[BUIDL Asia 2024 Panel] The Business of Staking

Transcript

[Music] so I thought we would get started talking about what's happened over the course of this year and all of the new developments in the staking world and how they're affecting each of our projects maybe uh Zach you can start and we can go around yeah I guess like one of the it's it's it's come up uh in Brian's talk and in the earlier talks uh igen we restake has been like a huge Factor so you know um in addition to co-founding simier um I I I I've been working on a a sort of small staking business called inclusion uh so we run validators mostan Cosmos chains uh but

you know reaking has been a kind of a huge Factor um now you have all of this demand for all this additional service also similia plans to integrate with ien weer and Ethos um to enable uh uh eat stakers to be securing the simila network right now it is s stakers uh who secured the the simila network I think that's probably like what one of the biggest changes that's sort of In Motion um and you know we're like actively building the ethos integration now and planning to sort of change the way staking Works in Som and I think it's it is like moving from you know every Cosmos asset having their own staking token and staking their own validators uh towards this model of it's only like sort of more and more security comes

from the big liquid assets I I think is going to be a big change in uh the entire staking economy Ryan cor one yeah I mean aside from uh restating uh you know I think I talked about it a little bit earlier on ethereum I think a lot of just like figuring out actually there is a lot of things that validators can do to optimize uh yield and then I think that of course triggers a lot of discussion again on like ether in protocol development and like what does it mean ago so I think that is something that's kind of come up in the last year that I think it's a significant thing and will have an impact uh another thing that you know I think is is becoming like an

important topic is I guess the whole like ETF topic as well and you know I'm sure we will see ethereum ETFs and salana ETFs and things like that and those will be staked so I think that's another one and and I guess maybe this again like a sort of ethereum staking topic but and it doesn't seem to be discussed like that much but I think the centralization around block building also seems like a very important topic where you know today you really have kind of you know three Builders who are very dominant and two of them are like basically big market makers and trading companies uh which seems very counter to the kind of desire and vision of ethereum so I I think there's

a lot of discussions there around you know where should it all all go yeah those are some excellent points right um we I I would love to discuss some in the panel later um but uh yeah and and and you also mention ethereum protocol changes right so I think like within blockchain what we have seen so far is that we initially develop um a protocol and the protocol has certain credible signals uh that it can how to say make programmable contracts over however what we found later is that those uh credible signals are not enough for the contracts that we want to express so like say for example uh you know many applications of reaing I think

include things like well execution tickets or uh inclusion lists in ethereum and then for those they essentially are they are essentially a way to how to say allow the ethereum protocol or ethereum validators to provide credible signals about things that are happening within the block time which is something the original protocol doesn't support and I think because there's so much desire for such um autop prodical Solutions we see more and more centralized entities providing them because you know it is indeed better I guess ux or uh developer experience that people want um so it would happen uh and uh uh what we I guess should do is to

think about how to uh use a decentralized solution or at least um to make the services that it provide credible in the crypto way yeah I think everyone brought up centralization risks which is one of the biggest risks in the in the ecosystem and one of the things that the ethereum ecosystem and other chains have been working and trying to make improvements in order to address um maybe we can talk about what those challenges are in terms of centralization and what you think are good solutions to try to fix them in that ecosystem and others sure um I think like one of the

biggest Challen so there are like a bunch of different challenges uh in the cosmos ecosystem one of the bigger challenges has been you know the dominance of exchanges um and exchange staking so you know centralized exchanges and their staking programs have been a huge component of uh you know the entire staking industry uh and you also so you know I think we have we have like a lot of different concentration risks with with staking tokens in the early days of networks it tends to be like you know investors early backers of the protocol who have most of the staking tokens it takes a while for that to evolve but then you tend to also uh have a lot of people who just like the convenience of staking on binance or coinbase or uh uh uh or any number of other exchanges and

you know so these all of these things have been uh a huge challenge you know Cosmos has had built-in delegation so it's been easy to choose you still have to self- custody uh all these things and then on top of that you have uh you have in ethereum liquid staking is incredibly dominant and can be thought of as either a force of centralization or decentralization I think it's very uh controversial and in in Cosmos networks salana Etc the liquid staking providers are also uh sort of a huge force in terms of validator selection and I think all of those things are are huge elements yeah I'm curious just why why so different between each of these chains um in terms of how people in these

ecosystems approach staking something we were chatting about for a moment but I think people would be interested in so I guess I I'll I'll just maybe I could start with talking about how I perceived them to be different so on ethereum um liquid staking financialization of staking so uh leverage staking all of these things incredibly popular activity drive a huge amount of uh of activity on chain uh similia is actually like a is a protocol it's an app chain that powers ethereum one of our biggest areas is actually providing like sort of automated vaults that like sort of take your staking and instead of of you know earning the base staking yield on ethereum it uses things like Leverage staking and providing

liquidity for various uh liquid staking tokens uh to give you you know three four times as much uh as much uh yield as just staking ethereum so you have this incredible amount of defi activity that is layered on top of staking on ethereum on salana on Cosmos it's it's it's a fraction of that you know maybe you know less than 10% of the stake is provided is participating uh of stake uh of Stak Soul or Stak atom or Stak Tia or State uh or State uh dydx is provided is like actively involved in any sort of defi activity so I think there's this huge Delta and I think it's like a really interesting question as whether or not everything converges to looking

more and more like ethereum in the long run or whether or not the culture of these things um I spent almost two years building this uh system why making changes to the basic Cosmos St G module to make it easier to to Pro to interact with liquid staking and after all of those years finally getting in on chain no one essentially has has has used these new features and it's it's actually been quite uh disappointing from my point of view but I think there's an interesting question as whether or not you know uh whether or not all these cultural things are with why why staking is so different staking Behavior so different is sort of locked in yeah I mean I think you know I think the answer is pretty simple and I think it's just primarily around the ethereum

staking design right where you had I mean when ethereum launched right you had okay you could stake e but you couldn't unstake it right because it was we went on the beacon chain and uh like you know they were like oh at some late Point later there's an upgrade then you can unstake it so that on its own were like well if you but if you lose lighter right you could put it in there you get State e you sell that so of course there was like a massive massive factor that drove that and then the other thing is well 32 e increments or minimum staking and so I I think it's really the ethereum protocol decisions that have uh driven that CU even if you if you look at Stak Eve most people who use on on on

do state de they wouldn't then use it in defy right they would just hold the state e and like if that's all you want in on other chains there really isn't much of a reason to use Liquid staking right then you can just stake directly and generally that's like lower fees and you know the the the user experience is basically equivalent to using liquid s maybe even easier in many in some cases so I I think that's really something where I mean in the end the the sort of I mean ethereum staking I think was kind of designed around this idea that we'll have lots of people who run their own validators and you know they'll have 32 e and uh we

kind of try to cat to that and that just is not really the reality and then I think people have built essentially things like delegation on top and I mean that has that has caused this huge rise of liquid staking I do expect that in other chains you know liquid saing will grow as well right so let's let's say salana and 6% today I mean I wouldn't be surprised if like you know 3 years from now it's 20% or you know something something significantly higher but um but yeah I think it's really ethereum staking design and and was that a good thing in retrospect you know I'm not I'm not so sure that's a great segue to like because liquid staking as you mentioned

on ethereum we didn't include that include the delegation into the protocol and therefore someone deployed and how to say out of protocol Market to solve that which is I guess what we also seeing a lot of chain around me or the Builder layer um which uh I guess tests back to the centralization now let's talk about me um how do you think me plays into the the staking Paradigm yeah and I think uh I mean so for the for the very least staking staking par uh yeah to run staking business basically means you have your own validators and then to uh then you can play things uh things called like timing games which

are essentially uh you could delay the time you submit the block uh in order to how to say capture more M because um you know the volatility on centralized exchange given that most of uh the uh I come from like uh a selection in uh defi liquid the providers then the volatility increases expectation with time then you want to delay that as as as far as possible however uh it's really kind of a how to say uh a behavior that may increase the protocols Miss slots which could be interpreted as uh uh lowering the health U so I think that's uh that's

something we need to uh think of a solution for yeah I'm curious Brian as um chorus one is a big staking provider what you think about the changes happening in terms of me I mean for us uh you know differentiation for a staking company is it's not easy right cuz in the end everyone provides a sort of similar service and you know when it comes just to the thing of keeping a valat running and doing it securely not getting slashed like there's a lot of companies that can do this and they can do it pretty well uh but of course if you are able to say well you can stick with us

and you know you earn higher returns than with this other uh provider then that that is a strong selling point right and that is something that's not easy to replicate so I think from our perspective it's just been like okay you know we want to develop an expertise on me we want to like build things do a lot of data analysis like modify client things like that uh because it's a great way to differentiate and that's been very ethereum focused I mean we've done things on other chains that were more like research building things but less about you know operating a different thing that provides higher returns but uh you know I'd expect that in the future hopefully or I expect that in the future there will be many more

opportunities on many other chains to also do things that you know kind of like differ a little bit from uh from sort of just running the software that then allows you to generate higher returns and and differentiate and of course you know we we we expect to pursue these kind of things and then I think on the other hand it's of course a job for the people developing the blockchains and developing these protocols to figure out you know is this something that's desirable is it something that's a problem is it something that you know has some kind of uh you know undesirable effects and then maybe there will like be protocol changes that come out and then of course we'll have to adapt to these protocol changes but I think that's kind of the fundamental

Dynamic do you have a opinion on M so I think like one of the more interesting aspects of it so like when we say there's a lot of me on ethereum there's a lot of there's an enormously varied set of and uh we'll we'll have maybe there are other opinions but the vast overwhelming majority of the Meb comes from uh like Unis swap amm pools um and from liquidations on lending protocols and it's a choice at the application developer lay to uh to sort of make all of this me float through down into the consensus layer and so I think a lot of those choices are going to end up being

Revisited in the in the next couple of years I think a lot of the lending Protocols are realizing that you know auctioning off liquidation rights could you know generate you know as much revenue as like all of their other activities combined um and uh with uniswap V4 uh and protocols like an amm protocol like ambient um there now with this like concept of hooks U there are ways of of of containing the me within the application and allocating the application a so we may end up in a world where there's much less me uh and so all of these like massive amounts of efforts that have gone into uh uh Building Technology around capturing me Etc um may become a lot less uh sort of super relevant than they are right now I

mean the other thing that you've seen right recently is the rise of UN swap x uh which is doing sort of offchain order matching on uh and so again that like moves uh meev into the application layer and off of the consensus layer Sunway broadly hopeful about all that would you consider unisoft a to be a how to say satisfying solution to am at the application layer given that it how to say gives a lot of power to centralized competitors um I guess like what I would say is I would rather applications try and figure out like what is best for themselves um like so like the whole app chain thesis

has been you know if an application fully integrates everything from block construction to use case the application is in the best is in the best place to figure out what uh trade-offs are best for me for their users and I think that's generally true and I think we're going to start we're seeing that more in general purpose change as well that as Builders are more aware the role Meb plays in the overall user experience you know if you leak a lot of Meb it just basically means it's going to be harder to recruit liquidity on your trading protocol and your users are going to get worse prices um and these are things you know execution quality is a thing that you know decentralized exchanges now compete on um and so you know you are incentivized to think about Meb um put effort into providing mechanisms for

Innovation on the ma layer um and so yeah I see yeah that that's uh that's a good answer I menine unx primarily because it's kind of so like Unis swap from my understanding the frontend other flow is default to be sent to Unis swap X which is um so the mechanism is basically you have a their their own server that uh market makers give give codes um and uh so that basically means you indeed get way better ux theoretically on on their unisoft X platform which disincentivizes the uh unchain liquidity providers because now they get more adversely selected given that they get

toxic flow which means uning liquidity is a I guess a forone forone dream um all I was I mean it's sort of been interesting um how this is how this has played out in so so far you know Unis swap X went live last summer um so we've had about six months um of doing it similer um through our vaults is one of the biggest onchain liquidity providers um on a bunch of different ethereum pairs um in spite of this like thesis this sort of high level thesis okay we'll only get uh toxic flow Unis swap X has mostly been good for similia Vault uh profitability um it has mostly been an advantage there's

still an enormous amount like even though uh essentially like a professional Market maker sets the price um they frequently are sourcing liquidity on chain still um instead of sourcing liquidity from their own invent and that has actually been like I think good for pricing as far as we could tell I see a great answer although I think like as it goes on because like the market makers they're guaranteed so like in tradify we have this mbbo thing right which is saying like you Market maker when you provide the code to I guess the aut flow you uh your code has to be better than the national best beat offer which is the uh um the spread on like the open exchange uh on defi we don't have such a m things the only

enforceable thing is like you know the the amm codes provided by the LPS uh which which in that case would be you know if we have less LPS in the market makers can can actually you know provide a wider quote than they would have been before um and in in TR we kind of solve this by saying that you know in in in addition to MBO we can like do audits to say like oh you you did like the best effort in defi I guess since we're building a permission assistant that's major concern but yeah curious about your opinions any of you on um the impact that EIP 1559 PBS has had on centralization meev the topics we've

been talking about sure um I let's see so these things are somewhat different um EIP 1559 is this in protocol base fee um and this movement away from fees going uh fees are essentially burned instead of going to the block producers so this now means that you know and like as a practical matter there's like less fees are going to B producers their their revenues are dominated by me uh me rewards and by uh the like uh like the the base uh uh staking incentives uh for Bach producers so these things have become you know has has made fees less important from a

proof of stake point of view and me and sort of what the base inflation rate is more important from uh uh from uh from the point of view of users I'm not entirely sure that I agree that like uh these things have been sort of necessarily the greatest decisions especially because 1559 was designed during proof of work and not really updated um into the transition to proof of stake um I think that there are um it it has also had this like uh pervers that around uh on ethereum once you move to uh stake where it's actually very cheap to to like uh to buy empty blocks um so if you want to like buy like censor users of ethereum for whatever reason um censorship actually has become

a lot cheaper in the current 1559 design I think all of these things could be improved a lot um so there's just quite a lot of work to be done on the on on in general and like sort of core the in vertical design yeah I mean I think when it comes to PBS it seems pretty like just if we look at the the distribution of stake uh versus the distribution in Block building then block building is a lot more centralized than uh then the redistribution of stake right like in stake I don't know we have mean of course you still can say oh there's a bunch of like centralization concerns you know I don't know I think coinbase maybe like 15% or something and like uh but you know it's still like let's say

the top three entities and I think Lio it doesn't really make too much sense to count as one entity know because a lot of different node operators that kind of do a bit their own thing but um but yeah I don't know what the top three entities amount to in proof of sake maybe like 25% or something uh whereas in Block building it's you know it's like 90% uh so I think from that perspective it seems like it's got more centralized and uh you know and these entities are known to block Builders they can be uh targeted through regulation you know when it comes to uh let's say doing some sort of sanctions list ofac things like that uh I think they're much easier to pressure so to me

it seems pretty clear that like PBS is is more led to more centralization yeah I always say um the design philosophy is more that stakers and blog Builders they provide very different Services right so I I guess you know which is like the uh the modularity argument that Cosmos people love um but anyway like the philosophy I would say is more in saying that so validators provide those Services uh as you know increasing The credibility of the network uh or like you know Economic Security so it's important for them to not cud so so in that case uh if we separate some of their uh some of the

jobs for them then they would how to say it yeah I understand it's hard to compare the cont factual um but in this case they would have less of a worry uh to do the other job which is block production and optimizing for me as much as possible um but of course given now that we have uh many other chains experimenting around very different from PBS it'll be extremely interesting to see how that pans out so we've talked a lot about what's changed and evolved in the staking landscape this year but what kinds of Innovations do you think are going to drive the next cycle of conversations about

staking yeah I think reaking is certainly like a very dominant one and I think that adds a lot of like complexity uh you know for one today right if you're staking then you know you hold a particular asset and then you know I'm staking this asset I'm staking Salon I'm staking Adam staking Eve for something like that uh now it's already the case I guess in the cost in the atom case where V change security that you know now you have like governance voting and it's like oh we also going to secure some other thing that like maybe you don't care about maybe you don't know about and now maybe have some revenues in some other asset so I think that's already happening a little bit there but then of course it's also the case with

igen layer right the expectation is not that like individuals would choose which igen layer AVS they want to run but it's basically sort of outsourced to someone else whether that's staking provider or whether that's some sort of protocol Dow structure on top that will choose a whole bunch of abss to run so I think that's kind of something where you know a big change right where maybe people will be more I'm just providing some capital and I'm just looking at some return and like what is it exactly being used for to secure what and what are the risks I think the transparency is going to decrease a lot people will have a lot less idea about what's happening what the risks they're taking on so yeah and

and I think there are there are some some problematic incentives there maybe right where there's a big incentive to sort of say okay I'm just going to you know do a lot of different protocols so there's a lot of new tokens coming and uh you know the risk will be a lot less uh visible um but yeah I think I think reaking is going to be a huge topic o over the next 3 5 years I think it's going to take a long time to play out and and also so unfold as a as an industry and and what the impact is on staking overall soon or zachi Trends you think are GNA Drive The Narrative this year reaking something else so I think one of the big re like to most users I think

for for for staking providers I think reaking has opened up like all of these new business decisions that need to be made but for users who have assets that are stable I think one of the biggest things is going to is just this move from oh when I stake my eth now I have this huge menu of different assets that I could be earning I could be earning some I could be earning uh uh igen we tokens from Igan da I could earn you know and so now you have this like vast Universe of of sort of different portfolio of like portfolio management choices and how that's going to be presented to users I think is going to be really interesting I think on the other hand you also have this sort of significant movement towards sort of real yield um so like with similer I

think almost half of our staking rewards now are coming um from protocol fees rather than from uh you know just like releasing new tokens onto the market with dydx they you know uh it's there's no inflationary rewards all of the rewards come in usdc um from staking uh for dydx uh you know ethereum uh validators you know ethereum issuance you know during bull markets is negative so I think more and more you know as we as as staking as like these applications and networks actually start earning more real Revenue I think the the model of hey like this is only just printing tokens from thin air to drive staking sort of is going to fade and you're going to see more and more networks that are driven uh by real yield amazing

would you uh yeah there's a question I actually want want to ask sorry to go for it get the moderator but uh okay yeah so given raking and the perspective of yeld in you know significant yeld increase from from from reing right given that say a lot of applications on ier they actually not critical Innovation applications but like a lot of uh uh you know applications that are even related to AI sure yeah would you guys expect uh you know I guess the participation rates in stake to greatly increase and how that changes the uh the business perspective you know would you be more say y or read help faic yeah I

mean I think we've already seen the E taking ipation kind of continually go up and uh and you know the reason is kind of simple right because the risks are very minimal and if you holding e anyway why not earn another 4% or something like that I mean I get that there's like some desires maybe in some of the ethereum uh Community to that they think this is not a desirable thing and you know there was some discussions around decreasing inflation but for example I think that's a little bit naive and it doesn't make too much sense because if you think about like what has been driving a lot of the stake increase I mean first of all if if you're holding it anyway for the long term and then you

know getting an extra 4% is great and you know if it's like 2 and a half% it's still it's still probably something you'll do and of course the other thing where that's been driving this to a huge extent is people putting e into ion layer or like these reaking protocols and that's also not affected by the base rate so yeah I I would expect that it will continue to increase and continually more e is going to be staked um so yeah but I don't think that's a bad thing yeah but what what kind of I guess applications would you be thinking about from like you know that the uh that is uniquely unlocked by restating which is uh not I don't think anything is uniquely unlocked by restating it's just

uh is just an alternative to creating your own app chain or your own roll up and then I mean I guess saki is probably the great example there who can talk about this yeah um I think like one of the big benefits of reaking right is it the audience for your token is so large right you know have an asset like eth or an asset like Bitcoin you know many many holders all over the world and there's a lot of people I'd say there's our our experience has been the number there's like the there's like one small population of people that are like we want more ethal um and we're willing to do defi um and then there's a very larger much larger population that's like I want to do

staking and it's likely that the reaking and uh population will fall somewhere in between the people who are willing to earn defi yields and the people who are willing to earn staking yields so that's tends to be a very large audience and I just think that being able to have such a lar like being able to present your token present your application to such a large audience is like one of the biggest advantages of reaking and like one of the reasons is most so interesting yeah distribution yeah and and I guess uh sort of on that point I think another thing that's going to become very interesting around staking is you know we have a big explosion in uh Bitcoin l2s and Bitcoin I mean you know called

l2s right but I don't generally I think not not rollups in the sense of like the ethereum rollups at least not yet maybe there will be at some some point but more like kind of side Bitcoin side chains and many of them are incorporating some degree of you know Bitcoin staking Bitcoin yield so I think that's that's also going to bring in a huge new population of people you know who've just been Bitcoin holders and now all all of a sudden exposed to oh I can like use my Bitcoins to you know either earn some other token or maybe earn more Bitcoins on it and I think that's all yeah that's also going to be a very big trend so we have a couple of different ecosystems we have Bitcoin coming in we

have ethereum Cosmos ecosystem salana then we have a lot of new protocol updates and Technologies so how does a user or a potential Staker actually decide between different options for staking you you go to staking Solutions websites you see very secure a certain amount of yield how how do you make that decision as a consumer of staking which provider to go with and maybe you can break that down into who the different audiences are for staken because they're different yeah sure right I mean first of all there's a huge range of different uh audiences and I think they make the decisions very differently right I mean you have like let's say if you take the

cosmos chains well you'll be there you have a whole validator list and then what what are things that people consider well they will consider for example commission rate right that's a significant one uh they might consider the brand of the valid and then of course it can be different things where maybe it's like well-known brand institutional or something else is like oh they're very engaged in the community or the v l in governance I think the wide range of factors there and then of course you have other types of uh let's say more institutional uh clients that will look at other things I mean for example last year we made a big effort was a lot of work to get like ISO certification right so you basically have some external uh

body that does you know does like security Audits and like assesses a lot of and that's something you know normal people do not care about that but then when it comes to you know more institutional audience they do or like insurance is another thing that's you know now there is availability right for like Insurance offerings both sort of more like 15 defi insurance with like you know NEX Mutual on ethereum but including you know more traditional insurance companies so yeah I think you have a whole bunch of different criteria that people look at I think one of the other factors is frankly like political um I think all like validators lsts all of these things

um choosing to STI with them has an impact on the future evolution of the asset um and I think people sort of over index on things like commission um and under index on you know how are you collectively incentivizing the people who are sort of involved in the protocol maintenance and stuff like that validators review code they have a lot of influence on you know future protocol Evolution all of these things I think should make a bigger difference when you hold an asset who you choose to STI with Y that's a great note to end on thank you everyone