at the end of the cycle and you're like trying to withdraw your money from crypto and it says uh you know it's just magic internet money. What did you think? You know? Like uh did you think you can actually withdraw this, you know? And I think people have a very similar feeling about DeFi and like DeFi tokens that you know it's it's {quote} {unquote} just a governance token even though like governance is very valuable, right? Like

in the governance can decide whatever it wants. Um in this like very decentralized way. And but yeah, like this is not I think not something that people really feel like and so I think it's almost like people want to do it once um just to see that it's possible. And I think then like maybe more of a like realism uh about what you should actually do can kick in. I mean I think there's plenty plenty of short-termism. It's like not just from investors but also from projects themselves. You know, they have maybe their 2-year vesting schedule and they don't care what happens in year three or year four, right? Like like in if if you're in that situation,

you know, what you should be doing is like you know, really pumping the price of your token like you know, you know, use incentives to pump your revenue, pump the price of your tokens, then put like some kind of buyback on top even though like your issue your issuance is even outstripping that. And then like exit your tokens, you know, over like, you know, like as as soon as they vest etc. Like we I think we've seen that playbook like used plenty of times. Um and uh so yeah, like some some some parts where this is used is surely just to like pump like a particular token. But even for those who are very long-term uh incentivized, I think you really have this like, okay, I I need to feel that

this is actually real. Like this is actually this token that I'm holding is actually valuable. Like you can actually redeem it for something or like you you know, you can actually um there's actually some linkage here between this protocol that's uh that exists that I'm governing and like my my kind of outcome that I get. Yeah. I completely agree with all of that. I think to maybe steel man the argument for a second here because I'm ultimately in the camp that you're in, which is it doesn't make sense to be returning capital to token holders at this stage in the life cycle where most of these protocols are is that unlike equities there first of all, there are so many

success stories of equities running this playbook or companies running this playbook, right? Of you build up a network effect and Amazon is a great example of this. Uh you know, for many many years they were deeply unprofitable. They just reinvested everything back into the business and you know, they built up this amazing business and you know, that now they're in the place where if they wanted to, they could return, you know, mounds of cash flows, uh you know, to shareholders. And so there are lots of examples that that has been proven in your words like many times, and we just haven't had that so much in in crypto. The other thing, too, is equities and tokens are not the same thing. All right, you have these you have these in theory, not not all, you know, not all uh equities are like this, right?

Facebook is a good example of something there's no dividend and actually no voting rights or anything like that, but for most equities you actually have these you have these rights, and so you don't need to you don't need to question these sorts of things, but uh you know, tokens are kind of a low-trust environment, and I agree. I think it's I think it's reasonable for people to say, "Hey, there's no precedent here that I'm going to get anything back from my token investments. I want a little bit of proof here." So, I totally understand that. On the other hand, I think the guiding force should be exactly what you described at the beginning. This is a capital allocation question. And ultimately, it's kind of bearish if you basically, when you're returning capital to token holders, what you're saying is, "I don't have a higher ROI investment

opportunity organically in my business." Which is not good. That's That's not good. You should be able to find higher, you know, higher ROI growth type opportunities, and so I don't know. And also, I think empirically even, there are examples of of protocols that have tried to return cash to token holders, not necessarily you know, mostly through buybacks, right? And like the perp decks is are probably pretty good to look at around this. I mean, I feel like especially during bear markets, people just because there's a lot of disillusionment, people fall back on this idea of cash flows, and they're like, "What What produces cash flows? A perp deck." Oh, and Rollbit's doing buybacks like Rollbit is the next thing, and it runs for a little bit, and then it tanks. And Hyperliquid's doing that now. We'll see They have no buybacks or

anything like that. We'll see Hyperliquid's a funny protocol in general but they had, right? They had They had buybacks actually. Do they? Okay, I don't I think so, yeah. They're Yeah, they're Yeah. So, Yeah, I don't know. Maybe with these things it's like the acknowledgement that you can't build a really durable moat as a perfect ex for whatever reason and so you just want to like max extract on like some short period of time. Yeah. Uh and maybe that is correct, but yeah, I I I really don't think so, right? I mean the prime example of this is probably Maker like now sky which has been basically buying back uh

uh you know, MKR for years and it's like Yeah, it's also been sitting at like 5 billion die uh like in circulation for the same number of years. It's like, are you really telling me that you don't know what you do with this money? Uh that like like the stablecoin market has in this time grown from like 50 billion to like 250 billion and you're like you're steady, right? And you're not growing at all. And um it's just uh such dramatic mismanagement that this is almost painful, you know?

Um so, yeah, I wish people would like I mean, we have the examples of like the stuff going wrong even in crypto even in its like relatively short history and I wish people would pay more attention. Mhm. Well, also we've already gone I had a whole other line of questioning for you, but I'm looking at the clock and we've gone and I've got an hour and 45 minutes here. So, I think you know, we're going to do an an episode in one or two months here and so maybe we can take some of the more like Ethereum specific DeFi questions that I had lined up for you then and maybe leave the listeners with a little something to look forward to, but before we before we sign off here, can you can you just give us whatever you are you know, don't reveal any state secrets

or or whatever, but anything that you can tease us maybe a little bit about Lido V3 and that can set us up for our next conversation. Yeah, so I think first of all dual governance Um, is going to go to a doubt vote. Um, it's it is it is done. It is passing audits. It's formally verified. Um, and it's yeah, it's going to go to a to a doubt vote. Um, you know, sometime in uh, I think by March at least. So, it's very it's getting very very close and I'm I'm personally extremely excited about the way governance. It is the first of its kind, I think a doubt that is, you know, it is

governed by token holders, by LDO holders, by the it's just giving this very explicit uh, you know, right to to exit, to pause the protocol and exit to stake ETH holders and uh, in this like bicameral way and I think uh, it's like such a good example really of what crypto can do, like designing these new systems that maybe have been kind of theorized, but you it is it is really like creating like net new rights for different groups.

And um, yeah, I think I'm very very excited for that to go live. It's like been on the road map for two and a half years or something and yeah, this will be a massive massive milestone. And then, yeah, I think probably by that time or like very very very likely by that time um, you know, uh, there will be more info about Lido V3. Um, it is the the staking vaults, um, but it's also more than that. It's I think it's a very very compelling and synergistic vision that turns Lido from basically just being staked ETH to this platform where

uh, anyone can create, uh, you know, staking products um, on top of Lido infrastructure that also benefit from staked ETH liquidity and integrations. And yeah, there's a whole range. We didn't get to talk about that very much today, but there's a the whole range of of use cases that I think you can really point to and that you can build on this that are very very exciting. Some are related to the institutional market, some are related to re-staking, some are related to, you know, leverage staking, some are related more to um yeah, like basically unlocking these like protocol-to-business opportunities where

someone has a lot of customers and they want to offer staking to them. Uh maybe using a specific setup and is, you know, is it they don't have a way good way of doing it today. And so, yeah, I'm uh personally very bullish um Lido for 2025. Mhm. Same. Well, I'll say it's always a pleasure to to get you back on the show, my friend. And yeah, we'll uh we'll follow up in a month or two here whenever ready to unveil or talk in a little bit more detail about uh V3. So, it should be a ton of fun. And um Yeah.

Okay. And yeah, as mentioned, I know I we're we're recording this on Christmas Eve here and I believe it's about 5:00 p.m. or 6:00 p.m. your time Christmas Eve. So, I'm going to let you go and enjoy some some much-deserved time with your family and uh yeah, we will Happy holidays, my friend. And yeah, we will reconvene in the new year. Yeah, happy uh Happy holidays. Um Merry Christmas. And yeah, see you in the new year. All right. Merry Christmas. Cheers. Merry Christmas.