Why ZK Will Power Crypto's Next Killer Apps with Lagrange

Transcript

GM G be gr another episode of the I layer ABS Series today with our good friend ishmail from LR welcome to Igan layer unlocked an interactive educational Journey Through the Igan lay ecosystem created by technical Founders and builders for the entire crypto Community a special thank you to our partners allir polymer authentic skate and lrange for helping to make this happen our goal is to raise the collective knowledge of the igen lair ABS ecosystem and unpack the technical designs of the top teams in space welcome to ig layer unlocked GM G the gr another episode of

the IG layer ABS Series today with our good friend ishmail from lrange and uh ishmail you're no stranger to the show so welcome back I'm not I I think I've been on the rollup more than any other podcast and I will keep coming back this is this is by far my uh my favorite place to discuss lrange and a lot of the interesting things we've been working on you guys were early to Anan early to lrange and I think you directionally everything you guys talk about comes true I hope so and uh yeah I mean this uh you know if if the rollup had a uh a rollup Hall of Fame I think you would be a first ballot so

awesome more ZK uh coverage coming way ishma and LR you guys are obviously building a ZK co-processor one of the first abss on igen layer and uh some of the most stake allocated to your co-processor congratulations thank you um and obviously we're still very early to ZK and uh co-processors in general so yeah absolutely uh love the topic uh I'm glad that you're here uh to educate us and our community about it and uh let's let's dive in yeah so we put together some slides I know usually we keep it a little bit more free form but there's a lot of really exciting developments that have been core to L Grange over the last

two years since the foundation of the company and a lot of it has kind of come together into a synthesis very recently of a direction that I think is unique in the space and it's a direction that combines the work that we've done on ZK with the work that we have done alongside ul and this this concept that very broadly I like to call the internet of proving this basic idea that the future of zero knowledge is a large amount of independent applications that use ZK as part of different parts of their core function so to make it very specific State proofs for interop protocols um uh ZK uh proofs for rollups

validity proofs for rollups and then execution proofs for co-processors all of that coming from one Central Point um and so yeah and so we'd like to talk about kind of this evolution of blockchain architectures as starting with the first generation of chains the first the first chain being Bitcoin a a consensus based on proof of work to this second generation that is this evolution to proof of stake systems where economic guarantees coming from the con uh consensus validators were used and are used to produce blocks where the attestation to the chronology of a chain

at some point in time and a fork Choice rule over how a leader is able to propose a change to that chronology from the execution of transactions is core to producing the next um uh independently verifiable unit of that Chain's history and now talk about this Evolution towards a third generation architecture and this is a proof-based future this is a point where every block is not guaranteed safety by an economic guarantee of attestation it's guaranteed safety by a proof where the the block itself is composed of requests and verifications of proofs from other execution spaces or from other offchain compute sources and the actual validity

of that block of the state transition function is also guaranteed by a proof it is an Ence the use of ZK at all levels of the stack this is what we think of as this third generation of blockchain architectures and this is where lron sits at the core and what we talk about as this internet of proving co-processors ZK rollups ZK interop all of those together create this veritable internet this veritable network of networks of verifiable zero knowledge computes I can keep going but I don't know if you want to you want to ask anything in I yeah I mean I I think I think you're setting the stage here so I'm going to try not to interrupt too

much but if I have any burning questions I I will jump in perfect um and so yeah the we'd like to call this concept the internet of proving it is basically as I was saying before this idea that every application in crypto will use proofs for something some will use it for guaranteeing the validity of your execution space for a rollup some will use it for requesting heavy offchain computes from a co-processor and some will use that for interop for being able to access cross chain State and together it forms this network of networks where you have networks specializing in the computation of specific proofs and delivering those proofs to a variety of different um

Downstream partners and so we we're very fortunate to have been one of the first companies to launch um on igen lay and the first company to launch a ZK approver on Igan lay our state committee product is delivering proofs now to layer zero Axel and polymer um our co-processor product is delivering proof the teams like isuki ethery gearbox um and a number of other ones we've yet to announce that we're very excited for um and very broadly we're launching a new train of proving very soon related to some rollups that I can't share more about today but expect some big things very soon but at the core every proof comes back from the same network of networks run at the core by top institutional operators people

like coinbase okx Kraken who are generating proofs across every single domain of the space all from one unified substrate and so the question that people always ask us is why why I why would you use igen layer as this place for Economic Security and staking to generate zero knowledge proofs um you know don't you not need Economic Security for generating zero knowledge proof is a very common question I'm asked but let's take a step back for a minute at the core what a proof is able to do is guarantee the safety of a computation so you can say I don't have to trust ismile to give me the correct

computation over some data for the co-processor I don't have to trust ismile to give some computation of data for this cross-chain state or for validity proof for rollup all I have to do is verify the proof but what you still have to trust even with the proof is that I'll actually give you the proof the liveness of the delivery of that proof is not guaranteed so if your application needs a validity proof or a co-processor proof or a state proof at a certain point of time to underwrite some State transition or some specific action you still need to guarantee that you will get it when you request it and that's this concept of liveness Within blockchains within Prov networks within

zero knowledge systems more broadly the way we guarantee that is through Stak and the way we get that stake with the lowest cost of capital and the most favorable cost structure in crypto is through reaking um very complex Pro needs can be met very succinctly and very simply by using the core lrange Pro Network pro market which is in effect just a network of more Network it's the internet of proving and so to make this very concrete you know how does this work well at a very high level when you want a proof you request it from what we call

a Gateway a Gateway is able to manage the relationship between a proof requester and a pool of provs who will compute those proofs based on demand that Gateway announces a new prover task or a group of PR tasks to all provs who have subscribed to generating a certain uh topic of proofs and those provs bid on uh the ability to generate those proofs this is through a novel paper called double auctions for dynamic resource resource allocation that our team has come up with um that is to our knowledge and to our belief the first and the only incentive compatible structure for um for pricing of proofs in a heterogeneous resource Market within a

pro Network um if the operator generates the proof on time within a given time slot they receive their proof payment they receive a fee um for generating that proof and if they fail to generate the proof they receive a penalty you can think of this very much like a block validation right you're ethereum validator you have a slot under which you can execute an attestation or propose a walk um and if you don't meet your requirements you face an economic penalty except what we're talking about here is not a signature or validation action we're talking about the generation of proof this is why I call this the evolution of blockchain architectures moving from an entirely cryptoeconomic system to a proof-based future where cryptoeconomic guarantees on igen lay are used for

liveness and so I mentioned this idea of our double auction design but what we haven't talked about is why this matters why does it matter to have an incentive compatible auction design to match buyers and sellers and why would a user care right why would anyone care about any of this stuff Beyond an interesting paper and the reason is because incentives in efficient pricing are core to making sure you have to pay the least amount possible to be able to get what you want if the network has collusion or it doesn't have group strategy proofness the academic term for that then it means

that the amount you pay could be proportionally much higher there could be rent seeking done by provs if the network isn't able to guarantee efficient pricing or welfare maximization another of the properties that we discuss in detail in depth in the paper then there's no guarantee that you get to pay the lowest possible fee or that across the whole network proofs will be delivered in a way that maximizes everyone's ability to get what they need from this network and so by solving for these core properties buyers have the best experience possible as do sellers which means that everyone we've discussed from the nft projects like isuki to the defi projects like gearbox ethery and more tokomak usual money all

the way to some of the rollup Partners all the way to the interop protocols like polymer layer zero axler all can have the best experience possible buyers of proofs and many of the provs the institutional operators who are generating these proofs can make sure that what they receive for generating them is proportionately higher than anywhere else in the industry when everyone wins we believe that Network succeed and so what I want to end with is just a way for people to get involved so we're doing a hackathon right now alongside igen layer and ALT layer where we have a bounty for using our ZK Co processor which I've discussed briefly before we also are throwing the

inaugural proof Summit lr's uh owned event at um Devcon alongside many of our partners including polymer and alair um and we also invite everyone to join our Discord and to follow us on Twitter or X to say a priz some updates that are coming very soon and if you want to run aover alongside some of the top operators in this space reach out to our team we're always looking for new people who can participate as Network participants who can run improvers who can run um infrastructure and who want to generate rewards and fees from doing so so that's the

presentation um and it would be great to move into kind of some some dialogue over over any type to dive into yeah absolutely I mean I I think frankly one of the things that I I love about the presentation was one of the last things he said which is that networks succeed when everyone wins yeah um I I really like that and I think that is something that serir and Ian L have alluded to over the course of their their their development which is that these infinite games and these positive sum games are you know there's kind of like levels to it you have zero sum then you have positive sum and then you have infinite sum and so Ian lay becomes sort of this network of infinite sum games

lrange being one of those and so diving you know a little bit deeper into L Grange and it it its Network here you know yeah I think maybe it's a little bit it's pretty straightforward but um who are the like the supply and demand side of lr's network um and then you know you mentioned that like a lot a big part of this is incentive compatibility between the two yeah and so I think at a surface level it's not it's not as simple as just like an order book right of people like on proofs so could you just expand a little bit upon like the economics that you guys have come up with and maybe the secret SAU is in these double auctions but could you just

unpack that a little bit more and and help you know me and our audience understand the incentive compatibility between the supply and demand side of lr's network yeah so very broadly speaking we Define a set of properties under which we believe a network to be incentive compatible this is very similar to what ethereum did with defining the properties in Tim Ruff Garden's paper related to ethereum's transaction fee mechanism and the properties that we Define are truthfulness group strategy proofness welfare maximization uh budget balanced and computationally efficient um in effect it is can we run an auction efficiently that is both compute efficient ensures

that everyone involved is able to maximize their own outcome and to ensure that the reported prices and the dominant strategy is to have the correct private values reported um to the auctioneer by both the buyers and sellers of compute and in this case um we work on a double auction mechanism that has a novel composition rule of how we match buyers and sellers such that participants of the network can have guarantees that those properties are met and when we talk about our ecosystem it is really about how do we ensure that you know the the group in this diagram under ZK Prov Network the the people who are lending and who are apply who are

providing compute can guarantee that what they're receiving is the best possible outcome and how can we ensure that all of the people using our zero knowledge proofs the people using our co-processor you know isuki ethery gearbox and more soon the people using our state proofs all are able to guarantee that what they receive is um the lowest cost for the proof possible uh and that's the core of where our Network um prioritizes this incentive compatibility um and then you know very broadly speaking we know the the kind of the concept that we kind of talk about with this is is kind of the eli5 idea the internet the idea being that you

have this this Universal substrate under which you want to derive proofs from you want to be able to request some type of proof or some type of um uh verifiable information from somewhere within a network whether that be information on computation information on state information over State transition information over some execution and you want what's returned back not to be that information but be that information in addition to a proof awesome okay um and so drilling a little bit deeper into the the economics here like you have you have the ZK Prov Network and these are

these are the entities that are supplying the proofs and and there are computational resources that are required to to generate a proof yeah and and coinbase okx crack and these you know tier one partners are are they they have a cost to generate this proof and so let's say um let's call that like the cost of the task right and then on the other side call it the demand side you have co-processors and those who are uh consuming these state state proofs um the layer zeros and the and the usual monies and The Ether FES of the world and those are buying those guys are buying the proofs um now the the the entities that are buying

the proof are are you know paying for the cost uh to the ZK Prov Network and then and then some right and then there's a Delta and lrange may be capturing that Delta but then a port at least a portion of that is going to stakers in the form of apy and so maybe you could talk a bit about lr's fee mechanism how how stakers in lr's uh ABS ultimately end up um earning this this apy uh yeah that's a phenomenal question you know I I think very broadly every ABS blockchain network has two costs the first being a

capital cost you know the expectation of yield on Capital that's provided and the opportunity cost that exists on that Capital through other sources and then it has an operational cost how much does it cost to run this infrastructure um and with POS chains usually the capital cost is the most expensive component the amount you have to pay for a tenderman chain for instance to the validator sets is typically 25 15 35% it it can vary substantially but it's usually in a double digits and you can look at you know staking rewards to see what most POS chains are paying now if you look at the operational cost of

those Chains It's it's pretty low the amount of cost to run a validator is proportionally much lower than the amount that the chain has to pay to offset the opportunity cost in the capital ZK is almost a diametrically opposite design a Prov network has very high uh operational cost the amount of of Hardware that's required the the complexity of running that Hardware are much higher that said because stake is only being used to guarantee liveness the amount that's being paid to Stak cures can be much lower because the stake is not risked to the same extent it is in a POS chain and so the way the network works is that to your point

earlier a user requests appr proof from the co-processor from the state committees or from one of the other things we're announcing soon and from there you're able to from there look that face from there you're able to um uh pay a fee to the network to receive that proof and that's generally through a contract that emits an event or through just a direct request from one of the gateways when that proof is generated and delivered back um uh the approver is remunerated for that and the amount the approver receives is proportionate to what they bid so the profit margin on approver depends on what they run what Hardware

they run and this is why over time these market-based designs converge back to having substantially lower um uh cost than often times just a SAS or a cloud-based uh proving service because the incentive is on every operator to optimize their costs where if you can underbid everyone else by one cent and still maintain a profit margin of 50% that's a very great economic incentive for you to be in economic position for you to be in there's a a an incentive to optimize provs by someone the signs as a core team in order to be able to increase the profit margin of generating these and you know if we talk about the size of the proving market right now

it's about 1050 million from our predict from our assessment annual if we look at rollups co-processor State proofs in terms of the amount being spent generally on cloud now compute costs and there's a a very large pie available for anyone who can take existing implementations of a lot of these provs optimize them and increase their profit margin and a market and an auction that assigns work based on bids is the best way to allow people to capture that value and to create positive externalities over over cheaper cost and better performance re in resulting in um material uh material Revenue material profit for

operators awesome okay yeah I mean that that makes sense and and just kind of like uh I guess briefly kind of characterize this like you know this is a stark transition from that of like a proof of Staker tendon R chain which has relatively low operational cost just to run a few Val but a very high Capital cost and in the in the range of 10 to 15% paying for that for that Economic Security whereas uh an ABS and particularly a ZK ABS um has a very low Capital cost you know uh due to reaking but a very high operational cost per task um uh for each of these proofs that are getting generated

now um you know one of the actually quick quick quick tangent which is that a while ago we were doing one of these we were doing one of these episodes and it was you know everything moved so fast in this industry and so at the time I think you know you guys were working on your PR and there was another entity that had undergone some sort of transition they were doing aover uh but then they ended up going more into the prover network uh realm and at the time you had told me like you know you guys are focused on the the real ZK right which is those who are are building uh building the provs the ones the right and maybe going into Pro network was

almost like an easy way out do you is there like a new is there new evidence that kind of supports Pro networks and like lowering the operational cost dramatically or is are the pro networks mostly just like a I mean generally how do you reconcile like this yeah you know the doing a pro Network versus being one of those entities that is help helping to generate those proofs via either a ZK VM or a circuit yeah this is this is this is a great this is a great um comment so very broadly lrange builds a co-processor we build a a crover that we use to verify arbitrary SQL computation um over blockchain data

that's kind of the core function of our co-processor um you can write any type of SQL statement that you'd want to run we can parse that SQL statement into what's called an abstract syntax tree we can prove that computation of data and so that is one of the core things that's deployed on top of our Network the second core thing that's deployed is our state committees and state committees are State proofs for for rollups State proofs generated tropistic rups they like a fast pre-confirmation design in essence that we distribute through a lot of our cross-chain partners um and so both of those are kind of core products that we we build and so the imperative on those two core products is to have a Network that underpins them that can guarantee liveness on delivering those

right so you know isuki uses approver etherly uses approver gearbox uses our prover a number of other D5 protocols will announce soon use our prover um just as you know Axel polymer layer zero use use State proofs for dvn in in layer zero we have an integration with with polymer and exler we're we're part of their we're going to be soon part of their cross chain um amplifier protocol and so the question of you know why would you use approver Network comes down to do you feel that there is a reason to build one yourself versus do you think there is a reason to deploy another one and so we have a very bespoke architecture that we that we um have been working with some of our very

close Partners on that we think has very creative economics overall for their design and so as we've increased building our own product along the lines of our ZK co-processor and our state committees there are certain things that our team has built that are actually very extensible for other teams so you know building a a production grade decentralized auction for resource allocation in a dynamically and horizontally scalable network is complex and we've found that you know while it is not complex to just spin up a couple AWS instances and call yourself Prov Network it is very complex if you want incentive compatibility resource pricing and a very robust and dynamic set of in

institutional operators maintaining that operator base ensuring that they have the right upgrade paths uring they have the right binaries to running uring they participating properly all of that stuff is is a very large overhead and so there's some teams that we've that we've spent time with um who have started to feel that that being able to move some of that onto a network that's already generating proofs and production for a variety of other applications is is beneficial for them but broadly speaking I'm actually kind of bearish on these general concepts of pro networks because I I I don't think you you really need um you really need a company that just builds Network a network um if that network is not fundamentally

differentiated in what they can offer to you um and if that the economics of that Network aren't aren't beneficial to you so to make that very concrete you know let's say you know there there's the Robbie Pro Network and it has Robbie token um and I let's say I have a proving demand of about million a year for for let's say a couple of my products um would I route all $10 million of my fees per year to Robbie's Network and Robbie's token likely not it just doesn't make sense but if someone came to me and they said hey you know is smile um we'll build the whole Pro Network for you build the auction for you we want nothing would I do it yeah obviously I'd save I'd save a lot of

money so there's something in the middle between the network takes nothing and the current design of these networks which is these giant monolithic basically POS chains with some provs plugged into them they try to take everything right the the left side has taken has gotten no pmf and the right side means there's a very high overhead for everyone to build things right means that when lrange said in you know in May May April hey you know we want to be able to have a network to deliver our proofs for our customers so they can trust that they get there on time so they can trust there liveness there's no option but the build ourselves either we lose all of our revenue or build it ourselves I I think that architectures like what we have and we'll have a lot

more public on docs very soon they they find a middle ground they let teams maintain sovereignty and agency over what they're doing the same way that we maintain sovereignty and agency over our proofs within our network but they do so in a way that that makes it a actually very reasonable decision to underwrite moving your proving onto an external network and this is why we kind of talk about this internet of proving or this network of networks because it really isn't you deploying on lr's network it's you deploying a network that mimics an architecture that lrange has much like a rollup right you deploy an optimism rollup but it's still base right you deploy a optimistic roll up but you know it might be on the arbit

from snack you can deploy a what we call a supernet that that benefits from all of the things that we've talked about is a production grade infrastructure to run your improver on that exists within the broader context of our interet Improvement our network of networks okay I do want to hear more about supernets so stay tuned but um I ju I want to make a quick analogy and I I think I am at risk of oversimplifying it but you know one of the one of the things about uh just to draw a parallel here to the interrupt space you know uh uh on the other side of the ZK interop is is kind of like the intense spased

interop and so across is one of those projects that has done quite well uh and like you know pretty uh uh accepted into the into the bridge landscape and one criticism of their technology has been that you know they run their own solver right and so basically you know they they have their their uh their solver and they say that it's a solver network but really like most of it just goes through their one solver right and it's not like you have a very like robust decentralized network of solvers and so when we're looking at the ZK network is and you know is it is it akin to like lrange has

deployed its Prov is that and then it's one of the provs amongst the ZK network is that akin to like across has deployed their solver and it's one of the solvers amongst that solver network but you know granted these two these two networks have different levels of decentralization to it I think the best way to think of it is like as an app chain or a rollup and that's the analogy I think makes the most sense if you want to if you're if you're a high usage application and you said I need dedicated execution space you're not going to go build your own side chain or build your own rollup stack it just isn't reasonable right if you want a ZK rollup you would contact a Ras provider

or you would contact ZK sync or uh polygon or Linea or scroll or or even starware and you would say I have this thing that I want to deploy on on a chain in your network and I want to be able to deploy my own execution space with my own token with my own economics with my own design but I want it to be on your stack and part of your broader elastic chain or AG layer or super or super super chain or or you know the the orbit l3s you you effectively want economic sovereignty while simultaneously wanting the ability to build on an existing stack this is the same thing with Cosmos right if you want

a cosmos chain you're not going to roll your own if you want if you want a chain you're not going to roll your own your own consensus stack right a lot of teams will build on Cosmos stack and they'll use IVC and they'll use all the out-of thebox engineering Frameworks that are available to them they they they want their own token they want their own design they want they have value capture but they'll participate in a broader Network as part of that and that's very much the idea here co-processor is something that or co-processor is you know it's a state-of-the-art proving system that our team builds we have multiple papers to underly it we have actually two new papers coming out soon on uh like a new form of snark that that's updatable as well as um on a new verifiable SQL construction for joints

our state committee products been in production for like eight months at this point it's delivered you know probably over a million proofs at this point um and so these are production grade products and lrange needs to maintain economic sovereignty over the proving revenue on these for us to operate and exist of the business just as if you build a zkm you know you need to maintain sovereignty over your zkm proving Revenue if you build a rollup stack you have to maintain sovereignty over that Revenue as well um and what we offer is very similar to that you know you you build a rollup and you want sovereignty over your your your sequencer fees you want sovereignty over your gas token you deploy a approver network you deoy a proving stack you Deploy on the gr you want sovereignty

over something else in your network you want it over the Fe the fee token that Prov is being paid in you want it over staking requirements you want it over cons specifics of the auction design you want it over seats of who gets to do proving you want all these things that mean that it's your network but it will exist in the broader context of our internet of proving yep and I think that makes sense uh the the app chain analogy makes sense here as well as the r up more broadly but the app chain narrative you know kind of talks about all of these it is very closely associated with sovereignty um because now you know there's more dedicated block space um but granted there is interop that connects all of these app

chains and we we want deeper interop and ultimately we want composability between these app chains and so a fully connected uh internet of app chains would look a lot like uh a fully connected web of um uh you like Z ZK uh enabled app chains in that internet as well and lrange is helping to connect those together um okay so that was one tangent uh thank you for I love that one I love that one and so to add one very quick point you know we we talk about sovereignty and we talk about the evolution of what sovereignty means right two three years ago sovereignty meant

you want to deploy your own app chain on the cosmos or on you know par chain on polka dot you want agency over your gas token you want agency over your execution client you want agency over customizations over over how you build block space block time all this stuff right but you wanted to deploy in a stack that was production great now we're talking about a proof based future every app will use proofs I believe and I think we are very quickly moving the Direction Where We will see this in the next 18 months and the question then becomes if everyone uses proofs do we need sovereignty over them do we need sovereignty over who generates them do we need sovereignty over how they're paid for do we need sovereignty over over what's stake to guarantee liveness I would contend that we do and I would

contend that the architecture that's going to be the most accretive and infinite sum across all of this is going to be the one that allows customization configuration and ownership and sovereignty yep um I want to double click on one thing you said there which is I think the main uh the main reason that you know you guys and Ian L are working closely together and that is using Economic Security for liveness where predominantly you guys are cryptographically secured put you know with with ZK proofs and that's kind of like the main the main output of the business the the liveness isn't guaranteed uh cryptographically it's

it's incentive based uh and crypto economically secured and so so we actually had a had a podcast and part of the series as well with tun who helped yeah unpack the math behind uh Economic Security on a per task basis and and help answer the question of how we can value Economic Security and you know you pointed to like the low cost of capital um and and so how actually do we value that capital and one of the things that that fell out of that conversation was um an adaptation that Ian later made in their security model where it used to be totally pulled everything you know

was was pulled together and then you could kind of have um let's say I had a 100 eth that I was staking and I could use that 100 eth to stake in avsa and absb could both use that Economic Security my my 100 eth but in reality you know there was some issues because if AVS a slashes me you know that could have an impact on absb now that that led to this to what tun was calling a unique stake almost like a reserve ratio for avss some some avss may need a high Reserve ratio of stake um be to protect against like a Black Swan event yes I'm starting to maybe answer my own question here but I so I I

I think I'm gonna phrase this as an assumption but please correct me if I'm wrong um I would assume that you guys wouldn't need a very high unique stake you guys could set your reserve ratio that stakers you know have to uniquely stake into uh the lrange ABS relatively low because you're only staking for liveness and not uh having you wouldn't have any significant um flashing event uh that that would you know reduce an uh Staker stake by a dramatic amount and the the example that tun gave was like an oracle would maybe only be able to move the price you know 50 basis points or or one to two percent and so that

wouldn't lead to some dramatic staking uh slashing event um and so they wouldn't need a very high unique stake amount how how does this land in the LR case yeah do you guys need a very high unique stake ratio or can you guys be a little bit more Capital efficient and and a lower stake ratio in the ABS yeah that's a good question so I think what it comes down to in all of these conversations is the very simple equation of cost of corruption versus profit for corruption from corruption so what does it cost me to compromise some system and what do I profit from doing

so and so the good thing about ZK systems is the amount that a adversarial actor can benefit from um corrupting liveness is generally not very high if you are expected to generate a proof and the proof takes 30 seconds to generate and you miss your slot you face a penalty of some type and you get moved off of and someone else generates that and if if the network dynamically allocates work uh by a composition of both bidding and then operator performance you're able to design something that is very strongly um that's that very strongly disincentivizes somebody from behaving

badly and from engaging in malicious behavior and then the size of the penalty therefore only has to be proportionate to what can be lost from that penalty or it can be lost from from an adversarial actor um and with ZK systems to your point it's not you know incredibly high so this is why I actually don't think that a lot of proving systems or approving networks or any type of architecture delivers proof proof markets whatever require require slashing so if you have $2 billion dollar of stake in your in your operator and I assign you a proof and the penalty for you not Computing a proof is me not paying you for the next two weeks well then what you've lost is proportionate to the risk-free rate of

that Capital over two weeks and so let's say risk- free rates 2% so you would expect um 40 million per year in rewards and I compromise that over over two weeks so I effectively cost you 1.6 million 30 second delay of liveness 1.6 million in slashing it's it's rather high and I can never I in this case I don't actually even go after the principal I just go after the stake or sorry I just go after the the ability for you to generate Returns on that stake over a future interval uh jailing in essence and that's what a lot of uh prover networks and prover markets will likely move towards because it's much more Capital efficient and then the risk to the capital is much lower because you

don't lose principal and so the rate you have to pay is once again proportionate to risk and so you have to pay less and so the overall Network's more Capital efficient okay and so would you would you expect or would would anyone expect that the the because there's no risk of slashing principle here yeah the and tun used like credit rating the credit rating of lr's AV would be relatively high like the risk of getting slashed or at least your principal getting slashed would be relatively that risk is relatively low leading to a higher credit rating now it does that does that lower risk translate to potentially a lower reward lower apy versus like some credit rate I don't

want to pigeon hole you here but like yeah you know is is that is that sort of the the thought process yeah like we're not we're not issuing short positions on top of aan layer right like we're not it's this is not like you get slashed of eth price drops below a certain amount where it's it's and you're getting yield based on someone else taking else out of the position like um you know I I I think what's what's interesting with with our design is that it is able to effectively create a um environment where you can stake with a near zero risk of loss of principle which means that in so far as you have eth that you're staking it is advant advantageous

to restake it into the gr because you will not unless there's a contract failure on on one of our counterparties you will not lose your eth um and that's a very powerful position to be in we think because it means that people who want to restake without wanting to risk their Capital are able to do so in something that generates a nominal yield on it and it might not be as large as if we're issuing options on top of of restate eth but it's it's it's much less risky and it's something that can scale to you know right now we're at about seven eight billion restake into lrange but it could scale up to 10 billion 20 billion yeah it wouldn't be a systemic risk to the Bas Slayer any right and and so I again like I don't want to use too

many analogies from that previous podcast but like it it really does help put things in perspective like yeah t tun helps or he kind of illustrates this is like a bond market and and you know this this uh there's essentially bonds for Economic Security and so for this case like yeah you guys aren't you know slashing validators based on some some eth price up and down right so that's like very predictable um and and very low risk of getting your principal slashed and so we would we would you could call this like a like a triple AR rated um AVS Bond essentially or you know uh in the grand scheme I think that that's one one way way to think about it

yeah we it's one of the things we pride ourselves on we we want to be the the safest the safest AVS or one of the safest avss uh we want there to be a situation where people can stake into the network they can work with the proofs generated by the network as defi protocols as nft projects as um uh as rollup teams as um interop protocols and benefit from the proofs being delivered for them trust that the proof should be delivered properly such that everyone in the protocol is in a position where they feel good yep and I think there is a large subset of e validators that are not too inclined on taking some exorbitant risk that you know they've

already deposited into igen Lair they they're comfortable with that and then I think you know we we will end up seeing some sort of slippery slope down the risk curve But ultimately those those those validators that go further down the risk curve are you know they they've got to kind of watch out because that's what happens when you go further down the risk curve um and there's probably going to be some of that but um but for the most part for any institutional siiz capital or you know large validators I you know I think it's reasonable to expect that they would they would stick to lower on the risk curve collect their apy that they could get from triaa rated AVS and and be quite happy um exactly awesome so so I I do think that a large

subset of uh of e eth validators are going to uh are going to absorb and and find this AAA rated AVS uh quite quite nice in addition to their e validator rewards totally agree um and I I would I would even add that when you have 10 abss you can stake into without risking principle if those avss and aggregate pay you 50 bips total 25 bips total it's advantageous to do so especially if if the you get a receipt token and that that you can further compose into Define with the same adoption there there really isn't a a reason as a Staker that if you are comfortable with the smart

contract risk of using any of these services that you wouldn't stake into things that don't have slashing um this is why if we look at lrts right now they've delegated them to almost every there hey I lost you there for a second hold on I still don't have you totally back cool yeah so I think it makes a ton of

sense um that uh a significant subset of the ethereum validators are going to go into these triple rated avss um and and collect yield without taking uh risk to their principle yeah that is how we envision the future as well when the risk of slashing from an ABS is is zero because the ABS has not implemented slashing there isn't really a material concern about opting into many of these which means that if you receive yield without any risk to the principle you have to Simply offset whatever the opportunity cost is and given the the fact that you can use these receipt tokens in ways

that can pose within defy in very interesting structures like you can you can take a receipt token on LRT and you can use that within defi the same way using LST it means that opting into 10 15 AVS gues that don't slash you for you know a nominal yield of 25 bips 50 bips is is very compelling especially for institutions that are trying to maximize Returns on Capital maybe you know a dgen wouldn't buy eth and then stake it into Aon layer if they're getting 25 bips but if you're long you know two billion dollars of eth because you're a major institution then it makes sense that you would stake that for your your your three and a quar percent and then you

would restake it through an extra 2550 bips and so I think that we'll see Capital continue to ACR to the AAA abss the ones who to tun's point have you know the the the best risk adjusted return because they have the lowest risk abolutely I mean just take Taking like a very non- crypto native angle here is that you know we're we're still only what four maybe six months from uh no probably less the ethereum ETF only launched you a few months ago you know very much just just spot ETF for E I imagine and you know a traditional Financial person would know better than

I would but you know we're going to end up getting staking uh in those ETFs we're going to see some some larger institutions allocate capital and then we're going to see incremental adaptations to some of those uh staking uh configurations that are placed into those Ed ETFs and yeah maybe there's a basket of of AAA rated abss um and we can incrementally ACR more risk adjusted return to these larger institutions that aren't trying to take any risk on their capital and they're comfortable you know with with the amount of return uh that comes from this and they can just continuously stack these these returns without adding any any risk to the underlying Capital exactly and especially once you've

underwritten a smart contract risk that's inherent to every ecosystem um for the first ABS you support becomes very easy to support the marginal ABS that is based in the same smart contracts it doesn't in fact add any exogenous conditions or exogenous contract for slashing um and you get very strong properties like Cil resistance um from having you know stake based uh waiting of of how actors are allowed to join the network right where if you're if you're only allowed to compute proofs up to a certain amount given the amount of stake you have if you're only allowed to participate if you meet a certain threshold irrespective if you have slash and you have very strong properties of of that guarantee liveness and guarantee some

aspects of safety by using uh Economic Security that isn't slash yeah and and what you're alluding to is I think that unlocks potentially new use cases that haven't even been thought about yet oh it does it does yeah awesome very exciting times um Imagination always goes wild during these conversations with you ishmail um I uh always appreciate you coming on the show love you love being on it I appreciate you guys having me and I'm glad you're not tired of me already we're just getting started CK is still so so early and uh yeah you always bring a you know a very interesting and informative perspective so thank you as always than thank you I really appreciate that