Is Liquid Staking Winner Take All? | Hasu

Name: Is Liquid Staking Winner Take All? | Hasu
Uploaded: 2023-07-11T11:00:08.000Z
Duration: 3 h 24 min 16 s

Introduction and Disclaimer

The hosts provide a disclaimer that the views expressed in the episode are personal and do not represent any organization. They also mention that the episode should not be relied upon as financial, technical, tax, legal, or other advice.

Episode Introduction

The hosts introduce the first interview episode of Season 5, featuring a special guest named Hatsu. They mention that Hatsu was previously a co-host on another season and will now discuss his expertise in liquid staking.

Hatsu's Background and Topic of Discussion

Hatsu is introduced as a strategic advisor for Lido and will share his insights on liquid staking. The hosts highlight the big themes they want to explore this season, including market structure development, self-limiting debate, impact of restaking, and decentralization as an offensive tool.

Market Structure and Self-Limiting Debate

The hosts discuss how the market structure for liquid staking might develop and raise questions about whether dominant protocols like Lido should cap their market share. They also touch upon the impact of restaking and its relationship with other protocols like Eigenlayer.

High-Level Frameworks and History of Lido

The conversation delves into high-level frameworks for understanding liquid staking. They explore the history of Lido from a first principle standpoint and discuss tactical considerations in protocol development. The role of decentralization as an offensive tool for protocols like Lido is emphasized.

Conclusion of Interview Introduction

The hosts conclude the interview introduction and express their excitement for the upcoming conversation with Hatsu.

Interview Begins - Liquid Staking and Mev

The hosts welcome Hatsu back to the show and mention that they will be discussing liquid staking, another topic of interest to him. They briefly reference their previous discussion on Mev (Miner Extractable Value).

Liquid Staking in a Bear Market

The hosts highlight that liquid staking is thriving in the current bear market, evidenced by Lido's Total Value Locked (TVL) surpassing 14 billion. They aim to understand the reasons behind this rapid growth and adoption.

Reasons for Rapid Growth in Liquid Staking

The decline of lending markets due to decreased demand for borrowing is mentioned as a reason for liquid staking protocols rising in TVL. Ethereum's transition from proof of work to proof of stake has also increased demand for participation, offering consistent rewards compared to lending coins.

De-Risking of Proof of Stake

Proof of stake networks, including Ethereum, have been de-risked over time. This has led to an increase in staked ETH as it offers relatively lower risk compared to other options.

Rewards and Withdrawals in Proof of Stake

Users participating in proof of stake can earn inflation rewards, transaction fees, and Miner Extractable Value (Mev). Additionally, withdrawals have been enabled from Beacon Chain, further contributing to the appeal of proof-of-stake participation.

Conclusion and Risk Considerations

The hosts conclude the discussion on liquid staking, highlighting its appeal in a bear market and the reduced risk associated with proof of stake. They acknowledge that while it is not entirely risk-free, it offers a relatively safer option for users.

Timestamps are approximate and may vary slightly depending on the source video.

The Use of Liquid Staking Tokens for Recursive Leverage Trading

This section discusses the concept of recursive leverage trading using liquid staking tokens like STEVE. It explores the spectrum of healthy capital efficiency and the potential risks associated with this type of trading.

Recursive Leverage Trading with Liquid Staking Tokens

Recursive leverage trading involves staking ETH to obtain liquid staking tokens like STEVE.

These tokens can then be used as collateral to borrow more ETH, allowing traders to increase their leverage.

There is a spectrum of healthy capital efficiency in this type of trading, balancing risk and opportunity cost.

Market Driven by Degen Activity

The market may be influenced by speculative and high-risk activities related to recursive leverage trading.

It is important to understand the extent to which such activities drive the market and where one stands on this spectrum.

Changes in Borrowing and Lending Markets

Currently, it is no longer possible to borrow at a cheaper rate than staking due to efficient market conditions.

Inefficient markets in the past allowed for looping trades with high leverage, leading to concerns about liquidations.

Usefulness of Liquid Staking Tokens

Despite potential risks, liquid staking tokens offer liquidity and flexibility for users.

They provide an additional option for those who are not comfortable with traditional staking but still want exposure to its benefits.

Access through lending markets has further democratized access to staking.

State of Liquid Staking Providers: An Overview

This section provides an overview of Lido, a liquid staking provider, including its history and current functioning. The speaker acts as a strategic advisor to Lido.

History and Purpose of Lido Protocol

Lido was conceived before the Beacon chain went live on Ethereum.

Initially, there was only one form of staking, involving delegation to professional node operators.

Ethereum took a different approach with an isolated Beacon chain running in Canada, serving as an incentivized testnet.

Impressive Technical Feat

The transition from proof of work to proof of stake on Ethereum's Beacon chain was a significant technical achievement.

The engine of the system was swapped mid-flight without missing any blocks, showcasing remarkable technical prowess.

Lido's Role and Advisory Position

Lido is a protocol that allows users to stake their ETH and receive liquid staking tokens in return.

The speaker serves as an advisor to the DAO governing Lido, participating in decision-making processes.

This summary covers only a portion of the transcript.

The Challenges of Ethereum Staking

In this section, the speaker discusses the challenges faced by Ethereum stakers.

Ethereum's Initial Cost and Lock-up Period

Ethereum was initially much cheaper than it is today, with prices in the range of several hundred dollars.

Staking required a substantial amount of Ethereum, with increments of 32 ETH being the minimum requirement.

The lock-up period on the beacon chain was expected to last for at least two to three years before withdrawals were enabled.

Liquidity and Liquid Staking Tokens

Users wanted liquidity for their staked ETH, as they didn't want to lock up their funds for an extended period.

Liquid staking tokens were introduced as vouchers representing staked ETH on the beacon chain that could be traded or sold.

Lack of Native Delegation Ability

Ethereum did not have a native ability to delegate staking to a node operator.

Users had to find someone trustworthy and sign legal contracts for delegation services.

The Need for a New Protocol

This section highlights the need for a new protocol that addresses the challenges faced by Ethereum stakers.

Dominance of a Protocol Solving Problems

A protocol that solves all the problems faced by Ethereum stakers would have a significant advantage over existing solutions.

Differentiation Lines in Staking Protocols

Liquid staking vs. non-liquid staking: Liquid staking allows users to trade or use their stake in various decentralized finance (DeFi) platforms, while non-liquid staking involves leaving funds with an exchange that stakes on behalf of users.

Retail vs. Institutional Focus

Different protocols cater to different customer segments, such as retail users or institutional investors.

Lido's Value Proposition and Competition

This section discusses Lido's value proposition and the competition in the staking market.

Lido's Initial Focus

Lido initially targeted Ethereum native users who wanted non-custodial custody, liquidity, and access to DeFi platforms.

Other Protocols' Focus on Ease of Use

Other protocols focused on ease of use and offered custodial solutions, making it easier for users who prefer centralized exchanges to participate in staking.

Concerns about Exchange Dominance

There were concerns that exchanges would capture most of the stake before withdrawals became available due to their ability to provide liquidity and easy trading options.

Surprising Lack of Liquid Staking by Exchanges

This section explores the surprising lack of liquid staking offerings by exchanges.

Expectations of Exchange Emphasis on Liquid Staking

It was expected that exchanges would heavily focus on liquid staking due to its simplicity and potential for liquidity.

Unexpected Outcome

Contrary to expectations, exchanges did not prioritize liquid staking as anticipated.

New Section

In this section, the speaker discusses the importance of a non-custodial staking protocol as a counterweight to centralized exchanges in the Ethereum ecosystem.

Importance of Non-Custodial Staking Protocol

The speaker believes that if it weren't for a non-custodial staking protocol like Lido, there would be significant risks associated with having a majority of Ethereum validators controlled by a few large exchanges.

Lido aims to provide an alternative option for users who want the convenience and liquidity of staking without relying on centralized exchanges.

Three different user personas are identified: institutional users or exchange users, Lido users in the middle, and self-stakers who run their own nodes.

The growth prospects of these user groups are discussed, with emphasis on capturing market share from existing exchanges and offering custodial products through traditional asset management channels.

New Section

In this section, the speaker further explores the growth prospects of different user groups and discusses potential strategies for expanding Lido's reach.

Growth Prospects and Strategies

The current market share of institutions using Centralized Staking Exchanges (CBE) is mentioned to be around 10%. Despite higher fees charged by Lido compared to CBE, it indicates that there is demand for non-custodial options.

To capture more market share, one strategy could be offering alternative custodial products through existing exchanges where users can buy stake ETH and hold it on an exchange or wallet. Another strategy involves targeting traditional asset management channels like Fidelity or Vanguard.

New Section

In this section, the speaker discusses Rocket Pool as a decentralized staking protocol and its importance in maintaining Ethereum's decentralization.

Importance of Rocket Pool

The speaker acknowledges the significance of solo stakers who run their own nodes in ensuring Ethereum's decentralization. Rocket Pool is seen as an important backbone for decentralization.

Rocket Pool has been around longer than Lido and offers a specific model where users can divide their stake and borrow additional stake to stack together. This model provides more trustlessness compared to other protocols.

New Section

In this section, the speaker emphasizes the importance of leveraging solo stakers to enhance Ethereum's decentralization.

Leveraging Solo Stakers

Leveraging solo stakers through protocols like Rocket Pool helps increase Ethereum's decentralization by giving them more stake and influence in the network.

The speaker suggests that if all assets on CBE were held on-chain, Lido would already offer similar functionality. However, since self-custody is required for CBE, alternative custodial products offered by exchanges or wallets could help access that market segment. Traditional asset management channels are also mentioned as potential competitive channels for Lido.

The Risk of Proof of Stake

The speaker discusses the risk associated with the implementation of proof of stake and how it continues to be a significant risk even though it is often overlooked. They mention a debate about Lido and the concerns raised about its size and the need for self-limiting.

Risk Associated with Proof of Stake

Implementing proof of stake was considered a rare and significant risk.

Many people avoid discussing this risk, but it still exists today.

There was a debate about Lido's size and the suggestion to self-limit its growth.

Lido had minimal new inflow due to trading at a discount compared to Eve.

Over 90% of staking was going to centralized entities that lacked transparency.

These entities did not prioritize client diversity or decentralization.

Similarities between Lido and Rocketpool

The speaker highlights the ideological similarities between Lido and Rocketpool, two protocols starting from different points but moving towards the same goal. They discuss version two of Lido, which introduces a staking router for modular architecture, allowing anyone to write new modules for approval by the DAO. They also mention Rocketpool's scaling limitations and their efforts to reduce collateral requirements.

Ideological Similarities

Lido and Rocketpool are ideologically similar protocols.

Lido introduced version two with a staking router for modular architecture.

The staking router allows anyone to write new modules for approval by the DAO.

New modules can include permissionless staking with collateral attached.

Lido is expected to increase node operators from 35 to hundreds or thousands.

Rocketpool has hit scaling limits due to high collateral requirements.

Rocketpool is reducing collateral requirements and whitelisting entities like Coinbase.

Meeting User Demand

The speaker discusses how Lido and Rocketpool are evolving to meet user demand. They mention that Rocketpool will have more professional permissioned node operators, while Lido will support permissionless staking for users who prefer solo operators. They anticipate both protocols becoming more similar in the future.

Meeting User Demand

Rocketpool will have more professional permissioned node operators.

These operators will have an off-chain reputation at stake.

Lido will support permissionless staking for users who prefer solo operators.

Users can choose to stake specifically with a solo operator.

Both protocols are expected to become more alike in meeting user preferences.

Context of Market Structure Debate

The speaker provides context about the market structure debate surrounding Lido and mentions Vitalik's proposal to limit Lido's growth. They highlight the paradoxical situation where the debate occurred simultaneously with negative press coverage.

Market Structure Debate Context

The market structure debate started in May of last year.

Vastly and Vitalik were involved in proposing limits on Lido's growth.

Negative press coverage coincided with the debate, creating a paradoxical situation.

Timestamps may not be exact due to limitations in processing natural language.

New Section

In this section, the speaker discusses the market structure of liquid staking and its potential for centralization. They explain the network effects and returns to scale associated with liquid staking, as well as the importance of brand recognition and trust in staking providers.

Market Structure of Liquid Staking

Liquid staking is perceived to have a winner-take-all or winner-take-most market structure.

The speaker believes that liquid staking has a large network effect and return to scale, leading to concentration in the market.

Liquid staking offers superior benefits compared to regular staking, such as liquidity and non-custodial options.

The market share of liquid staking is expected to approach 100% over time.

Network Effects and Brand Recognition

Liquidity begets liquidity, making tokens with higher acceptance and deeper liquidity more attractive for users.

Tokens used actively as money exhibit strong network effects.

Brand recognition plays a crucial role in building trust among users who are willing to stake their assets for an extended period.

Users are inclined to stake with larger and more established providers due to trust considerations.

Minimum Size Requirement

To compete in the liquid staking market, protocols need significant integration capabilities and liquidity.

Breaking into liquid staking requires substantial investment, which becomes less burdensome for larger protocols due to economies of scale.

Overall, the speaker emphasizes the potential centralization of liquid staking due to its network effects, brand recognition, and minimum size requirements.

Governance and Decentralization in Lido Protocol

This section discusses the concerns regarding governance and decentralization in the Lido protocol, as well as the steps taken by Lido to address these concerns.

Dual Governance for Protocol Changes

Concerns are raised about having most of the Ethereum ecosystem dependent on a protocol that is not part of the Ethereum core protocol.

Danny Ryan expresses concern that multiple entities within Lido could behave as one entity under extreme conditions, potentially leading to actions detrimental to Ethereum users.

Lido introduces dual governance, where stake ETH holders can veto any changes proposed by the governance layer, ensuring bad changes do not pass through.

The larger the protocol, the more stakeholders need to be convinced of a change's benefits for it to pass. This creates checks and balances and increases scrutiny on governance decisions.

Concerns about Influence and Self-Limiting Debate

Many people worry about the influence a protocol like Lido has due to its growing size and being perceived as unstoppable.

In May last year, there was a debate on whether staking providers should self-limit their stake percentage. A proposal was initiated but ultimately voted against.

The question arises whether it is beneficial to limit the growth of protocols from a capitalist perspective and what impact competition in liquid staking may have.

Risks and Responsibilities

Concerns about the risks associated with a single staking protocol growing too large are valid, as it could have spillover effects on the security of the entire Ethereum system.

Governance decisions could potentially be detrimental to stakeholders, such as changing smart contracts in ways that harm stake ETH holders or node operators.

The structural outcome of competition in the liquid staking market is also a consideration, with exchanges having the potential to become influential players.

Conclusion

Balancing size and responsibility is crucial for protocols like Lido. While concerns about influence and risks are valid, competition and self-limiting debates also play a role in shaping the future of liquid staking protocols.

Pragmatic Approach to Liquid Staking

The speaker discusses the importance of being pragmatic in the liquid staking industry and aligning with the underlying base protocol. They explain their support for Lido as a protocol that fights against exchanges and shares similar values with Ethereum.

Being Pragmatic and Supporting Lido

Being pragmatic means making the best decision for the liquid staking industry while keeping it decentralized and aligned with the base protocol.

Lido is seen as a protocol that can fight against exchanges and is culturally aligned with Ethereum.

Lido has a commitment to transparency, decentralization, and constant self-improvement.

The speaker supports Lido both with their time and financial contributions.

Involving DAO in Decision Making

The speaker explains how decisions regarding self-limiting came up within Lido's governance process. They discuss involving the DAO (Decentralized Autonomous Organization) through grants committee called Lego, which led to an unbiased analysis of the topic.

Involving DAO through Grants Committee

Self-limiting debate was expected to be a significant issue in the governance process.

Lido has a grants committee called Lego, which has a budget for giving grants.

The decision on self-limiting is crucial for determining the strategy of the protocol.

It was clear that this decision should involve asking the DAO for their opinion.

A member of Lego sought someone to write an unbiased analysis similar to Swiss booklets used in referendums.

An independent expert wrote an unbiased analysis presenting arguments both for and against self-limiting.

Importance of Unbiased Analysis

The speaker emphasizes how unbiased analysis helps voters make informed decisions by presenting arguments from different perspectives. They compare it to Vitalik Buterin's writing style, which represents both sides of an argument.

Unbiased Analysis for Voter Education

The Swiss booklet concept was applied to Lido's governance process.

Independent experts wrote an unbiased analysis presenting arguments for and against self-limiting.

The analysis helps voters understand different perspectives and make informed decisions.

Vitalik Buterin's writing style, known for representing both sides of an argument, is mentioned as a comparison.

Governance Decision on Self-Limiting

The speaker discusses the outcome of the governance decision on self-limiting. They mention that Lido token holders voted against self-limiting, possibly due to their belief in the importance of decentralization in the staking market.

Outcome of Governance Decision

Lido token holders voted against self-limiting after considering arguments from both sides.

While there is a vested interest in safety, it is believed that people involved with Lido support decentralization in the staking market.

The decision-making process demonstrated how the DAO should work when major decisions arise.

Alignment on Sequencing and Competitiveness

The speaker highlights that alignment exists among stakeholders regarding the need for training wheels in the early days of Lido to compete with centralized exchanges. Sequencing plays a crucial role in this alignment.

Alignment on Training Wheels and Competitiveness

Stakeholders agree that Lido needed training wheels initially to create a competitive offering against centralized exchanges.

Differences arise regarding sequencing and when certain features or limitations should be implemented.

Proper sequencing ensures that Lido can compete effectively while maintaining its decentralized nature.

This summary covers key points from the transcript using timestamps provided. It provides an overview of each section without going into excessive detail.

Lido's Stage of Growth and Decentralization

In this section, the discussion revolves around Lido's stage of growth and decentralization. The disagreement arises from differing opinions on where Lido should be in terms of its growth and decentralization. The conversation also touches upon topics such as native staking, dual governance, and ossifying parts of the protocol.

Lido's Stage of Growth and Decentralization

Some individuals believe that Lido has already mitigated the risk of centralization to some extent but hasn't fully transitioned away from centralized control.

The level of comfort with higher market share for Lido depends on how decentralized it is perceived to be.

The discussion around Lido's growth felt tribalistic at times, with rival protocols being brought into the conversation.

In the past year, Lido had more training wheels on compared to its current state.

Initially, a smart contract couldn't control a validator on the beacon chain, so an EOA (Externally Owned Account) was used. Later, Lido switched to a smart contract custody controlled by Aragon governance.

Ossification is limited not only by resources but also by constraints imposed by the underlying base layer (e.g., Ethereum).

Certain ossification steps require unlocking changes in the layer below before they can be implemented in the staking layer.

Decentralization is crucial for many systems and seen as a form of sacrifice. However, in staking protocols like Lido, decentralization is beneficial and a top priority.

Decentralization in staking protocols enhances neutrality and trust, making it a priority for Lido.

Suggestions will be posted by the strategic advisor to outline steps for decentralizing governance.

Steps Towards Decentralizing Governance

This section focuses on the steps that Lido should take to decentralize its governance. The importance of decentralization and its role in enhancing trust and neutrality is reiterated.

Steps Towards Decentralizing Governance

One of the key suggestions is to take steps towards decentralizing governance.

Include timestamps as necessary to link to specific parts of the video.

Staking Module and DVT Module

The speaker discusses the staking module and the DVT module, which can help alleviate concerns. They emphasize the importance of trust in delivering on the roadmap.

Staking Module and DVT Module

The staking module and DVT module contribute to decentralization.

Increasing the node operator set from 35 to 350 helps address concerns.

Trust is crucial for delivering on the roadmap.

Importance of Trust in Roadmap Delivery

The speaker highlights the significance of trust in ensuring successful delivery of Lido's decentralization roadmap.

Importance of Trust in Roadmap Delivery

The more already shipped on the roadmap, the higher confidence in future delivery.

Trust is essential for maintaining momentum and achieving decentralization goals.

Moving Towards Permissionless Validator Sets

The speaker explains how Lido is moving towards permissionless validator sets with the staking router and DVT, mitigating governance attack risks.

Moving Towards Permissionless Validator Sets

Staking router and DVT contribute to permissionless validator sets.

Dual governance acts as an interim solution to mitigate governance attack risks.

Hypothetical End State and Ossification Concerns

The speaker discusses potential challenges related to ossification in Lido's hypothetical end state, including decisions about deposit distribution, fees, and contract ossification timing.

Hypothetical End State and Ossification Concerns

In the ideal end state, there may be challenges related to ossification.

Decisions about deposit distribution across validator sets need consideration.

Determining fees and contract ossification timing can be difficult.

Ossifying too soon may lead to catastrophic situations.

Liquid Staking and Ossification

The speaker draws a parallel between the question of liquid staking in Ethereum and Lido's potential ossification, highlighting the need for governance over the node operator set.

Liquid Staking and Ossification

Liquid staking in Ethereum poses similar challenges to Lido's potential ossification.

Liquidity aggregation and node operator selection are crucial factors.

Governance over the node operator set is necessary for better outcomes.

Centralizing Effects of Incentives

The speaker explains how following incentives alone can lead to centralization in staking, emphasizing the value of Lido's governance over the node operator set.

Centralizing Effects of Incentives

Following incentives alone can result in centralization in staking.

Lido's governance helps prevent concentration of power among node operators.

Quotas for geographical decentralization and client diversity contribute to a better node operator set.

Necessity of Governance Over Node Operator Set

The speaker emphasizes that some level of governance over the node operator set will always be necessary to match stake delegation demand with supply.

Necessity of Governance Over Node Operator Set

Some level of governance over the node operator set is essential.

Matching stake delegation demand requires effective governance.

Quotas for geographical decentralization, legal entity control, etc., improve outcomes.

The Importance of Fine Tuning in Lido

In this section, the speaker discusses the need for fine-tuning in certain aspects of Lido and emphasizes the importance of stakeholder buy-in.

Fine Tuning and Stakeholder Buy-In

Fine tuning is necessary for certain aspects of Lido.

This process should be infrequent and have the full support of stakeholders.

Stakeholders' agreement is crucial for achieving a realistic state for Lido.

Decentralization as a Core Value Proposition

The speaker highlights how decentralization is not antithetical to the product but rather a core part of its value proposition. A comparison is drawn between Lido and Ethereum's approach to outsourcing critical functionality.

Decentralization as a Value Proposition

Decentralization is an integral part of Lido's value proposition.

Ethereum outsources critical functionality, such as block building, through protocols like Flashbots.

Restaking protocols, including Lido, can also serve as examples of outsourcing important functions within Ethereum.

Restaking Protocols and Critical Functionality

The speaker explores restaking protocols and their potential role in providing critical functionality within Ethereum. Examples are given to illustrate this concept.

Restaking Protocols and Critical Functionality

Restaking allows leveraging Ethereum's validator set for additional activities by opting into slashing conditions.

Examples include data availability protocols, sequencing layer 2 roll-ups, and oracles.

While restaking has potential, it currently lacks revenue-generating activities and requires further development.

Core Functionality and Restaking

The speaker discusses the importance of core functionality and infrastructure in relation to restaking. The need for a balanced approach between risk and reward is emphasized.

Core Functionality and Infrastructure

Restaking protocols provide core functionality for Ethereum.

Examples include utilities, banking systems, and health-related services.

Balancing risk and reward is crucial in restaking protocols.

Principal-Agent Problem in Restaking

The speaker addresses the potential risks associated with the principal-agent problem in restaking. The interaction between restaking and liquid staking is explored.

Principal-Agent Problem in Restaking

Restaking introduces additional risks related to the principal-agent problem.

The high-level interaction between restaking and liquid staking needs further examination.

Understanding the relationship between these two concepts is important for evaluating their impact on the market.

Use Cases and Narrative of Restaking

The speaker explores various use cases for restaking, highlighting its potential benefits. The current state of revenue generation from restaking activities is discussed.

Use Cases and Revenue Generation

Use cases for restaking include data availability, sequencing layer 2 roll-ups, and oracles.

While there are promising use cases, revenue generation from restaking activities is currently limited.

Competition among staking protocols drives rewards to node operators, but a balanced ratio of risk and reward should be maintained.

Importance of Decentralization Roadmap

The speaker emphasizes the significance of executing the decentralization roadmap over focusing solely on boosting rewards for stakeholders through restaking.

Focus on Decentralization Roadmap

Executing the decentralization roadmap takes precedence over maximizing rewards for stakeholders.

Restaking may become a differentiator in the staking market in the future, but it is currently not a top priority.

The speaker's personal focus lies on achieving decentralization rather than pursuing immediate reward boosts.

Co-opetition Between Lido and Eigenlayer

The speaker discusses the co-opetition relationship between Lido and Eigenlayer, highlighting strategic considerations for liquid staking protocols.

Co-opetition Between Lido and Eigenlayer

Lido and Eigenlayer have a co-opetition relationship.

Strategic decisions regarding restaking protocols need to be made by operating companies behind liquid staking protocols.

Restaking may become a significant differentiator in the staking market within one to two years.

The summary has been provided based on the available transcript.

The Complementary Nature of Liquid Staking Protocols and Ein Layer

In this section, the speaker discusses the complementary nature of liquid staking protocols and Ein Layer. They explain that liquid staking protocols offer higher rewards, while Ein Layer seeks access to note operators and users. This creates a perfect match between the two.

Liquid Staking Protocols and Ein Layer Integration

Liquid staking protocols and Ein Layer have a complementary relationship.

Liquid staking protocols provide higher rewards, which is desirable for users.

Ein Layer benefits from accessing note operators and users provided by liquid staking protocols.

The integration between these two can be mutually beneficial.

The Importance of Real Demand for Liquid Staking Protocols

In this section, the speaker emphasizes the importance of real demand for liquid staking protocols. While there has been significant success in creating hype around these protocols, it remains to be seen if there will be actual demand to fulfill those expectations.

Evaluating Demand for Liquid Staking Protocols

There has been successful marketing and hype around liquid staking protocols.

However, it is crucial to determine if there will be real demand to meet those expectations.

The speaker questions whether the anticipated demand will materialize or not.

Potential Vertical Integration in Second Protocols

Here, the speaker explores the possibility of vertical integration in second protocols. They discuss how every second protocol may eventually consider integrating vertically by running their own staking protocol. However, they express skepticism about such moves.

Vertical Integration in Second Protocols

It is possible that second protocols may explore vertical integration by running their own staking protocol.

The speaker personally does not support these moves for a few reasons.

Protocols can grow much larger than anticipated, making internalization and vertical integration less beneficial.

Collaboration is often more advantageous, especially in markets where customization and user experience are important.

The Benefits of Collaboration and Trusted Interfaces

In this section, the speaker highlights the benefits of collaboration and trusted interfaces between protocols. They argue against vertical integration and emphasize the importance of keeping protocols thin and neutral to survive in the staking market.

Collaboration and Trusted Interfaces

Collaboration between protocols is highly beneficial.

Vertical integration may not be suitable for survival in the staking market.

Keeping protocols thin and neutral allows for better user experience.

Crypto serves as a good example where composing with other smart contracts can provide a satisfactory user experience.

The Potential Size and Margins of Decentralized Protocols

Here, the speaker discusses the potential size and margins of decentralized protocols. They explain that decentralized protocols can become much larger than expected, with small profit margins. This influences their perspective on internalizing operations or vertically integrating.

Size and Margins of Decentralized Protocols

Decentralized protocols have the potential to grow much larger than anticipated.

Profit margins tend to be small in such scenarios.

Internalizing operations or vertical integration may not offer significant advantages due to slow emergence and limited gains.

Customization, User Experience, and Complexity in Crypto

In this section, the speaker discusses customization, user experience, and complexity within crypto. They argue that controlling the entire user experience is unnecessary as good user experiences can be achieved through collaboration with other smart contracts.

Customization, User Experience, and Complexity in Crypto

Crypto demonstrates that good user experiences can be achieved through collaboration with other smart contracts.

Controlling the entire user experience is not necessary.

Minimizing complexity and focusing on customization and user preferences are key.

Lido Dao's Strategy as a Neutral Middleware

Here, the speaker explains Lido Dao's strategy as a neutral middleware. They emphasize the importance of minimizing Lido's management surface and avoiding vertical integration to maintain neutrality.

Lido Dao's Strategy as a Neutral Middleware

Lido Dao aims to be a neutral middleware.

The protocol should have an incredibly small management surface.

Vertical integration goes against the objective of being thin and neutral.

The speaker advises against any form of vertical integration for Lido Dao.

The Importance of Growth for Liquid Staking Protocols

In this section, the speaker emphasizes the significance of growth for liquid staking protocols. They argue that continuous growth is essential for survival in the staking market, making collaboration and trusted interfaces crucial.

Importance of Growth for Liquid Staking Protocols

Continuous growth is vital for liquid staking protocols' survival.

Collaboration and trusted interfaces play a key role in achieving growth.

Failure to keep growing may lead to stagnation and eventual demise.

Avoiding Complexity and Managing Fees in Liquid Staking Protocols

Here, the speaker discusses the importance of avoiding complexity and managing fees in liquid staking protocols. They advocate for minimal fees and fixed pricing to ensure fairness between users and note operators.

Avoiding Complexity and Managing Fees

Complexity should be minimized in liquid staking protocols.

Fees should be kept small, if managed at all.

Lido could have an internal fee market similar to Ethereum's gas market.

The speaker believes that fees should be determined by supply and demand, not controlled by the protocol.

Limited Value Extraction in Decentralized Protocols

In this section, the speaker discusses the limited value extraction in decentralized protocols. They argue that decentralized protocols cannot behave like centralized entities with outsized bargaining power over users and suppliers.

Limited Value Extraction in Decentralized Protocols

Decentralized protocols are limited in their ability to extract value compared to centralized entities.

The promise of decentralized protocols is that they cannot behave like centralized entities with significant bargaining power.

Value extraction is limited to a smaller scale, ensuring fairness and avoiding excessive pricing.

Pro-Collaboration Stance and Anti-Vertical Integration Perspective

Here, the speaker reiterates their pro-collaboration stance and anti-vertical integration perspective. They emphasize the importance of collaboration between liquid staking protocols and advocate for trusted interfaces.

Pro-Collaboration Stance and Anti-Vertical Integration Perspective

Collaboration between liquid staking protocols is highly encouraged.

Trusted interfaces play a crucial role in facilitating collaboration.

Vertical integration goes against the objective of being thin and neutral.

The speaker strongly supports collaboration over vertical integration.

Ensuring Fair Fees in Decentralized Protocols

In this section, the speaker discusses fair fees in decentralized protocols. They argue that fees should be small, fixed, and determined by supply and demand rather than being subject to manipulation by the protocol.

Ensuring Fair Fees in Decentralized Protocols

Fees should be kept small and fixed in decentralized protocols.

The speaker suggests that fees should be determined by supply and demand, similar to Ethereum's gas market.

The protocol should not have the ability to manipulate or increase fees arbitrarily.

Decentralized Protocols' Limited Value Extraction

Here, the speaker emphasizes the limited value extraction in decentralized protocols. They argue that the value captured by these protocols is inherently smaller, preventing them from behaving like centralized entities with outsized bargaining power.

Limited Value Extraction in Decentralized Protocols

Decentralized protocols have limited ability to extract value compared to centralized entities.

The promise of decentralized protocols is that their value capture is inherently smaller.

This prevents them from behaving like centralized entities with significant bargaining power over users and suppliers.

Fee Management and Price Discovery in Lido Dao

In this section, the speaker discusses fee management and price discovery in Lido Dao. They propose a system where fees are set by supply and demand, with node operators adhering to an objective function defined by the Dao.

Fee Management and Price Discovery in Lido Dao

Fees in Lido Dao should be set by supply and demand.

Node operators should adhere to an objective function defined by the Dao for setting fees.

Price discovery between users and node operators can be left to the free market.

The speaker argues against allowing the protocol to manipulate or increase prices arbitrarily.

Ethereum's Internal Fee Market as a Model for Lido Dao

Here, the speaker suggests using Ethereum's internal fee market as a model for Lido Dao. They explain how Ethereum defines gas supply while leaving gas prices to be determined by supply and demand.

Using Ethereum's Internal Fee Market as a Model

Ethereum's internal fee market can serve as a model for Lido Dao.

Ethereum defines gas supply, but gas prices are determined by supply and demand.

Lido

The Potential of Experimentation on the Supply Side

In this section, the speaker discusses the potential benefits of experimenting with fees on the supply side of Lido's protocol. They suggest that a fee split between the protocol and validators could be interesting to explore, as it could lead to a healthier protocol.

Exploring Fee Split and Bootstrap Collateral

The speaker suggests that experimentation with fee splits between the protocol and validators could be beneficial for making the protocol healthier.

They propose that larger validators may be willing to take a smaller commission than 5% in order to receive larger deposits.

As Lido aims to bootstrap permissionless validator sets via the staking router, higher fees may be necessary initially to attract validators.

The revenue generated from higher fees for larger validators could potentially be used to bootstrap their collateral.

Importance of Setting Own Fees and Price Discovery

This section focuses on the importance of allowing staking modules to set their own fees and promoting competition between different modules. It also highlights how price discovery can help determine optimal supply-side fees.

Allowing Staking Modules to Set Their Own Fees

The speaker emphasizes that staking modules should have the ability to set their own fees.

Competition between different modules can drive innovation and efficiency in fee structures.

Price Discovery for Optimal Supply-Side Fees

With potential increases in Ethereum's price, it becomes crucial to determine the actual cost of providing validator services.

Market equilibrium is not achieved when note operators' costs are significantly lower than their earnings from running validators.

Price discovery helps establish what constitutes a fair cost for providing validator services.

Conversely, if Lido's price increases significantly, note operators may no longer be incentivized to perform their services due to fixed costs.

Flexibility in Adjusting Fees Based on Costs and Revenue

This section highlights the importance of allowing notable operators to adjust their fees based on changes in costs or revenue. It also mentions the role of bonded note operators and their need for compensation for the cost of capital.

Adjusting Fees Based on Costs and Revenue

Notable operators should have the flexibility to increase their fees if their costs go up or revenue goes down.

This ensures that they can remain competitive and profitable while providing services.

Compensation for Bonded Note Operators

Bonded note operators, especially those without a reputation initially, should be able to request higher fees to cover the cost of capital.

It is important for the staking router's vision to allow different modules to set their own fees, promoting competition and price discovery.

Conclusion and Appreciation

In this final section, the speakers express gratitude for the insightful conversation with Hasu and acknowledge that there are many more topics left unexplored. They look forward to future episodes and appreciate Hasu's contribution.

Gratitude and Future Expectations

The hosts express appreciation for Hasu's time and insights during the conversation.

They acknowledge that there were many interesting topics discussed but not fully covered.

The hosts look forward to future episodes with anticipation.

Limiting the Surface Area of the Dow

The roadmap for Lido includes limiting the surface area of what the Dow does. This involves ossifying core parts of the protocol and focusing on decentralization rather than vertical integration.

Limiting Surface Area

Lido aims to limit the surface area of what the Dow does.

Ossifying core parts of the protocol is one approach to achieve this.

The focus is on decentralization and not vertically integrating with other platforms.

Importance of Decentralization

Decentralization is seen as crucial for Lido's success. The goal is to ensure that the winner in this market is as decentralized as possible.

Decentralization Perspective

It is important for Lido to prioritize decentralization.

The belief is that there will be a winner-takes-all scenario in this market.

Making sure that the winner is decentralized and healthy is a top priority.

Sequencing Decentralization

Decentralizing the protocol is a strategic process. Initially, centralization was necessary for competition, but now decentralization becomes a growth unlock.

Importance of Sequencing

Centralized aspects were necessary initially to compete with centralized exchanges.

However, now decentralization becomes a growth unlock for Lido.

The sequencing of decentralizing the protocol is crucial for success.

User-Facing Applications vs Infrastructure

Unlike typical protocols, Lido focuses more on building user-facing applications rather than just infrastructure. Decentralization can be both beneficial and challenging depending on the context.

User-Facing Applications vs Infrastructure

Lido prioritizes building user-facing applications.

Decentralization can be a growth hindrance for protocols focused on infrastructure.

Lido aims to strike a balance between decentralization and growth.

Dual Governance and Decentralization

Dual governance is an upcoming topic of discussion. The elegant design of Ethereum's fee markets is appreciated, and the introduction of liquid staking as a fee market possibility is intriguing.

Dual Governance and Fee Markets

Dual governance will be explored in the next episode.

Ethereum's fee market design is considered elegant.

Liquid staking introduces the possibility of a local liquid staking fee market.

Strategic Decision-Making for Growth

To increase market share, Lido needs to execute its decentralization roadmap. Making the protocol as hard to change as Ethereum itself is part of this strategy.

Execution of Decentralization Roadmap

Increasing market share requires executing the decentralization roadmap.

Getting stakeholders comfortable with Lido's winner-takes-all position is crucial.

Making the protocol as hard to change as Ethereum itself is part of the strategy.

Importance of Curation in Permissionless Sets

Curation plays a vital role in permissionless sets. Allowing stakers to decide may lead to less decentralization, so curation becomes necessary for bootstrapping deposits.

Curation in Permissionless Sets

Curation is important for permissionless sets' success.

Allowing stakers complete control may result in less decentralization.

Curation helps bootstrap deposits for permissionless sets.

Elegant Design and Liquid Staking

The elegant design of Ethereum's fee markets is appreciated. The introduction of liquid staking as a fee market possibility is intriguing.

Elegant Design and Liquid Staking

Ethereum's fee market design is considered elegant.

Liquid staking introduces the possibility of a local liquid staking fee market.

Levels of Corporations and Lido's Primitive

Lido's primitive, being a liquid staking provider, can be compared to different levels of corporations in terms of function and regulation.

Levels of Corporations and Lido's Primitive

Lido's primitive can be compared to different levels of corporations.

Highly regulated industries tend to have more predictable returns.

Lido's limited surface area and ossified smart contracts contribute to its unique function.

Curation for Decentralization

Curation plays a crucial role in decentralization. Permissionless sets require curation for successful bootstrapping.

Curation for Decentralization

Curation is necessary for decentralization.

Permissionless sets require curation for successful bootstrapping.

Potential Returns and Social Contract

The potential returns for Lido are discussed in relation to highly regulated industries. The social contract between stakeholders is highlighted as an important aspect.

Potential Returns and Social Contract

The potential returns for Lido are comparable to highly regulated industries.

The social contract between stakeholders plays a significant role in the success of Lido.

Connection Between Different Industries

A connection is made between different industries, such as utilities, defense, banking services, healthcare, and the function they serve within society. This connection is related to Lido's primitive.

Connection Between Different Industries

Different industries serve critical functions within society.

Lido's primitive can be compared to these industries in terms of function and regulation.

Understanding Income Streams and Revenue Generation

The speaker discusses the concept of income streams and how they can vary in terms of profitability. They mention historical periods where annuities have been in and out of favor, highlighting the importance of assessing the potential ups and downs of income streams.

Exploring Revenue Generation for Protocols

Revenue generation for protocols is viewed as a framework that requires active involvement to drive revenue.

By strategically increasing the rake without affecting user rates, protocols can enhance their revenue.

The current fee structure involves splitting fees equally between the Dow and validators, but there are opportunities to introduce auction dynamics or market dynamics to distribute fees among validators differently.

Taking a higher cut from fees while giving larger validators a lower cut could increase protocol revenue.

Leveraging Supply Side Influence

The speaker discusses the potential for protocols to exert influence on their supply side, which can impact revenue generation. They highlight the limitations in significantly increasing profit margins but emphasize the importance of exploring new business lines.

Capitalizing on Supply Side Influence

While it may be challenging to achieve substantial increases in profit margins, there is an opportunity to exert influence on the supply side.

By not vertically integrating or reinvesting gains, protocols limit their ability to expand profit margins or invest in new business lines.

Despite this limitation, returns could still be better than annuities if small profit margins prevail within a winner-takes-all market structure.

Underestimating Market Size and Ethereum's Role as Money

The speaker reflects on underestimating the potential size of markets related to Ethereum's role as money. They draw parallels between Ethereum and dollars/state dollars (bonds), highlighting the potential for a significant market size.

Underestimating Market Size

Ethereum's role as money may be underestimated, but reasoning by analogy suggests that people currently using Ethereum for financial purposes will likely continue to do so in the future.

Comparing Ethereum and state dollars (bonds) to dollars, the global market size for bonds is larger due to demand for yield-bearing assets.

The market dynamics between Ethereum and state dollars may not be one-to-one, but there is potential for a substantial market size beyond current estimations.

Restaking Possibilities and Relationship Dynamics

The speaker discusses restaking possibilities and the relationship dynamics between different providers. They highlight the challenges of demand on the supply side and explore the coopetition dynamic between Lido and eigenlayer.

Restaking Possibilities and Relationship Dynamics

Restaking faces challenges due to limited demand from node operators compared to stakers.

There is a coopetition dynamic between Lido and eigenlayer, emphasizing the importance of understanding who has a relationship with customers in terms of vertical integration.

The speaker expresses skepticism about restaking's potential due to limited demand from node operators.

This summary covers selected sections of the transcript.

Demand for Roll-Ups and Oracles Bridges

The speaker discusses the demand for Roll-Ups sequencer sets and oracles bridges in the crypto space. They mention the importance of attracting larger players beyond those looking for a narrative to latch onto.

Interest in Demand and Security

There is interest in understanding the level of demand for Roll-Ups sequencer sets and oracles bridges.

It is important to determine when these technologies will be considered secure enough to attract larger players.

The discussion revolves around whether it is a good thing to limit Ethereum's growth or if there are more creative solutions to implement.

Limiting Ethereum's Growth

The speaker explores the idea of limiting Ethereum's growth and presents their perspective on this matter.

Philosophical Question

Is it beneficial to impose limitations on Ethereum's growth?

Rather than implementing caps, there may be more creative solutions available.

Imposing limits could send a negative message to entrepreneurs.

The history of monopolies provides insights into how entrepreneurs have influenced markets.

Entrepreneurship, Monopolies, and Diversification

The speaker discusses the role of entrepreneurship, monopolies, and diversification in market development.

Rich History of Monopolies

There is a rich history of entrepreneurs entering early-stage markets with volatile conditions.

Entrepreneurs often help stabilize markets through monopolistic practices.

Examples like John Rockefeller and Standard Oil demonstrate how monopolies can lead to industry growth.

Monopolies can eventually give birth to diversified industries.

Upcoming Episode with Lido Team Member

The speaker introduces an upcoming episode featuring a conversation with Izzy from the Lido team, who is responsible for node operations.

Nitty Gritty Questions on Staking and Governance

The next episode will feature a discussion with Izzy from the Lido team.

Topics to be covered include staking module dual governance and decentralization strategies.

Decentralization is a core value proposition for liquid staking protocols.

Understanding the technical aspects of decentralization is crucial for these protocols' success.

Conclusion

The speaker concludes the conversation and expresses excitement about the upcoming episode.

Looking Forward to Future Conversations

The speaker expresses enthusiasm about the upcoming episode with Izzy from the Lido team.

They highlight the importance of understanding decentralization in liquid staking protocols.

Overall, they enjoyed the current conversation and look forward to future discussions.