The Business Model of LSTs: Banks, Bribes, and LSTaaS | Adrian & Vance

Transcript

all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-hosts today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode [Music] all right everyone welcome back to another episode of bell curve today we've got a really exciting episode with Adrian from Steakhouse finance and very Advanced Spencer obviously one of the co-founders at framework and a member of the Roundup portion of this this podcast uh today we're going to be we're very

cognizant miles and I've been giving you very technical sort of deep Dives on the staking router and restaking in the intersection with liquid staking today we want to zoom out a little bit and actually try to get a sense of give you guys some sort of mental models and Frameworks with how to assess some of these protocols and you know I'll caveat that by saying none of these are perfect but it's sort of a simpler way of describing what we're really doing here when we're talking about liquid staking we also want to get into some of the possible business models that Lido or other liquid staking uh protocols could provide somewhere down the line and then value accrual and how these things are going to work and you know dare I say it even put on your your sort of investors cap when you're listening to us talk

here so this should be a fun one miles I'm excited to get into it yeah I am too um yeah you know it will be great to chat with Vance again and really looking forward to chatting with Adrian as well I've been a big fan of Steakhouse Financial for a long time and the work that they do with Lido and maker so we have great guests and pumped to get into it yeah we actually got a fun little sort of compare and contrast of the Lido versus the maker end game so stay tuned for that hey everyone we've got a great episode here but before we do I just wanted to give a quick shout out to permissionless this is the biggest and best conference in all of D5 it's the one that we do with bankless who's a great partner for us last year we had

almost 7 000 people there in West Palm Beach we are moving this year to Austin Texas so I'm September 11th through the 13th and if you're a listener bell curve any of these last five seasons this conference is basically custom made for you we're going to be talking about liquid staking the theme of this season we've got a bunch of great panels on Mev if you listen to the app chain thesis we've got a bunch of Cosmos folks out there in full force we're talking about the converging architecture of Solana the roll-up space in eth and Cosmos so I would love to see all of you there into reward you for being such great listeners to bell curve you get a special 30 off code it's bell curve 30 that'll get you 30 off tickets click the link in the show notes and then head

over to the permissionless site and make sure that you get your ticket today again that is bell curve 30 click the link in the show notes alright everyone welcome back to another episode of bell curve uh today I'm doing as always by my co-host miles and got Vance uh who many of you will know from framework but also from the Roundup portion of bell curve so welcome bands and adcv uh from Steakhouse Finance uh you guys hello all right all right guys we've been uh these last couple episodes uh we've been getting really into the the nitty-gritty uh this one's a little bit more aimed at folks in the middle of the belt for like miles and I um and what we want to do is give you guys some sort of high-level Frameworks for uh zoom out of the weeds a little bit and sort of give you guys some high

level Frameworks for how to like think about these different liquid staking protocols and you know the caveat being these aren't going to be exactly right but they'll be sort of helpful mental models that you can use to assess the different liquid staking protocols that are out there and then we'll sort of have a little bit of fun uh going back and forth on sort of speculating on the potential business models um and risks and potential opportunities that these protocols could take um as well as talking a little bit about value cruel the actual governance token for some of these liquid sticky protocols but um if I had to you know just ask like a really high level question to start this out feels almost very basic to be asking you know four episodes into this season but maybe uh adcv I could throw it over

to you and just ask you like if you had to describe what a liquid staking protocol is to a layperson right who only had a very basic knowledge of of crypto you know how would you do that and then what sort of more analog or traditional businesses would you use to sort of help them understand what we're looking at here um so I think you have to start by thinking about ethereum and I think a reasonable way to help people understand so to help people who are not so familiar with crypto even understand what liquid staking is I think you could start with describing the concept of ethereum a decentralized database that allows people to run a sort of virtual world computer and the way that the security is maintained that the incentives are

aligned on this let's say World computer is through this concept of staking a certain amount of capital in order to validate the transactions and what liquid's taking fundamentally does is allow sticking to be accessible to as many people as possible and I think this is the key value proposition staking in itself is a reasonably technical Endeavor it's not impossible and there's a lot of progress that's been done to make it more and more easy and I think the more democratic it is for people to participate with their own computers the better but liquid sticking is a way to sort of abstract all of that complexity away for every person to just join in and participate in securing the network yeah

I think that's a I think that's a really helpful explanation and uh guys you'll remember actually if there's a call back to uh uh some some material that adcv actually created um we referenced in the staking router episode that we did with with Izzy and ashine um but you actually have a really helpful metaphor that I like uh of thinking of these liquid staking protocols as as Banks and again I'm not saying that this is a Perfect one-to-one Analogy that's certainly not exactly right but I think this this idea of managing assets and liabilities is a particularly helpful one so maybe you could get into that sort of description a bit and maybe show where you know if that happens within the context of liquid state and protocols the description of a bank is is I think an

interesting model to help people get comfortable with the way that this liquid sticking protocol works as a representation of their their stake so when someone purchases or any other liquid sticking token they're not actually doing the staking themselves they are in a sense transferring that stick out somewhere else and that stick is being staked by another party and I think a bank structure the word that you know let's call it B asterisk and K is a useful way of thinking about this because they are in their most abstract and narrow sense just the way to manage assets against liabilities and you see many protocols in crypto function according to this Gmail is so it's not unique to to stake teeth

you you know for instance make it out decentralized stable coins anything that has a sort of quote-unquote liability token must match those tokens on the other side with doing something on the let's say asset side and uh and so I think this is where the the the concept is helpful for understanding how a protocol can balance the incentives between both sides of this sort of semantic balance sheet but it is also very important to note that in the case of both maker down as teeth unlike in the case of JPMorgan these are not actually custodial so they don't fulfill many of the conditions that would actually make them vax they are just you know smart contracts that coordinate incentives between players in

a in a decentralized and permission this way and I think that's actually the most interesting part of this Innovation so it's important to stress that you know there are some analogies which are interesting and relevant and helpful for you know building conceptual models about how these incentives can balance but you can only it only takes you so far and I think the more relevant Insight here is to recognize that liquid sticking tokens are you know ethereum itself is unlike anything that's ever been done before it doesn't really match closely to analogues from the past or from chartify and you know neither does staking and also therefore neither does liquids taking at least when done in a in a sort of decentralized and and permissionless

and trustless way it's something that's in certain ways resembles some things but in most of the other ways that matter does not and I think that in the areas where it doesn't is where it gets the most interesting because you can take some of these you know mental models about asset liability matching so you know what does the validator set look like and how does that change the risk of the liability token and how do you tweak the incentives to make sure that the risk is always contained and mitigated for the liability token holders but then you can say instrumentalized instrumentalize that and automate it and make it into something much more powerful than just just quote-unquote a custodial system uh so yeah sorry I'm ranting on now but

I think the yeah there are some insights which are relevant but I think the more interesting Explorations and insights come from looking at the places where it does not look like yeah no I couldn't agree more and I think the bank mental model is really interesting uh especially with the staking router and and honestly before the staking router existed I I always had used kind of more of a Marketplace uh mental model for liquid staking protocols um you know the product being access to staking yields while retaining your liquidity and the supply side being validators that are already running nodes uh and the demand side being you know people that want this product without having to run nodes um but before the staking router it was

only one you know curated set and it was almost somewhat commoditized on on the supply side and now when you move to the staking router and having multiple modules uh there actually is much more risk management to be done with the that collateral um and so yeah it's not a fair analogy to say that it that the bank I guess mental model now comes in a little bit more strongly because there there is a lot more risk to manage with you know bringing on say DVT sets and solo staking sets yeah definitely and I think you can so I think the the asset liability model is helpful and the interesting part of the sticking

router is that this is an area where the sort of banking models of asset liability management start to fall apart so in traditional asset liability management you use credit models for established asset classes to derive how much Capital you hold in Reserve at any given time but in the case of liquid staking on ethereum it's you know we're entering completely Uncharted Territory here and the problem that lighter has to solve is how to design these incentives in a permissionless and trustless way such that the protocol can continue running in a you know in a decentralized and permission this way in the future for many many years with as many with as little government uh governance interaction as possible and I think that that's that part is far

more creative so when you so if you came up with some sort of repo or money market structure and traffic you could use like established you could open the textbook quite literally and just like pick from there at the patterns that match and what's so interesting about this space is that you know it kind of looks like this when from a distance and that's a helpful way to think about it when it comes to sequencing the risk but you'll find that all none of the textbooks will actually be helpful there's no chapter in you know Professor Murad chowdery's principles of banking about you know staking on ethereum and I think that's the that's the really interesting design space here that opens up yeah I I would agree with that and actually so for those of you who aren't following Along

on a video we're we're looking at a diagram that adcv put together that's actually an extension of the original one of the OG sort of crypto banking pieces written by uh Sebastian daravo um who's also at Steakhouse and there's sort of a this Illustrated there's sort of a spectrum of capital capital structures ranging from the Federal Reserve on all the left all the way to Steve on the right and it's actually kind of helpful because you can see the similarities in terms of matching assets and liabilities but obviously if you just zoom out and look at the two extremities the Federal Reserve looks absolutely nothing like Steve so it probably doesn't make sense to you know apply the exact same set of rules to them but one of the things that I actually like especially about this

document or about this diagram is you've kind of got the Federal Reserve then what JPMorgan might look like what maker down might look like and then what Steve might look like and even though obviously those things are all very different from one another there are you know you can um you can sort of see helpful similarities like one thing that I often think about is under discussing crypto generally is distribution so if you look at something like this like JP Morgan what would JP Morgan consider distribution um you know brokerages are actually like the the sort of arm of distribution within the the realm of financial services right so they kind of do this asset liability management and risk management but then there's this additional sort of arm of distribution or it's a brokerages are kind of like an

investment shop right where you go and you select different assets to buy and then they'll go execute those things um and one of the things that I would kind of like to get into is like frankly from the standpoint of something like Lido or steth or any of these liquid staking protocols what distribution might end up looking like and I think maybe the easiest way to segue into that uh and minutes maybe I could involve you here and get your your thoughts it's like I almost want to compare and contrast maker Dows end game approach uh to what something like Lido or rockapooler or fracks or any of these other liquid staking protocols might end up doing and the the maker Dow end game has been I think if you're not inside of it a little bit confusing and it's

difficult to parse some of the signal from the noise in terms of the actual activities that are going on but you know I I do think there's some some method to the madness there that we could actually sort of apply to something like uh liquid staking protocol as well so uh whoever whichever one of you wants to take this um could you kind of just give us a high level of how you view the end game and then maybe we can get into the similarities between what a liquid staking protocol might do and some of the choices that they'll have to face down the line so I I think uh if you listen to kind of roon describe it uh like maker is what he calls like a broad Dow and uh it's it's a it's a you know he's basically building a large Central Bank

on chain it has you know many different types of use cases it has many different types of collateral uh that could onboard it has you know the sub-dow structure which is effectively for user acquisition collateral onboarding all the things where governance needs to pick up to the PACE where they can actually do different things strategically and that's just like a lot different of a of a concept of a dow than what Lotto is today which is you know he calls it a narrow down and like I don't think these are exactly like the right terms you know it kind of depends on what the overall size of the market is in terms of like if a dow is Broad or narrow but Lotto is you know at this point focused on liquid staking mostly on ethereum um but if you look at the stats there

are you know 15 billion in Lotto tvl so that's about 3x the amount of dye that's outstanding today the holders of steath and and die I I would call it a wash they're probably roughly equal it says there's like 280 000 holders of Steve there's 400 000 holders of die maybe if you add the wrap teeth holders and the you know people were holding in custody that they don't quite now maybe it's like roughly equal I think if you compare both of them right now Lido uh is just growing Earth's teeth you know which is you know a lot of stick staking derivative is just growing a lot faster than dye um and so like those are kind of the rough dynamics of what I would say is going on at the moment in terms of its

you know its final end game plan I I think you know makers is pretty uh I would just call like just ruthlessly moving the ball forward in terms of more collateral and more debt and getting more people to hold the stable coin steath is a little bit different there are different things that you can do with steak teeth like we're seeing people use it in restaking espresso Suave you know eigenlayer like there's gonna be a lot of things that you can do with Ethan so the end game of Lotto depends on a what those opportunities are and B how they want to participate in them but they're certainly going to be a role and then I I think you know those are kind of the Strategic imperatives there's things like you know leverage staking if you want to use the Surplus or not use the

Surplus to your advantage to actually you know extend people lines of credit kind of like spark is doing for maker Dao you know there is like some version of that for lotto you know that you could think of but maybe it doesn't make quite as much sense but I think what's uh what's really exciting about Lido specifically is that um it has this Reserve currency potential that something like a die you know in my mind doesn't just because at this point dye is a lot of usdc it's a lot of real world assets it's a lot of kind of things that are not endogenous to blockchains and I don't think that's ultimately where you know lotto's Market is is going to be and I think the lotto Market is just bigger as a result so those are kind of like how I think of both of them at the moment but I would

probably ask Adrian like is that directionally correct you know a lot more about this than me there's uh so I Steakhouse actually originated as the Strategic Finance core units at maker though so we've been through the depths of all of the you know Anon posting on the forums that we've been uh written by this in the past we've helped with you know financial reporting with now we're helping as an ecosystem actor in terms of real with us and underwriting and alien balance sheet management and so forth I think it's so from what I retain I think they serve two completely different use cases I think uh coming back to this however

there are a lot of very interesting similarities coming back to this analogy of asset liability management it's definitely far more relevant for makerdale in a traditional sense than it is for Lido let's say I mean to begin with maker Dao is a decentralized let's say euro dollar transparent cash on the blockchain and to your point on the usdc and the and the real world assets I think what's emerging out of this phase of uh maker thou is well firstly it's there's not as many usdc as there used to be and this is intentional and the idea is to make this sort of transparent make this make die the sort of transparent cache where you can look at the collateral and

verify that it's in as Broad and and diversified set of jurisdictions and asset classes uh always constrained by obviously the constraints of you know a liquidity Surplus and and the viability of the staple Finance as such I think there are interesting parallels in the sub-dial model for sure I mean the end game is a reaction to let's say the over complication of as you point out lighter is very lighter is indeed very simple it aims to do one thing which is to make staking as accessible as possible to as many people as possible maker has a far more complicated set of collateral types to juggle with and bringing all of this in at the core has

proven to be a very difficult governance exercise because for now a lot of these collateral types still require a lot of very manual governance Decisions by token holders and quote and coordinating all of this activity in a efficient and and productive way for all of the stakeholders in the system so for die holders as well as for maker holders it proved to be a very difficult challenge and so my read of the end game and you know you mentioned the bell curve the middle of a curve and definitely on the on the single digit IQ side of the curve so for someone as simple as on the left side of the curve the right side doesn't exist you had like Izzy and and the eigenlayer people and hustle and stuff that's now you can

balance it out a bit uh so yeah I have a lot of difficulty parsing a lot of the end game but I recognize that it's a reaction to the implicit chaos that emerges when the rules are not made very clear for a governance system that doesn't have a clear hierarchy like a doubt so you know it's uh it's and it's it's making all the rules of governance extremely explicit on the one hand which is a huge benefit actually because it removes a lot of the cognitive overhead of having to debate or interpret what a rule is supposed to say and on the other hand it moves out the collateral types over time into these sub-dial structures which

I suppose more resembles what the sticking router may look like you can think of the staking router and the sub-dial structure as a sort of generalized asset liability management contract or allocator and you know spark is like one Parts one set of like die validators if you want um it's obviously far more complex than this and then the real world assets are another one thing I would say is like just watching the forums of both Lido and maker the hardest part in What the Dows get tripped up on is uh on the die side collateral onboarding and like just agonizing over like you know what's good collateral why what's the risk limits you know why all of those questions and it's just really tough when it's maker core having to make all those decisions

like maker core was really never made for that in my in my view Lotto is kind of the same like all of the things that uh it felt like you know what used to take up half of people's time or more was like you know should we should we do Matic staking okay should we develop an in-house or should we license it out okay should we do Solana staking okay should we like it's like the same questions I think like this generalized framework of sub-dials of staking routers of like those types of Technical Solutions that off-board it from the main Dao construct are really helpful because in my opinion just like the Dows can work um but like the the core there's going

to be a core unit of each of these ecosystems like whatever you want to call it like the maker core the Lido core you know snx uh you know with all of the front ends around it like those are capital allocation Dows those are not like you know blocking and tackling day-to-day decisions and seeing it progress to that new kind of state I think is really positive it just enables them to move a lot quicker I know a lot of people disagree with the make or end game I think it's more thoughtful than people give it credit for I think the meta point is like the staking routers and the allocator Dows like those are how you actually scale I mean it occurs to me that whether we're talking about eigenlayer um Lido or maker the end goal is kind of the same is to

remove any sort of risk through governance attacks and also to remove the amount of you know human subjectivity or you know I guess Central points of risk um and it's really interesting to see the different approaches that they're taking in eigenlayer's goal right to do this their end game is to actually get you know enshrined into the ethereum protocol lydo seems to be have an end game of you know wanting to remove uh as much human decision making as possible automate these processes as much as possible and also five parts of the protocol to you know take away governance as control and then maker is kind of you know on the opposite end of the spectrum and that they've accepted there's always going to be a you know a

need for a lot of human involvement but this you know sub-dial model and and division of responsibilities and you know decision making Authority is is really to try to remove any Central points of risk um but you know given the nature of the diff the differences across these protocols the way to get there is very uh very different I think hasu mentioned it somewhere that the better form of governance in decentralized organizations like this is governance over processes rather than governance over decisions and I think that's what Lido and maker have in common that's one of the central features of the end game is to remove all of the decisions and make them

explicit and then focus on the process of you know how do you make changes if you need to make changes how do you regulate the risk how do you supervise that all of the governance sectors are doing what they're supposed to do um I think this this framing is much more helpful because then you can really focus on this is the right process for the aim right like lighter's aim of making staking as accessible as possible to everyone this is a an aim that requires processes to get to and a few snarl governance in individual decisions you will never get there I wonder if you could also look at Lido and makers two interesting examples of one being a broad Dow or a wide Dao in the form of

maker and then a narrow form and narrow down the form of Lido is actually sort of going towards the same place from different starting points and the way that I have started to view the end game is actually a way to sort of cordon off and Silo some of the risk into some of these sub-dials and Lido is actually in this funny state of going from what was to miles's point earlier a very simple Marketplace model into something that is a little bit more complex with the the staking router albeit it's the way that Lido needs to move but they're actually sort of going towards the same place and then maybe there's this there's this idea of how do you cordon off the most core functional parts of that Dao and makers going from like you know it used

to do a whole bunch of this stuff itself to now maybe it's pushing some of the leverage and growth opportunities into some of these sub-dos and like sort of protecting the Golden Goose and maybe there's um that's kind of the similarity in between those two things but one one other idea that I want to start getting into sort of potential business models or growth opportunity for let's just say Lido but again this is any like what's taking protocol that has some sort of concept of a staking router um a big question Adrian I'd love to get your perspective on that we didn't get to somehow in that two-hour episode that we did with Izzy is a lot of the business up like opportunities that are going to arise for Lido is whether or not the protocol and governance will allow for a specific set of delegators

to pick their specific subset of validators um so right now the allocator mechanism in the staking router it has this very simple governance approves a new module uh it approves a Target limit let's say it's one percent once those once that one percent essentially gets filled the Overflow goes towards the whitelisted uh validators that originally were with Lido until you move that up to like two percent or something like that but right now now there would be no way for let's say there's an Institutional Staker they need to get connected with an Institutional um with like an Institutional set of validators that have all kyc'd what Lido won't do right now is direct you there and what that's done is open up other niches in the market for the liquid

collectors a liquid Collective the alluvials of the world and what they're doing is saying hey you know the validators within our Marketplace coordination mechanism it's the chorus ones the block demons or the figments of the world right so you don't really need to worry about all this an opportunity for Lido and this is where you can start to see more of this like liquid staking as a service type model emerge is you don't need to actually worry about that we we will connect you as a delegator as a Staker with the correct um the correct you know set of validators it's almost a concierge uh sort of service if you will like what do you think about this as a potential growth opportunity for for light up it's interesting um

so firstly I mean there's obviously a lot of opportunities that appear on the surface today when you open the possibility I I don't even know if it's even technically possible but uh one so one early risk that occurs to me and focusing just on Lido as a protocol in a team to make sticking as easy as possible to as many people as possible in a sort of API first taking in a neutral middleware type of structure allowing people to customize the exposure to the delegation to the delegators that they want risks creating centralizing forces inside the staking router itself the other and so just from that perspective I would be hesitant to sort

of think that this might be a Panacea or a solution for onboarding institutions instead would I I'd actually like to do here is take a step back and and explore some of these assumptions that led you through the uh the thinking of this phrase of like this this stake teeth is like kyc or it's with validators that are kyc unlike this other snake teeth so it's okay for institutions I think that there's two axioms here that we need to try and and push back on in in order to help move our industry forward uh the first one is that kyc applies at certain layers where it maybe shouldn't or doesn't have to or where it's more relevantly it's like it's like a known question like you don't kyc SMTP

servers when you send emails so in a similar angle it's very difficult to justify if you think from first person was why you would kyc a trustless permissionless protocol such as Lido because then you may as well kyc ethereum I see the responsibility of kyc is let's say in order to comply with you know fat rules to prevent crime and money laundering and enable supervision of centralized custodians and and financial services but the responsibilities in these institutions there's no reason why an institution couldn't kyc its customers and use ethereum for example all sorts of absurdities start to emerge when you start to peel apart this this sentence so all of this all of the stake

teeth is on the same deposit contract but this isn't a relevant comparison because this is one of those instances where you know staking on ethereum doesn't match money one to one it's just not the same so applying things that apply to money is you're going to have a very difficult time or you're going to contort the marketplace into a shape that makes it less useful or less credible uh ethereum ecosystem that's super centralized is less valuable for everyone so even if centralized players controlled 80 percent of ethereum staking ethereum would just be less useful and less valuable as a result but that market incentive is there to

centralize and that's one of the things that Lido is so conscious on fighting and the other uh the other Axiom that I wanted to challenge was this distinction of different types of steak teeth so yeah like I said earlier all all East all stake teeth is the same fundamentally they are all in the same type as a contract they're all on a validator they're all on the machine they're all performing security functions for the ethereum blockchain and so introducing this idea to Regulators of some eth is better than other I think is a dangerous path to walk down on and I think the more interesting approach the more creative approach might be for instance to engage Regulators to encourage them to run

validators themselves and to see that okay look not only is this not like the past but this is so new and so on like anything else that you need to have a stick in it yourself in order to safeguard the neutrality of the system and to allow your citizens to participate in it equally and so yeah coming back sorry coming back to the original question of like should lighter be able to allow its users to pick uh delegators I think just reasoning from these sort of first principle of like what is the point of Lido in the first place I'm inclined to think that it's not such a good idea though there may well be technical implementations that are possible the other aspect is breaking fungibility of course like if you you

know at the base at the most basic level like if you could make an Institutional stick teeth and a institutional lighter stick teeth and the regular stickies but this is the same like it alludes to a lot of the same problems that I was ranting about just now explain a little bit like what is the staking router used for if not um you know like this type of Market making with you know one validator to one customer on the staking side so the sticking router is a way to diversify the node operator set the validator set that underpins Lido and you know we talk about business models and I I do think that's the right framing but it's also important to note that for Lido and for many other decentralized protocols it's not

necessarily a pure profit objective so the standard Alm formula in a bank for instance is about maximizing profit or return to equity subject to constraints of you know liquidity insolvency but the same type of objective equation set for Lido is still being you know developed and thought out and discussed in the now uh because there's it's not clear that there's one single objective of like profitable deal holders or rebases to stake teeth holders it's more about decentralizing the node operator set enforcing geographic distribution uh you know maintaining the Integrity of the underlying base layer of ethereum and so I see the staking router as an Alm controller that has to solve a very

complicated multivariate equation that we haven't fully defined yet entirely that aims to guarantee let's say the security of ethereum and as many people as possible to to participate like in the future I think it would be really great if let's say whatever figment coinbase UBS you know Goldman Sachs joined Lido just as much as the individual stickers and the individual validators and the professional validators and then the role of the sticking router would be to control the effects of centralization that come with scale to prevent the larger players or the professional node operators from dominating too much of that stick or at the very least and

making sure that the the allocation is done in a in a fair and distributed way that that doesn't compromise the security I think it's a really interesting topic in advance you've mentioned earlier collateral onboarding being kind of the most Central the sensitive touch point of maker governance and I Envision I guess allocation of deposits across these modules to be one of the most sensitive areas of Lido governance going forward um and you know it's almost counterintuitive because the objectives of Lido you know are to remove the human subjectivity and decision making longer term but then you have kind of two options which is you know if it's technically feasible allow the steath holders to choose their delegations this

is basically a delegated proof of stake model um and as we see with delegated proof of stake that can often end up very top heavy which is you know the trade-off that you have to accept or you could let this kind of be a free market right and the that could also you know that would increase the rake on the supply side for Lido which you know maximizes profits and is great but obviously the largest validator sets would be willing to bid down what their you know lowest possible commission rate would be in order to get more deposits um and so the human touch point in this you know particular case is actually very aligned with ethereum because what you're trying to do here is think a little bit a little bit more

longer term about what the biggest version of Lido could be and that's a Lido that is healthy for the network right and so maybe this is the one area where keeping that subjectivity and particularly those controlled by you know this area is controlled by people who are very aligned with ethereum is actually very important and and much healthier longer term uh potentially is that is that a fair kind of you know synopsis of the trade-off space I think so um I I would say so like what you're talking about specifically is um Lido you know there's call it five percent yield per year on ethereum Lotto takes a 10 cut of that half of that goes to the Dow to pay the workforce half of

that goes to the validators to to effectively you know bootstrap and maintain their ongoing maintenance costs I'm I'm hopeful at some point that you know that's a formula where you can goal seek for validator profitability um that you can actually like fully automate that like like maker and the DSR I think uh central banks and banking is just like more subjective in many ways than like you know what is the goal saw validator profitability threshold you're trying to you know make for sometimes it feels like with maker it's like yeah like a little bit up or like you know way up like DSR is going eight percent then we're gonna go way down like it's more of a stable governance system that should be more able to be

automated so I I think that's one part of like the the long term of the governance for for lighto I just wanted to address one thing with like the the kyc and institutional staking narrative this is something that we've dug into a lot and I think you know just to put a finer point on it what people are looking for on the institutional side or at least are told you know what they're looking for is um number one you need to kyc the actual liquid staking tokens and and if you really think about it like does that really make a ton of sense when those liquid seeking tokens are then going to change Hands-On chain and you're not going to have kyc on the way out like that that doesn't really make a ton of sense so that would be the first

thing I would say second thing I would say is like you know the other thing people are looking for is um are we ever going to be caught validating like an ofact block like I think that's everyone's like you know nightmare worst scenario and I think you can run stuff that that filters that out I think that's ultimately bad for ethereum and I think ultimately you should strive to have more of a decentralized layer validation and I think Widow provides that service the last thing I'll say is like when and I posted about this on Twitter last night when you get to like the smaller scale lsts which a lot of the institutional ones are like you do run into this uh problem where you don't really have enough money to pay the validators to keep their rigs updated and safe and and

you know profitable I think the profit margin on current Lido validators is something like 40 like it's one of the best opportunities in crypto but if you're running like you know one of the four validators in one of these smaller lsts like you really kind of get to the point where it's like is this even worth it and so over the over the longer time Horizon I think you know if you're a team that's running an LST with underneath I like call it you know say you have a million eth and say the price of Youth is 2 000. you have two billion dollars in in tvl you're making you know five percent yield on that for everyone that's holding that LST so you're making a hundred million dollars and then you're taking a 10 cut

so you have 10 million dollars and then maybe half that goes to the workforce I mean five million a year that's a small Workforce so there's that then you have five million dollars to give the validators that's not a lot of money you know if you're supporting a million youth um and so like my expectation is you know in the state where this really plays out is things like DVT are just going to be a force for these people to kind of like sure you can still have the you know the rocket pool brand or like you know the swell brand or whatever like you're going to be using some middleware that lowers your validator costs so that these things are actually profitable at subscale so like that's kind of how I see it and that was a little bit of a tangent but

you know like I do think there are significant scale advantages where like many businesses don't get easier the larger they are liquid staking is definitely one of them miles and I in the beginning of this season there's a lot of interesting experimentation going on in liquid staking land that's broadly referred to as LST Phi and really if you look under the hood at most of these lst5 protocols it's just regular D5 protocols that start with liquid staking tokens is collateral first and that's actually I think what that is is a well and good way to bootstrap but probably in the long term it's very hard to like see the moat in between something like maker versus a maker clone that just their whole value proposition is that

they started with uh Steve uh and one of one of the interesting categories that we sort of explicitly decided not to dig into as much in the season was indices of liquid staking tokens because the how that gets billed is you're diversifying right there are a bunch of different liquid staking tokens and really you should have like some mix of like Steve or arith or whatever like whatever else to the nth degree but exactly to your point Vance these sort of scrappier liquid staking startups is unclear actually the security assumptions that underlie these things so are you actually getting more security by getting some sort of index or are you actually just taking off so I

don't yeah I think it's actually the opposite yeah I would argue that too I think it's much less if you're looking is for more diverse validators like it's like you know you're buying mortgage-backed Securities and yeah you're trying to diversify by like buying smaller and more idiosyncratic ones with more credit risk like that's not really a great idea um and so yeah I think it's like The Branding gets mixed up with the core question of like who are the validators and right now the validators are professional validators but this question is going to really change when DVD comes and it's like you've got a guy with a solar panel in Montana you know solo staking next to like a big institutional provider

like and there's there's going to be this combinatorial effect of there's going to be a lot of diversity in in holding just like more of the same LST if the validator set increases versus holding different brands of lsts the other approach to this which I think is interesting is frax where there are subscale LST but they're verticalizing everything they've got stable coin they've got the lending Market they've got you know who know like I think there's an L2 coming it's just like one piece of the puzzle yeah so those are the two avenues like you can either you know DVT it up with you know the staking router and go the direction of flyto or other providers are doing that or you can verticalize and try to build this ecosystem where eventually you do have enough fees to pay the validators properly I kind of love this idea of

targeting you know or centering fees around validator profitability um and you know whatever deposits go to maybe the largest validator sets you target something like a 20 profitability and maybe that comes out to only three percent commission rate because they already have so many deposits versus you sending you know whatever it gets sent to say the DVT or solo sticker set maybe they get eight percent Elida only takes two percent because that's what's required to keep them profitable um and then you can kind of you know well commoditize that side of the marketplace a little bit um but keeping everybody relatively happy um I think that could be an interesting Avenue

um especially with firms like rated that are that are getting into this and closely partnering with you guys it's such a difficult problem though because you like how do you even civil resistance defend you know your DVT set from the professional node operators if they see that the margins are different and I think that the the this is why designing uh sticking router free markets is such a so for maker it's actually simpler because it just has to solve for let's say quote unquote return on equity for the bank it's very clear it's very straightforward what that objective function is it has one outcome with Lido it has n and we haven't even figured out what the number n is right you know profitability is one of them but then

it's only one of them the decent the degree of decentralization is another and there's like 20 other ways that you can encode these variables into that signature potentially to make it more robust to civil uh to civil let's say yeah I've got a question for you Adrian um and how do you see eventually like if we're having this this discussion five years from now and we're looking at the staking router are there like five or six sort of broad modules or are we looking at thousands of modules where each module might end up being a very custom set of parameters for let's say a large pool of existing eth that could act as distribution so my like mental model eventually for where uh protocols

like Lido are gonna have to go is they're they're trying to be eth vacuums right they're trying to suck up all the all the eth out there and eventually you will max out the amount of just individual people with with eth that want to deposit and eventually Lido will need to find a way to go after large existing pools of ethereum and that could be in like D5 protocols today that have some sort of rehypothecation module or I don't know where it'll come from in the future but eventually I would guess is okay there will be this pool of let's say 100 or something like that and they'll say hey I I would like to use the you know I want to do this with Lido but you know come on I've got a hundred thousand Heath I shouldn't be getting the same terms as someone who's just

depositing one eighth into the protocol right so you could imagine and and they might also have like more bespoke set of of needs as well uh maybe some more technical requirements like we've used the example of makers PSM uh you know coinbase versus coin shares uh proposals that went out earlier this year but you know how do you think that might ultimately look and does Lido need to go chase those pools of Ethan there's two so on the on the validator side it's it's hard to say um I would be tempted to say I wish it was it was the scenario with like thousands of different types of modules because that would imply that Lido has developed to a point where it can trustless and permissionlessly onboard any arbitrary number of validator

modules and I think that would be a really great thing uh so if if it means having a thousand modules and Lido you know balances out the eth deposits successfully and guarantees the the security of ethereum and its decentralization then I think that's a really good outcome in you make another interesting point which is the let's say Channel acquisition of of eth um I think so it's interesting because they're certainly a stakeholder and you know a let's say a wallet with a hundred thousand each um has to shop around very carefully when it comes to allocating their their stake in order to secure the network part of that allocation May well be to not stick any of it at all or only some of it and

you know should they have a claim let's say to sort of preferential access or some kind of Revenue share there is a a revenue share program at the moment rolled out by the protocol relations team for sort of large stickers is it sustainable over the long run I'm I'm not super sure I have a preference just aesthetically for having the channel distribution Partners clip a fee for providing access to Lido from their customers like if you step back and Abstract away from Lido as a consumer product and think of it more as middleware then integrating with lighter will look something like you know you log on to your banking account and they have they plug into the

Lido API smart contracts for their customers the kyc and whatever they go through this whole song and dance and they clip a fee for providing access to the service and I think that's fine and I think that's probably a more interesting and more sustainable way rather than bringing them into the core of the protocol let's see um because the goal yeah again the goal of lighter is not necessarily to stay just take all the heat I once made a joke that uh you know slido stick to 100 of all the ether and circulation ethereum would stop working because you wouldn't be able to assign any transactions with any gas um so that's not necessarily the goal the goal is to balance the incentives of

like validators and eat stickers such that ethereum itself is as decentralized as possible so I think it would be maybe governance has a different view I don't know you would have to ask the token holders but I see these sort of Revenue share programs as more of a temporary situation though they are certainly you know relevant right and right now and I guess the revenue share is being done through the affiliate program um and I noticed there is a proposal with with bit Dao right now um right to deposit I think it was 40 000 eth um and that and that would put them into the category of getting I believe 30 of the revenue share back um so I think that's really interesting and maybe lighter touch uh as it relates to you know changing core parts of the

protocol um and again even if bit Dowd did have their own module per se you could not direct deposits only to that module with a custom fee structure right now so it's just worth thinking about um this is a this is a this is more of a let's frame this more as a Dao proposal rather than a protocol change right like lighter the protocol continues to function in exactly the same way but the lighter the Dao the union of token holders have just decided that in this particular instance it might be interesting for for bitaw for mantle to uh to get access to this affiliate program I think that makes a lot of sense um and I would also love to just kind of explore some some additional revenue and growth models uh that you guys may or

may not have been thinking about so far um and I think the goal with any sort of you know additional Revenue that you might think about is you know one not hurting steep users right not leveraging too much uh control with your market share over State users to you know increase the rake and two not hurting decentralization um and I think I guess two ideas that come to mind and the stride team and Cosmos has introduced this but you could they're introducing a a way to bid for instant with withdrawals and so this is really going after you know the Searcher Market uh who wants to perform arbs um and then another one which I believe was brought up on uh Uncommon Core is

this idea of you know we have sequencers on the all these Roll-Ups now and they're going to need to select a you know maybe a small sequencer set and Lido's in an interesting position because you already have relationships with a very you know geographically distributed set of validators um these two jobs of you know being an L1 validator or an L2 sequencer or Not So Different you could imagine um and so you could potentially be you know a I guess node operator as a service provider for some of these these l2s but other than those two ideas you know are there any other things you've been thinking about um on on the revenue side or just you

know growth strategies in general I think the the so the one out frame it more around product strategies the attitudes that the like the the shape of the lighter protocol that has emerged over time has been one of Relentless focus on just making a really good product and I think that that's the best growth strategy of all it speaks to the fact that you know of the liquid sticking tokens most people are choosing to stick with Lido it's not lighter that's going out and trying to acquire these users people are simply staking their so I think focus on the core protocol and there's so much created space left to to design around

I think the L1 and L2 you know the sequencer angle is interesting but as with L1 issues Lido the protocol I would hope would over time avoid positioning itself as a king maker in any one respect and try to solve for as much neutrality as possible and I think that that would make it a more attractive product for each one of these l2s and I think that that's what may result in its growth through that channel should that be you know a potential Avenue of of expansion of the protocol but yeah I think the the tldr is in my personal view as narrow as possible as focused as possible on the core problem

of you know making sticking accessible which is a huge huge problem and then finding ways of making sure that the incentives are balanced not you know not for like the next five to ten years for the next Bull Run but for like the next thousand years of people using ethereum as a base layer for stuff I think that's the that's the challenge that and I'm yeah thinking of and losing sleepover that's super bullish I mean just like uh qualitative perspective at least my perspective is um and also you know we hold tokens in Lido so disclosure probably a little bit late in the episode to say that but um like just like my perspective of uh the lotto Dao is that there's a lot of

people who learned a lot of things from maker hasu you know Steakhouse and and those guys um even you know Constantine just has been around the block so many times that like he's seen it all um and the first time Dallas didn't have this benefit and and kind of ended up I think like a broad Dow is like a good thing and also a bad thing it just reflects like a level of scope creep that people probably wouldn't have preferred if they could do it again and anytime uh you know things are proposed that are more short-term more likely to distract the Dow more likely to you know decrease decentralization it's always just kind of like laser focus and product focus and it's very refreshing to me at least like it is

really one of the better run Dows and does lift the principles of you know aligning with ethereum decentralization making staking easy and um it's more product LED I would say than than most other Dows as well just because like people are just interacting with Lido in numbers that you don't really see in any other dap like there's a 168 000 unique depositors like depositors not just people who own this or trade it like people who interacted with the staking contracts like it's pretty wild there's a very broad constituent set and I think the ethos of the Dow reflects that I've got one more set of questions guys around just this this idea of an internal fee Market to Lido and this idea this idea that I've sort of been

thinking about since the episode that we did with Izzy about the potential of a sort of bribe model for the ldo token but one one question that I have about how this is actually going to play out in practice is my understanding is the way that fees are going to be set for these different modules is through governance um so anytime you have like set that sort of set that sort of ability you sort of open yourself there's an incentive right for people to try to to monkey with with governance right to uh to drive fees in the way that they ultimately want um so you know my two-part question for you is you can sort of see eventually the desire for big sets of stakers uh or more sophisticated actors with deep

pocketed actors that really care about percentage points on the amount that they're paying to the protocol or to validators uh to adopt the strategy of let's say in the same way that curve Finance has this bribe mechanism internally with CRV the token you lock it up there's a ve model you can direct and then you kind of have the ability to direct emissions of curve CRV the token to different liquidity pools and you create this sort of virtuous flywheel for the pool that you're in a little bit less so and you kind of have to squint at it but you could see a similar incentive with the ldo token of if you buy up a bunch of ldo before you have to stake you could lower the fee parameters of your specific module stake for a cheaper amount

um so there's kind of this broad model that you know I understand why that might sound not super positive to people but what I also do believe eventually is that we need to find Value accrual for these tokens you know you can't just say something to the effect of Lido is going to be huge and therefore there's some reason why this token is going to be valuable like ultimately you know if we're not going to stream if it's not going to be a claim on cash flows or something like that that would violate Securities laws there has to be something so that would be my my question to you and and if it's not this if the governance token doesn't stand in as the the mechanism for this fee market like how what what did these fee markets actually going to to look like internally it's true it speaks to the

this problem of adverse selection I suppose it's from the point of view of a very large depositor who is large enough that they could potentially influence the direction of governance through you know cutting into some of their profits by buying blocks of governance support for certain things it's I suppose it's a possibility because in effect the fee in the sticking router is set by governance at the moment it's a variable but I think the intention is to hard code this and to minimize this and so I think that the two mitigans so I see this is a I see this as a remote possibility for for three reasons the first is that the an attack of that size would have to be

very large at the moment and would have a very narrow scope of influence to actually change it would make a lot it would create a lot of waves you know like oh large stickers trying to change the fee from whatever five to zero or something or to a hundred the other so just the size of the attack that it would be required I think in this in this transitional phase while governance still has control of those parameters I think is a mitigator somewhat but then the other is the fact that this is not meant to be in the hands of governance forever the idea of governance minimization and ossification of the protocol is that you take away these levers and these variables and that you design a system that balances the incentives of all of the participants in

this you can call it Marketplace in a way such that they're all the least annoyed the least worst off with respect to each other and then the other one is the importance of introducing this aspect of a dual governance veto over ldo token holder decisions which is the sort of final Safeguard so if you see someone doing Shenanigans with the ldo token you would hope that all the hundreds of thousands of stake teeth holders could intervene to block it and to prevent any any uh yeah any Shenanigans with the fees or with governance so I think it's an interesting model yeah I think this concept of bribing people for governance is definitely a threat I don't know enough about the vote escort

modeling curve or anything I hope yeah I don't know seems a little overwrote and a bit complicated I'm sure it works out fine um and then the other aspect yeah so as relates to the sticking staking router fee Marketplace I would hope that it ends up in a place where it's automated where it balances all of these incentives and solves four variables Beyond just sort of profitability on the value accrual maybe the token doesn't have to agree I'm sorry to say I'm sorry to disappointments but maybe he's just holding governance tokens and that's okay and I think that's for governance to decide the the the the direction of in

the future you know there they are a constituency that needs to be incentivized to participate in governance for now and you know may well need to be in the future and those interests need to be balanced somehow but I wouldn't necessarily characterize it as value accrual necessarily although I'm sure Vance disagrees yeah I disagree You Know It uh at some point this is going to be a finished product it's going to be decentralized you know my hope is that all the governance will kind of run itself like I do think that's a part of like the maker end game that is you know a little bit sci-fi but like we should have just an automated system making all these decisions and then it's time to return cash flow to token holders right

I think it's a pretty straight line I don't think we need to hopefully we get some clarity and that can happen in the next 10 to 20 years without having to you know introduce these you know reasons to buy the token uh hopefully the tokens just you know generating a lot of cash flows um and we can I mean like you know think about Google as well like you know they have not distributed cash for a very very long time other than stock BuyBacks but like it's just such a valuable company that's growing so quickly and spitting off so much cash that you want to hold that governance token right and share whatever right like I I think Adrian Adrian's point is more so on that front or maybe I'm

putting words in your mouth but like the whole idea of I think like you know deferring returning cash flow is like this thing is growing so quickly and compounding and the internal management and the internal token holder Community can make it compound faster than giving it to people and having them you know do whatever with it so I think that's the spirit of it versus like you know these token holders it's a different way of thinking about it it's more akin to kind of like the traditional Tech valuation you know why you would hold those shares yes with the with the caveat that it's it's not a company it's a protocol so SMTP doesn't have token holders and if it did I don't know if they would expect some kind of dividend and I think that's a more interesting way of

thinking about it which is not to say that they're will never be some sort like you know Leo token holders are important there the lifeblood of the Dow they run the governance you know the the they are the union of token holders that make things happen and you know they are a constituency whose interests need to be managed to make sure that the protocol is maximally well run for the benefit of ethereum and yeah but I approach it from that perspective rather than from trying to let's say shoehorn it into a you know Corporation dividend buyback return on Capital approach yeah my Approach is also like a mat like assume the markets are 10 to 100 times larger than you expect like if Steve

really becomes the reserve currency of the internet yeah the governance token for that is gonna want to hold um whether there's dividends or not that's that's not going to be the thing that really sways your mind um but yeah like I think there is just I think a lot of these Dows are going to be far Larger Than People anticipate and the reason why is that the internal you know token holder Community is going to be able to allocate and redeploy capital in a market that's growing far faster than people expect so like short term I agree with Adrian Long Term I look at things like um and I know it's a company but Snapchat it's just like a egregious mismanagement of cash flow of incentives of you know

conflicts of interest like I I really think you know the way to draw the clean line between the token holders the validators uh and the steath holders is just cash flow like I don't really see any other Avenue for that to happen in terms of alignment there's definitely a big balancing exercise that has to be done with all of the different constituents with respect to the Surplus that the not the protocol generates for the for sure all right guys this has been a really fun one and definitely gave us a lot to think about and yeah it's just it's just fun to get a little bit more tactical and and you know talk about how you might you know different growth models or improvements of the product or or how you might eventually expect to gruesome value to these tokens because the one thing I would say I do

sort of conceptualize of a lot of these a lot of these protocols is Primitives similar to an HTTP or something like that but the problem ultimately comes down to incentivization then and if the if the protocol is dependent on these on people doing things and and holding the token then incentivization has to be thought of somewhere in that model but guys this has been a ton of fun thank you both uh so much for for coming on the episode thanks for having us yeah I hope you enjoyed the single digit IQ takes left curve only baby left curve only all right guys talk to you soon all right miles that was a great episode with with Vance and Adrian um both really smart guys yeah no that was that was awesome and it was great to

have Adrian's perspectives you know as we compared maker to um to light out given their position you know with with her experience working with with both Dows um and yeah we loved loved the perspectives yeah I gotta give a shout out to Steakhouse they're becoming one of my favorite teams I wasn't super aware of them uh even a couple months ago but Adrian and Sebastian the whole crew over there do really great work and make her light out some other protocols as well um let's sort of start with you know I thought it was I thought it was helpful you know the caveat here being when we talk about mental models like comparing Lido to something like a bank is all reasoning by analogy is inherently flawed and there's a limit to how far you really want to go down that road but

the reason I found that that was a helpful section of the podcast was just this idea of sort of uh balancing assets versus liabilities and managing that risk again I'm reminded of this this old post that multi-coin did a little while ago which is Dao's managed risk and ultimately if you have a dow that manages and underwrites risk that's a less forkable sort of more stable moat than something that could be easily forked or stolen away like uni swap liquidity or something like that although that's actually proven to be pretty sticky so I thought that was a useful part of the part of the program yeah and you know I think this becomes more relevant with the introduction of the uh of the staking router right um because you have not just one module

with you know a pretty uniform risk profile around you know each of the validators in it you have many modules with very different risk profiles and so while the goal for them broadly is governance minimization um I think this is you know the one area where there's actually can need to be more human you know um I would say touch points than there was before Lido V2 but again this can all these this governance you know interaction or I guess the objective of this portion of governance is actually very aligned with ethereum and decentralization since that is really the main goal here is how can we make this set as permissionless and you know Diversified as possible while still

protecting the users yeah I I also really enjoyed the the perspective of comparing makers end game versus Lidos and this idea of Lido as a narrow Dow and maker is a broad dial and how they actually might be sort of converging and one thing that we didn't draw out in the conversation but I found myself thinking about is there's a point at which I think almost every Dao starts off as a narrow down but then what ends up happening is you sort of hit this saturation of your initial product Market fit right so in the beginning for maker that was borrow against eth right it was the ability to sort of lever up and borrow against your eth the reason why there was some

complexity added to maker and it became more of a broad Dow instead of a narrow down is because the demand to borrow against your eth ran out and roon and some of the early Folks at maker had to make this really difficult decision up do I continue along this path of growth and do I allow onboard real world assets and add a little bit of complexity to my Dow and broaden it out a little bit or do I sort of stick to my knitting and something that actually occurred to me during that conversation was perhaps where just each Dow is just at a very different phase of their development where a light out hasn't maxed out its initial product Market fit and so it still makes sense to continue on this Narrow Path where at some point right they will they will saturate the market

for stake teeth right and then they might have to make some decisions about am I okay with just my current level of of you know my current size or do I need to look for a more complex areas to grow yeah I think that's fair or maybe they've maxed out their you know level of product Market fit with while having one you know curated uh validators and so the Insight here is to unlock more of the market we actually need to you know diversify this set we need it to be more permissionless that will involve you know making this dial a little bit less narrow right because there's more jobs to be done there's more to monitor um and more decisions to make but again

that is really all in the the benefits of hopefully ethereum and the Dow longer term um and it's part of I think you know this is something I was talking about with Aiden from stride but reframing the narrative um around lsts and and governance risk uh to something that is you know potentially an existential risk to ethereum that's really where we were in the like self-limiting debates to hey actually this can be a force of decentralization because it is so aligned with ethereum's values and frankly you know the light if the light of Doubt can prove that they that through governance ethereum can have a more

decentralized set than if it was totally up to the users you know to pick and choose how they delegate their stake um you know maybe that's a good thing maybe we should not be so concerned about Lido governance maybe we should be cheerleading it right um that would be a very powerful you know shift in narrative and and I think that that's really what LSD protocols should be trying to do at this point yeah I agree with that Miles and maybe this is the part where we can segue into some of the discussion about potential business models and one uh because everything is as a service these days I think what I would sort of have kind of heard what you're describing called is node operator distribution as a service so nod ass and what that would you know the

the basic desire behind that would be let's say let's actually say You're Something like uh let's say restaking ends up getting implemented your optimism and it's like hey we've got we've got one sequencer today ultimately we want a more distributed set of sequencers and then you sort of go through the same questions that you might in terms of how do you create a distributed set of validators well I don't want them all in the same jurisdiction I don't want them to all be the same person and there needs to be some amount of checkup on on my sequencers in the same way that a staking pool would have to check up on their node operators well I could either go about doing that myself which is a really tricky program or I could go to a third party like Lido and say Hey you actually have this distributed setup

validators you've done the hard work of Distributing these across different geographies Etc and I would like some of these guys to opt in and become a sequencer so that could be quite an interesting opportunity for a protocol like Lido yeah you could argue that Lido is basically a form of like proof of Authority for a theory for Distributing ethereum stake right now um and yeah exactly we've you know really have developed like a robust you know proof of authority system um and then you can you know replicate that you know all those existing relationships all of you know I guess all the distributed infrastructure to other sort of proof of authority systems um one of which could be you know

sequencer sets for for uh Roll-Ups and yeah that's just an interesting kind of Downstream um effect of of really what they've established already um and another interesting business model but again that kind of makes the Dow less Arrow right so all of these decisions of you know expanding horizontally or vertically or you know have trade-offs that I think might be tough to get past or at least in the very near future yeah I think a big part of our discussion as well ended up sort of hinging on this question of Will Liquid staking protocols allow some sort of service or allow the ability of delegators to select validators on the

other side of the marketplace with a specific set of criteria so we've stayed with this sort of example of uh with this sort of example of an Institutional depositor that wants to be connected with a kyc instead of validators and the big the big issue with this is one I think Adrian did a good job of pointing out that it doesn't really fundamentally make sense teeth is you know fungible today and it's all Steve they're like other Steve and this doesn't really make sense actually even at a high level and this is where the analogy of lydo being a bank or a money market fund or something like that breaks down because ethereum is fundamentally something new and these analogies don't fit because staking isn't really a thing in the real

world but the big protocol more mechanically is that the ability to do this would break fungibility with Steve and that at the same time that you open up a market and you put competitors like alluvial under an enormous amount of strain almost overnight by offering the ability to do this you do break a core part of the value proposition of your your product offering today and that should not be taken lightly I don't think no no I think it would it's like it's a technical challenge right now and if they're able to you know innovate something that breaks the trade off then this could be a more interesting conversation um I think the challenge is really around you know if there is a slashing event how do you you know make sure that

only some of Steve gets slashed right that is associated with the validator who who you know was responsible for the event um versus today if one of the Lido validators gets slashed then that loss is socialized across all of steath holders right um but then it's like you know even beyond the technical challenge it's more of a question of should we do this should we leave that you know this decision completely to the users um and that would shift you know later for more of a proof of authority sort of model to a delegated proof of stake model where someone that looks much closer to that and we know that those end up with typically top heavy sets and so yeah that will be

another sort of uh question I think maybe as Lido hits the next sort of ceiling of market share that they can grow um say they get all of the market share of you know Capital that doesn't care about you know I would say like or have institutional level requirements um yeah then they'll look at this a little bit more seriously but it'll take a while to get there and just to clarify for the audience why in a delegated proof of stake system it tends to be very top heavy is imagine yourself on the perspective of a delegator right and there's some sort of user interface and you're deciding you know who to stake your you know who to delegate your stake to and you can see maybe five

large validators with an enormous amount of stake and this great track record in history et cetera et cetera and then you see a longer list of validators again you don't know who any of these these people are it's not like you can look up a Yelp review on on your validators right it's just uh you just see that they don't have very much stake and you know you take the heuristic that if they're managing a lot of stake they must be trustworthy and reputable right right exactly yeah yeah there's no yelpful validators today but there are a lot of great you know tools getting developed like rated or you know also we see in Cosmos where governance and you know involvement is a big part of the value prop for validators that's right it's either track record and how they think

but yeah no I don't I don't think it would be I don't think it's a given that that would be a healthy thing for the protocol So eventually Lido and other liquid staking protocols like it are going to have to make this decision because maybe the staking router miles to your point earlier unlocks the next phase of growth but even after that right there will be a point where all of the Lido state are all of the ethereum estate right that is that could possibly be State someone made the point I think it might have been Adrian on this podcast that you can't actually stake 100 of each because you got to pay for gas right so there are these there are limits somewhere in terms of how much can be staked and then Lido's gonna have to grow some in some other way and one of the other ways is

you know you could have these additional sort of more service fee like models like liquid staking as a service where you're more of a concierge type thing or you could think about it from the perspective of again Steve is a claim on a pool of assets right so really what you want to do is grow the pile of Assets in that pool and one way that you could do it is you will eventually max out your eth so you could again do things like restaking and you get other Assets in that pool which again it causes all sorts of problems and complications but it'll be a challenge down the line and and one you know the last part of this discussion and this is where I think you and I are maybe a little bit less aligned so feel free to push back on me here is how value

accrual is going to work and I agree with you to maybe present the Steel Man of my argument here that there's this sort of broadens out into a discussion of tokenomics writ large right which is there are sort of these aren't mutually exclusive opinions but there are kind of two different ways that tokenomics or value accrual can work in a crypto protocol one is that it's more traditional right it's that this protocol doesn't function you collect a whole bunch of cash flow and then eventually the token holders will get distributed that cash flow after a period of time the equity model of value accrual right then there's this other more more crypto native one which is the token itself actually is part of the product so you create in in creating

this this protocol with this this set of uh this set of services you actually bake demand for the token into that design so a really good example of that frankly where that works and is very elegant is ethereum right that's a that's a crypto economic system where there's actually uh it makes sense there's a demand and then a burn mechanism for accruing Value another example of that would be curve we covered that in the podcast about the escrow model where you're locking a bunch of that up you can direct emissions of the protocol and I'm generally less of a fan of those token designs but the caveat that I'll that I'll you know say here is that there's some amount of path dependency where the problem with the equity model is that inherently that that looks very

Securities like right and there could be a period of time let's just use this hyperbolic example let's say we don't get clarity on the security you know uh Securities Law side of things for like 20 years right that's that's too long of a time for us to just say yeah that'll it'll it'll come down the pike at some period of time so what people will inevitably do is find I think in that situation the longer until we get clarity on the Securities Law side of things the more we are going to drift into this model of baking the token into the product in some way shape or form and that's where I could I could see a world where you start to see these like a bribe model for Lido or something like that but I mean I mean you tell me like what what do you what are your sort of

thoughts here yeah I mean I I'm definitely more of that more additional mental model for these things in general um you know I think Lido has a great product that people want and are willing to pay for today um and it's actually closer profitable already now that incentives have been wound down so much um and so I think about you know the future growth and value accrual to Lido token I think a little bit more traditionally where you shouldn't be focused on I guess reverse engineering you know uh some form some way to generate demand for the token into the product itself

um I think these typically you know degrade the products um and or at least make them less sustainable than than more traditional um products that don't require a token um I think even ethereum people are starting to like push back a little bit and it's come and gone at various points that you know ethereum is too value extractive from the apps on top but it's also a platform versus you know an app I would say so it's a little bit different um and then like longer term okay where how does light out grow um and and really you know generate demand for ldo the token um I think this is an interesting balance for them to walk as well because

let's just even if we ignore like you know tokenomics and just think about you know how to I guess maybe maximize profit um they could do something like have the validators you know bid down what they would be willing to take you know for a share in order to get more of an allocation of stake um and this is something that you see with other sort of marketplaces like like in the piece that I wrote a while ago I referenced Priceline right their supply side bid up right can bid for a better placement on search results and that increases the rake of the business without actually impacting the user at all so lighter doesn't need to increase its fee to the user you know in a

similar sense Lido wouldn't have to increase you know the feed of the user it could increase you know some sort of supplies height Dynamic but then again that's not actually healthy maybe to maximize long-term market share if that leads to a top heavy set people are going to get mad again um it's like Google AdWords actually yeah something more like that you know uh where you are not impacting the user um but if you can you know I guess increase profitability without you know really harming I guess the the objective of decentralization for the underlying protocol that's more what I would be interested in um than like v-e-l-d-o or something like that you know uh though

um that's my rant yeah partner I I really do empathize but I I also you know the best thing doesn't always end up getting done does it the path dependency is very real and impatient yeah yeah yeah hopeful we'll see all right miles this was a fun one um we should be hearing uh next episode actually so very this thus far the season you know we've been focusing on liquid staking but also on this sort of idea of um you know flat versus broad Dows and managing your surface area and you know not going down the road of vertical integration and I think our our next set of our next guests will sort of give us the Counterpoint there I don't want to

give away too much information but next episode is going to be sort of the the antithesis of what we've been describing and sort of the steel man for the steel man counterfactual as it were so yeah yeah all right buddy it'll be fun thank you [Music]