The Daily Gwei Drive Thru #6 with Anthony Sassano and Eric Conner | LSTs, Staking, Enshrinement

Transcript

hello everyone welcome to another episode of the dedu drive-thru I'm your host Anthony Sano and today I'm here with Eric Connor to talk about all things ethereum hey Eric how you going hey man how's it going it's been a couple weeks but good to be back at it yeah yeah it's been a few weeks I think we did say that you know we'll try to keep the twoe Cadence but there's going to be rugs here and there but we're back today and there's actually a lot to talk about I mean I'm sure everyone has been seeing the debates on on Twitter recently uh which kind of is giving me Vibes of 2019 remember in 2019 how there were all these kind of debates between like deep ethereum people and it was because like everything else was so quiet and then we had like the bull

market and everyone just kind of I guess got distracted by that right yeah it's funny to like throw it back right like I feel like at the bottom of these Bears debates come out I mean we've we've had many in the past I guess like the first bear was the the Dow hack obviously now Infamous and eth classic and debating you know should we do like a fork and like all that stuff and then yeah in 2019 little different debate more around like can they ecosystem funding right like kind of out of that gitcoin was born um and and you know it's funny as price goes up everything's healed with that like when it was $80 the EF didn't have much money and we were kind of like okay how are we

going to fund everything and as price kind of went up we were okay but we always seem to like run into these you know debates and like so I guess if we like you said like we're talking Lio and necessarily specifically Lio even though they're like in the spotlight now but liquid staking tokens liquid staking derivatives whatever you want to call them I think everyone's kind of settled on liquid staking tokens at this point um I I don't think you or I is necessarily surprised that this debate has come up um and I think we should you know kind of give a high level overview of kind of what's going on but also talk about like why and this can be kind of the whole episode I think but why like ethereum is at this point right I've seen a lot of replies on Twitter is like

oh you could have just done like deos or like why why did ethereum do this right there's there's a lot of reasons like as a community I think we knew we would get here um it's not really a surprise I don't think anyone's surprised that oh an LST provider is almost at the 33% like dangerous threshold but um maybe Anthony I'll throw it back to you for a minute because I mean you you have your pulse and all this stuff and I know you've talked about it a lot in the past um kind of like what is happening right like why is the ethereum community talking about this at like a high level like what what are we what are we talking about before we even go into this subject yeah I mean I guess from the highest level you know the ethereum community more broadly believes that no

one kind of entity should have too large of a share of of the staking uh kind of market share right that that's really the broadest kind of highest level I can give in terms of the debate here now I don't think anyone is particularly trying to pick on Lio it's just that Lio is the one in that position right like if it was centralized exchange like coinbase or binance it would be it would be the same discussion so it really is just about the the no one entity controlling too too large of a share of of the network here but off of that falls a lot of nuance you know people will often just look at like a chart a pie chart that shows you know Lio here at 32% coinbase here at I think it's 14% binance here at blah blah blah and they'll be like oh if they all colluded

you know they could take over ethereum but that just kind of misses the entire forest for like the little shrub right not even the trees like it's just the tiniest the tiniest kind of part there and people have been doing this for ages not just with ethereum proof of stake but also with things like uh proof of work right where like on Bitcoin today I believe two of the top mining pools have like 50% of the hash rate and they're actually KY seed mining pools as well but if you say that and say okay well that means that Bitcoin can be taken over by two of these mining pools that misses all the Nuance that that comes with that and how that isn't actually the case and the same true for ethereum and where I get particularly frustrated is when people say oh well in these dpos

or delegated proof of stake networks there are you know distinct entities like for example people will say well there's 30 uh validators that that have that kind of threshold um and they're independent it's like well just because they've got different names doesn't mean they're independent like I I hate when people kind of equate these things and say that and and they do this because it's just like an easy thing to see right it's for the everyday casual Observer it's very easy for them to like look at this and reason about it rather than talking through the Nuance which I think is what we're going to get into today but yeah that's really kind of the highest level debate there and I think that on Twitter the debate has kind of bled into not just kind of I guess uh staking but also bled into how much

should we let ethereum's values kind of Define what we want ethereum to be and how we want ethereum to react to things and this discussion is definitely like very deep ethereum stuff and I think that for most people they probably don't have the relevant context to actually get into these debates and the debates on Twitter to me are not healthy because what ends up happening is that everyone just picks their side based on their own preconceived bias and they don't actually care about the facts and reason anymore all they care about is their side winning so yeah the debates are tiring that's why I'm not getting involved in these debates on Twitter as you said I talk about this a lot on my show but that's more of like a one directional kind of approach there and then I may discuss it with people in the

daily way Discord Channel but generally the debates on Twitter they're too messy like it's not getting us anywhere right yeah I mean that you know social fors always end up in a bit of a disaster I mean I think the interesting thing is once ethereum switch I guess if we step back a little bit right like ethereum you need 32 e Stak you need to run a node if you want to be a solo validate well you don't technically need to but most solo sakers run their own node right so what is the benefit of these lsts these liquid staking tokens right it means that I mean there's a couple things you don't have to run your own node if you don't want to you can and you don't have to have 32 e those are like the two biggest pitches right I

would think of being an using an LST so you could have one e you don't want to run a node you deposit your eth you wrap it whatever you want to call it and all of a sudden you're earning interest and you might do that through Lio rocket pool and now there's a couple other like Diva and a couple other providers popping up coinbase like you mentioned a lot of exchanges um there are also a couple other benefits to this which all of a sudden your token is like wrapped it's movable a lot defi protocols like a or compound have added it as a collateral type um and you can use this in defi people would say okay well well then what's the benefit of being a solo Staker well there still are benefits um a lot of these lsts take fees um I think

Lio takes uh I think five s% or something like that I think rocket pool takes something like 12 don't quote me on those but they're in those ballparks um you don't lose that as a solo Saker as a solo Saker you're not relying on trust you're not relying on like um like smart contract code issues you're you're relying on the protocol having a code issue but not an ex like an additive code issue right so okay we go there now why do people care at this point about Lio why am I seeing 33% there are like two big thresholds in ethereum proof of stake one of them is 33% like if an I'm not calling a light o an attacker but if an attacker got over 33% of staked eth

they can cause Havoc because they can basically prevent the chain from finalizing and I don't want to go like too deep into the technicalities on this episode I mean we could talk about this for hours um you know and then the other is obviously over 50% that those create all kinds of other issues um Lido's at like 32 I think they get a size like 32 and a half I think it's down to like 32.2 so people are starting to say okay should be be worried a little bit because theoretically this one operator now they have like multiple nodes and there's all this debate around are they decentralized or not like you said there's a lot of nuance to this discussion it's not like if Lio just

gets 33% they're going to attack ethereum right um but it's more the Optics I think for the ethereum community in general these numbers do matter and I think as we approach them we start to ask ourselves one thing I will always apply the ethereum community with is it we never think we get it perfect right um we kind of got this stuff out there we got proof of stake out there we've gotten a lot of stuff I mean there's been what seven or eight hard Forks to this point there's been a lot of VIPs that have gone into the protocol um we are never like okay that's it it's done it's it's Bitcoin now we're never going to touch it again right um so we're always learning and I think Lio getting near this first threshold even though if they cross it

it's not like he's going to end tomorrow um it's just kind of like a wakeup call and a bit to hey do we should we be thinking of something different right and what is something different I mean you got to think of ethereum as the base layer which is just pure ethereum running code you've got a social layer which is people kind of values and you know what do we think as a community and then you've got like the app layer which is like Lio or a or compound and kind of what people are running on this ethereum protocol and they are kind of all in bed together right and there's no like I don't believe in cod's law they all kind of run together and I think we're just kind of waking up as a community like

hey is this an issue like not only if Leto gets 33% what if they get 51% um you know and what if they move to this fully decentralized governance and someone hijacks that and now all of a sudden you've got these compounding issues and you know again I don't want to like say if we cross this threshold it's game over over but I do think there are important conversations to have um and at the end of the day what matters it's not like we shouldn't rely on Lio necessarily to self-limit themselves at 33% we should be asking like why does Lio have this much market share right and I know some people believe in this like one stake coin to rule them all I'm not a huge believer in that necessarily

um but there are benefits right to LSS and as a community should we be thinking about enshrining on the protocol level should we be thinking about like how to discourage this through economic incentives stuff like that yeah I I think the enshrinement compensation is interesting and we can probably um uh talk about that in a few minutes but I wanted to hit on a couple of the the points you brought up there so this 33% threshold as you said like if one node operator I I should say um and node operator here is defined by an operator that can control uh that has control over validators right gets to that 33% thre uh threshold they of course can delay finality on the network now there is so much kind of nuance that

falls off of that and the two main things I wanted to hit on is one if you do that right as as a note operator you essentially uh get uh I guess like from the from the view of the protocol you're essentially offline which means you're now suffering What's called the inactivity leak if you're doing it with a lot of other validators at the same time which would be the case here because you're doing it with 33% of the network you suffer What's called the quadr quadratic inactivity leak which means your penalties go way up for being offline now this is in place because it basically means that the beacon chain can heal itself if this attack happens and essentially it kicks out these validators in order to bring finality back and and timing on this can take a take a little while but that's what the

beacon chain has has built into it to do this so that attack in particular I don't really think has any bearing on on ethereum it wouldn't actually lead to long-term damage for ethereum it would destroy Lio if they did this by the way or any any attacker it would destroy their business because immediately everyone will be like well you just went against the protocol you cost me money because you're suffering this inactivity leak I'm going to not stake with you anymore so actually I think that it's actually bullish for anyone entity to to attempt that because they're the losers in that scenario in my mind at least um and and and then the second part is that for Lio to actually do this would require all of their node operators to collude so I think there's like 30 node operators right now which have 1 point

something per share each so would actually require all of them um to collude right now and then for them to gain a little bit more market share to get to that 33% threshold for them to do that now you could argue that Lio governance could force them to do this right like the ldo token holders could force The nde Operators to do this but there is no mechanism currently in place that I'm aware of that allows governance to actually Force the node operators to do this they they can do it through social pressure because they could say okay well here's a proposal to force the nde operators to basically uh go offine line essentially right in order to delay finality uh and when you walk through that attack Vector it makes zero sense one because it can't actually happen

unless the node operators agree to it in in the current stance maybe in the future Lio changes where governance does have control over this but from my perspective they don't have actual Direct Control they have maybe social pressure which is which is a very different thing obviously um and then two like the end result is that Lio would just screw itself over basically because as I said like this is this is only punishing Lio long term um so that's the I guess like the the the main risk at the 33% where it becomes I guess more of an attack that maybe isn't something that is is penalizing to Lido itself is as you said like that 50% threshold where essentially at that threshold you start being able to propose basic basically you're proposing as as node operators as a network one of

every two blocks right and when you have that much power essentially what you can do is you can optimize your proposals for meev strategies right you can start causing reorgs to benefit yourself stuff like that but that again requires all the node operators to collude right or a lot of them to collude to to do this so again it's a tall ask and then there's another threshold that is is kind of like probably the worst case scenario which is 66% if any I guess like node operator or node operators that collude get to 66% what they can effectively do is halt the chain because 66% is the threshold for for liveness if you basically go offline with all your validators you hold the chain it would require basically a socially coordinated Fork to to get the chain back and it would be disastrous honestly that would

be like the a nuke going off for for ethereum we're nowhere near that today and I do want to just finish off this by saying with with the Lio market share people like complaining about it a lot now and talking about it a lot now in the last few months if you actually look at the historic market share of Lio relative to other I guess participants in the ethereum staking ecosystem their market share is the same today than it was in May of 2022 last year so you can actually go there's a dashboard um on Dune analytics called like the eth2 staking dashboard you can just Google for that and you can look at their market share on May in May of 2022 they were at around 32% today they are at around 32% right yes Lido's stake has grown but if you do a relative measure

to its market share in in um measuring it against all the other staking providers it's actually not grown right it's completely in place for for the for almost 18 months now so when I look it like that I I look at it as a positive basically because all these other protocols have come online because we have competition in the in the in the in the staking Market Place L's growth uh relative to others has actually stopped right it hasn't gone down necessarily but it has stopped now the challenge is to get it down like can we get L's market share down to like 20% right or 22% is like the the I guess threshold that people kind of look at and I honestly I think with more competition in in the marketplace we potentially can but I think that a lot of these Bates and a lot of these kind of like social

pressures a lot of the time they don't really move the needle on things they they're good for awareness but actually moving the needle requires competition in the staking ecosystem so that's my my kind of of view on things there and then that I guess like leads us into other question about kind of enshrinement and this kind of two-tiered staking that people may have heard about but Eric maybe this was something this was a conversation we were having actually um in DMS and then I said to you hey let's save this for the podcast where we were basically debating whether it would be worth enshrining l s in in in the protocol which would mean basically uh getting rid of lsts above the protocol and just having one LST called es e or something that everyone could mint directly in protocol and burn directly in protocol rather than having these

third parties or do we do like a two-tier approach where you still have the third parties um but you have like um uh I guess like pseudo delegation within Pro in in the protocol and stuff like that so so yeah your your view on enshrinement I'd be curious to get on that or if you had to reply to anything that I was just saying as well yeah I mean I think you said a lot of very interesting stuff right and I think so first of all I 100% agree with you I think people like I was saying you you're you're not going to get that 33% and everything dies tomorrow right and and to your point the real death Neal is 66% attacker if you get there you're done and I think there's so much Nuance not only on the 33% and then it's not

just like one Lio person is deciding at that point to run like what to do right like you said they have multiple I think 30 node operators something like that and a lot of them like trusted entities they're not going to all just say hey look we got 34% let's start colluding right um I think where people maybe get a little confused with Lio is this like decentralization plan they have over like the next one to three years I mean they claim they did this vote to c self-c cap and they like oh no we voted against it it was like 99.8% against but if you look at it like three people basically decide the entire vote so there's a lot and they have this plan which I'll give it to them I would push back on them and say hey why don't you just self limit till you get there I

know why they probably won't do that um but I think from Community Optics perspective that would be nice um and so there's a lot going on here like Lindy effect is one of them right like if you are the first and biggest staking provider so people are trusting essentially their money with you right they're saying I want to stake with your provider why does Lio have dominance because other people have trusted Lido and we talk about Lindy effect a lot way back in the day with like Bitcoin eth and like people just you become to know it and that's just that's the Lindy effect right you're like oh my neighbor's doing it so I'm going to do it whatever um I trust they trusted it so I'm going to trust it and you just become like this name um and it becomes a bit Unstoppable

and I know I mentioned earlier like there are a lot of people and I believe the Lio team thinks this um there will be one staked eth to rule them all essentially so like people think there will just be one stake D because of Lindy because of network effects um I'm a little I don't agree with that because I think if you agree with that you think you also have to believe there's a fee race to zero so if you're taking five to 10% of a staking fee if you think there's going to be 100% winner people are just going to keep undercutting you right so I expect the new thing to be someone launches and they say hey we have a 3% fee people hop over there because they're getting a higher return

right so there's going to be a battle there for a while and I don't think you're ever going to get to like 100% um but if you get anywhere near that 50 66% it gets it gets cautious and I think it's not necessarily that L's getting a 33% and we all think they're going to attack I think it's more for like the Optics because it's like putting eyes on what could happen and to be a little self-reflective I've hit on bitcoin for saying hey two or three mining pools own the hash power what if they attacked Bitcoin it's kind of the same thing right and bitcoiners sit back and say well they never would you could switch your hash rate over and like there's no reason it doesn't make economic sense it's kind of the same thing right and I don't love that we've put oursel in that

similar situation and I especially don't love that the protocol doesn't really benefit solo stakers and I how it's like written it's very hard to do um and but but it's it's a hard pitch I'll be honest to to solo stake other than oh you're just kind of you're solo sticker and you're cool and you're adding to decentralization right maybe you get like slightly higher yield and you can run me boost by yourself and but it's a tough pitch and like I know why we designed it this way and why we didn't go deos and we wanted hundreds of thousands of validators and it has worked out great um but I think a little

self-reflecting around some of these ideals is important and like seeing why so many people are using lsts is an important thing to look on or look at um but to kind of move on into your question enshrinement right so right now all thirdparty operators run like with staking derivatives like if you don't want to solell a stake you take your eth you rap with them and you just trust these third parties now there is a scenario where the ethereum community could say hey hey let's just make this part of the protocol and this was a conversation five years ago right and essentially instead of just saying hey I can only just lock my 32 eth and it's

part of my validators and I'm running my node and I can't move it you could have this and there's a lot of technicalities here that I don't want to get into you could essentially let's say in a very easy World stake your eth but you could also say hey I want this to be a wrapped movable eth that I want to use in Defi and it credits you um with like you said let's call it eth staked eth es eth um and you get that and you can move that around and you cut out third parties now like you said you and I were having this conversation and you had some good points where it's like okay well how does this you still have this problem with node operators right um a lot of people don't want to run their own nodes why won't enshrine stake eth just run

into the same problem that we've seen in Lio and exchanges and huge whales that have big infrastructure and they can run their own nodes why won't they just attract you know all the eth and then we're back to square one all of a sudden coinbase has they're the biggest node Runner and they have 66% of the eth it's a very good point um I think this two- tiered staking system which I'm just kind of like reading and trying to digest over the last week like wrap my head around um is an interesting thought I also think you could get maybe like a little creative with requiring people to run their own node and they get some benefits but again that's a very technical conversation um but I do think I mean V just put out this blog post

very timely I guess about a week and a half ago about in shining things in the protocol and ethereum has been anti- this not anti but we just haven't done it yet like we haven't enshrined things on a protocol level we've let the free market kind of just take a stance and I I'm not a big fan right now of these takes of that ethereum is free market maximalism I think ethereum is decentralized maximalism and if a free market participant starts threatening it I think it's up to the base layer which to me is the base free market anybody can submit changes to ethereum it's up to that actual free market to respond right I don't think the argument of hey it's a free market you can't possibly

like come after us on the Bas layer I don't I don't find that argument valid at all yeah I mean I think there's two things I wanted to touch on there the first thing was like you how you alluded to like it's it's all about the node operators right doesn't matter which way you have staking implemented in your protocol it's all about the distribution of node operators because the number of validators on ethereum doesn't matter because the number of validators the reason why it's we did we optimized for a lot of validators was because of the original sharding designs and because we've abandoned those that's actually Tech debt now and there are proposals that are going to get rid of the max effective balance cap which means that the validator count will actually come down because people will be able to consolidate their validators so the way

this would work is that instead of having you know if you have 320 e you have 10 validators um to to run that on you would just run 32 e on one validator right and you'd get the the same rewards it all work the same you just be able to consolidate and this is actually needed for a Network Health perspective as well because the overhead of having so many validators is is really large and we and we don't even need it anymore because we abandon the old sharting designs in favor of the new the new dank sharting designs um but again it comes back to the the the actual full nodes themselves right what what's the kind of full node count look like like how many full no nodes exist and obviously validator you can have like a thousand validators running off one full node you know that

that's kind of how it works so as I said validator account is not representative of anything really so it's all about the the number of full nodes but then it's all about who's actually running these full nodes you know who are the node operators are they decentralized themselves are they distributed across the globe are they individuals are they companies are they bad actors are they good actors right like who is actually running this it's impossible to ever know who's who's running all of them you can obviously make educated guesses based on what we see today like obviously lighter node operators are running a lot of full nodes they probably have them for you know production and for backups and stuff like that and then you have the centralized exchanges that are running them as well not just for staking but also for processing user deposits and

and withdrawals on chain and and things like that as well so all of these entities are running them but you know I know for myself that I'm running a multiple full noes at home for my staking setups I know you're running full nodes I know lots of individuals that are running them and then you have to think about okay well what you going to split this up so there are what I like to call economically kind of like uh R economically important full nodes right and these are the ones run by centralized exchangers these are the ones run by staking service providers because they're actually taking in stake from other users and essentially um they're The Trusted entity for those users right so they're very economically relevant especially centralized exchanges um because they hold a lot of weight in in different things they they hold a lot of user assets they they

process a lot of activity on the network and then you have like the the more longtale which is the individuals running the full nodes and these individuals may may not be as economically relevant but they are very socially relevant they are the ones on you know obviously crypto Twitter they are the ones on the um the various kind of like ethereum governance forums they're the C devs the researchers things like that they're the people that are actually getting involved in these discussions because you don't see coinbase as an organization getting involved in ethereum governance right there may be people within coinbase for example Like Jesse poak the lead at Bas he's very very active there but coinbase has a whole organization you know is not getting involved Brian Armstrong is not sitting on core developer calls and stuff like that he's not on Twitter debating these things right and the same

is true for like binance with CZ and and things like that but it's all about kind of that and it all comes back to the social stuff and that that's why I think node operator decentralization and distribution is much more important than anything else and this goes back to what we were talking about with enshrinement and and my argument to you was that if we had an enshrined e at the bass layer where everyone had equal access to the same um basically as we said it was es e everyone can mint and and and burn it the same way there is no Advantage there is no um kind of I guess like uh incentive for anyone to align themselves with any any one kind of uh I guess entity tapping into this we're just all aligned with this one thing well then it becomes a a kind of thing of well in

that world it's obvious to me that centralized exchanges would dominate because they've got the easiest onboarding process uh out of anything even Lio is is is is is harder than centralized exchanges because to get get with involved with Lio there's a few more clicks to it whereas with a centralized exchange on coinbase it's literally like two clicks last time I checked to stake your e right it's very very simple and also coinbase is a very trusted entity especially people are using fear to on and off ramp and stuff like that right Lio doesn't have as much lindia something like coinbase and doesn't have much brand brand awareness same with binance same with things like other other exchanges so if they've got access to the exact same LST that everyone else does it it it it kind of like point to me that they the stake

would just completely centralize around these entities because you would have no one promoting other projects because there would be no incentive to do so like a lot of people promote Lio because they''re holding the ldo token right A lot of people promote Rocka pool because they're holding the RPL token and they also align with the values of these different projects but if you just have one LST to rule them all basically enshrined in protocol there is none of that there is none of that social kind of layer pressure there is none of that none of those incentives the incentives really are just a race to the bottom on fees as you mentioned right where these exchanges just keep undercutting each other they can basically set fees to 0% just to get market share and then Jack the fees up once they've got the market share this is a common tactic this is

not anything new right this is used in in every industry basically where it becomes a race to the bottom and then once you've got people locked in you Jack the fee up because if you're an exchange and you lock people in at 0% and then you just say okay we're raising it to 5% um no one's going to care you know most people aren't going to care enough to change who they're staking with so I think that an enshrined like a a purely enshrined staking token LST wouldn't actually solve that issue because the core issue is node operator centralization um and and how we get around that um and that and an enshrined LST in my mind wouldn't fix that now as you mentioned there's also this concept of two- tiered staking which I mean there's a there's a post here I've got it up on my screen here as you said like

it's still relatively new and and it's it's not this post is only 24 days old but basically it it it kind of like um posits this change to ethereum staking where essentially you have uh two tiers of staking you have something called operator bonds which is from my understanding the current way staking staking Works where you basically have to go through the entry and execute um and and and there's capital on the line and then you have like a delegated stake where essentially this delegated stake could be moved around like it is in a delegated proof of stake system um and then you and the users who want to delegate their stake don't have to go through the execute to remove their stake and can do it without the permission of the actual node operator this to me is probably the best middle ground kind of solution here because you

still get the the the competition at the nde operator level you still have nde operators that have to put have to put this Bond up right essentially to become and stay node operators and to and to participate as one and then you also give the users the option of still delegating their stake right the same way they do today but in a much more trust minimized way and in a much more fluid way where essentially you don't lock them into that kind of deposit and entry queue and they can just move their stake if they feel like um that their their stake is at risk or maybe they just want to change providers and it basically lowers the the the barrier to uh of those switching costs cuz switching costs are always really high for these sorts of things so it lowers that that's my understanding of it but

the the post itself if people want to Google it is just two tiered staking you can go check that out um but that's my general view on on enshrinement there but this is a lot of open research stuff going on right now it's probably not going to come to the protocol anytime soon but as I was saying before I really don't I I really think the risk of of Lio at 33% is completely overstated at this point in time I think that long term obviously we want to deal with this and we want to make sure that they don't grow more than what they have which I think has actually been happening as I said for the last 18 or so months but we want to encourage competition as well and that's what I've been focusing on I that's why I don't get involved with

these debates I've just been focusing on promoting the competition telling people hey don't stake with ler they've already got enough stake you can go with other providers um and go with you know who you trust obviously you even go with even going with like a centralized exchange is better than going with Lio at this point because they've got less less market share here um and and the final thing I'll say before I I hand it back was that the the kind of like social signaling around that 22% self-limiting thing to me has done more damage than good at this point in time and and I know this may be unpopular with people and I have friends like good friends that have been advocating for this but the reason why I think it's done more damage than good is because Lo is not going to self limit to 22%

they're already over that threshold by the way but also if they voted to self liit that means the ldo token's going down because it basically means that L says oh we're going to remove our market share voluntarily right um in order to I guess align with this 22% um which means that the growth is capped and the growth is actually negative now for Lio which means the ldo token is going to get reevaluated so no rational ldo token holder who wants their token price to go up is going to agree to that and as you said it was dominated by three people anyway who are obviously large ldo holders but also have a lot of stake delegate or a lot of ldo delegated to them and also the other protocols that have aign with this they're nowhere near 22% and there probably isn't a reality

where they ever ever get to 222% right so for them it's very easy to virtu Virtue signal this and say oh yeah we we'll self liit at 22% when they know themselves that they're never getting there right so I think that as I said it's it's probably done more damage than good because it's made a bit of a joke of the ethereum kind of like social layer platform of things and it's very easy for people to make fun of um but yeah my my whole kind of thing is let's just encourage competition right let's make people aware of the issue and get them to switch from Lio to something else or get them to not stti with Lio to something else but the the the self-limiting stuff it's just not going to work for the reasons I just outlined yeah all right lots to unpack

here um I'm going to go with the recent the recent comment here around the light up token so obviously agree I don't think that any rational company would self-limit when it comes to like Revenue now my push back on that would be no Lio token hold ER is getting any Revenue share they getting they're getting a false promise of governance and I get it valuation of the token I agree with you um it's it's yes self Ling would be silly from their perspective but there are now social signals which maybe optic wise don't look so good to them from it's not like Lio token holders getting a p a

share of revenue from the state that's happening on theet networ right which by the way I'm shocked that no one's doing that like why is no one saying hey as a token holder of my LST we're going to cut we're going to haircut just like a little bit off of our stickers yield and instead of just taking 10% to ourselves we're going to give like one or two% back to toen I still this goes back to Unis Swap and all these defi companies right like companies whatever you want to call them protocols um why is no one thinking of this stuff now maybe that's a great vampire attack conversation that we we save for another day um but I think I want to hit on the social layer right because I think this whole conversation depends on

understanding what ethereum social layer means right and like when you say you're not scared and the debates aren't worth it when we're just over this 33% number to an extent I agree I I think educ I think being loud in debates and we've both you and I have done this over the years in ethereum just being loud on Twitter that's where the ethereum community is is valuable because it like wakes people up and in a way you have to like just be obnoxiously loud about some subject so that people keep seeing it right especially in a bare Market when like not many people are around but like what is the social layer of ethereum and it's what you were you summarized well earlier if you go over 33% those 40 LI on node operators are not going to

instantly collude to like take down ethereum right and that that's a social layer aspect of light itself the social layer of ethereum itself is are the people kind of between the protocol the app layer the node Runners like there's like this gray line of where people are and I think just kind of signaling this debate kind of activates that social layer to an extent and that social layer is that last line of defense where even if a bad actor were to get 66 plus per of ethereum stake as an ethereum Community we could just all get together on Twitter as

ridiculous as it sounds on forums on Discord and say hey F this guy let's Fork him out this is an ethereum as we know it we're gonna fork and we're going over here and this new 32% community that we have this is ethereum right and if the apps and if the devs and if the social layer follows you to that side that attacker just burnt a ton of money and I think this is that Nuance that you keep hitting back on when it comes to this is if Lio got 40% 50% 60% it looks very bad optically and it creates a lot of debates that we I think we should be having but it also is not like tomorrow

even if they were to attack it would cause a lot of drama and probably a dip in E price in the short term the social a would get together and say screw Lia we're forking them out we're launching new nodes and we're going over here and now this is ethereum and look we learned that lesson right so I think people forget and I hate this I'm seeing like cod is log in on Twitter and I just hate it grind to my gears I just hate it so much because it's not it it's so much of blockchain it's social layer and even bitcoin's monetary policy is social consensus right like everything is anybody tomorrow could say hey there's a big problem Bitcoin we need to add inflation boom done like nothing is actually code is law right and a in a

way this like lighter debate has been a um flashback to the eth classic debate now because you got this like cot's law side which is like free market hey actors can do anything and then you've got this like other side that's saying well there's a social layer and you know this might not happen as you think um but it's I'll be honest in a way it's been a bit in like re-energizing to finally like have something to talk about as a community and not just talk about charts and price and things like that um and I think one of the really important points is we've thought like validators being out there you know we didn't go with deos which is great but at the same time

at the end of the day it's the node Runners like you were saying like and eth one nodes you're always trying to encourage people to run it eth two noes we're once again trying to encourage people to run it and maybe should we be looking at that and I don't have the technical or the like expertise or I haven't thought about the economics behind it but like is there a way to properly encourage people to run noes and I know there have been thoughts in the past around this um but we always come back to this right like who's actually running the nodes and in you and I and DMS you had a good point like to the protocol a node run by coinbase and a node run by myself is no different but like maybe is this an area where we

should be like researching a little bit and trying to economically incentivize like good actors and spreading and but it's tough right like I actually don't know I'm just kind of thinking out loud here but it I feel like that's an area of research and I never by the way want to ever doubt like to your point enshrining on the surface seems like maybe it would just centralize but then all of a sudden you're like oh this two tier taking sounds kind of cool like I will never doubt the aean research community and I think these debates in general are just good to have because we're kind of like all of a sudden everyone's brain's activated again we're not looking at charts we're not looking at like eth going down over the last two years like we're we're having these

thoughts again and I think that's always beneficial in this community yeah I think on the topic of how to encourage more full nodes and stuff like that I think all of that has to be done extra protocol and what I mean by that is that from what I can tell in all of the research that I've done myself it is actually impossible to have the protocol be able to distinguish between as you said coinbase running a full node and yourself running a full node for the simple fact is the protocol only sees a validator right only sees a a full node it does not see you does not see coinbase and it cannot see that without an external data source which just adds centralization vectors you know for example you could have a Oracle

feeding in data saying that okay well this is coinbase's node and this is is Eric's node but then you're trusting the Oracle right you're not trusting ethereum's kind of I guess system anymore you're trusting this external dependency which is fine for things like price oracles um especially when they're constructed in a in a in such a way with like chain link for example but it doesn't work when for the actual kind of consensus of the um of the chain and for things like full nodes the other solution which isn't a solution at all and obviously I wouldn't never advocate for this would be to do kyc and and and the protocol would only allow kyc things in but then you still have a dependency on a third party because who who who controls that right and all of this just comes back to the topic of like civil

resistance and being able to kind of put identities to to to onchain actors which is in my mind basically impossible to do at at the protocol layer so okay if it's impossible to do with the protocol layer how do we do this extra protocol well there are a few different ways we can do this in terms of encouraging more full nodes um and and and more distribution of full nodes there are various projects in in the works and and right now something called like project solo Staker which essentially they just send people hardware and they can run the full node in this little box in their house and they they basically do it for free um and then there are other things like DVT or distributed validator technology which essentially splits up a validator into various different parts and you know I'm in a cluster right now

an early cluster with obal as part of their Alpha Testing where essentially there's four of us running in this cluster and we're all running the validator software and the full node software on our own hardware and the 32 is split amongst four of us it's actually kind of obal's 32th it's not ours right now but the way this would work is that everyone all four people would bring their their eight eth they would pull it together they would have the 32 eth and then they would um all run this the software in the full nodes which does on net increase the number of full nodes in the world and actually increases the potentially increases the distribution as well and I I camed I don't know if I I know I don't think I came up with this term I think it was David Hoffman or Ryan Shan Adams they

come up with the term of squad staking which essentially uh you you get you get your squad together and you stake together but it's not just in terms of kind of pulling your eth together and staking all on on one node you're actually running the validator software the node software yourself which is as as I've been saying is what we want to encourage right with the node we want to encourage more node operators more full nodes more distribution of node operators so from all my yeah as I said from all my research the extra protocol stuff is the only real way to do it in protocol it's it's it's basically impossible because even as you were alluding to before you know you said well why can't we I guess like reward solo stakers more than pulled stakers well because as as I was saying as we

both said to the protocol uh coinbase is a solo Staker because coinbase's validators are the same as as as my validators right the exact same thing and the protocol doesn't not does not know and will not know how to differentiate between the two in order to reward solo stakers more than um more than coinbase now where this two-tiered staking thing comes in and where it's beneficial for uh I guess like for um for solo Stak is is that they can essentially allow um you know stake delegation stuff like that to them which essentially means that they could earn increased rewards from fees and stuff like that so essentially you become like I mean everyone becomes like a Lio for example right where you essentially you get delegated stake to you um while still having that not operate a bond on

there so you can still do all the slashing and stuff like that and have distribution of of stake and and all that goes into that so that that's my kind of General view on on that one there and why I think yeah unfortunately not not possible and and keep in mind this is to every single blockchain right this is not an ethereum specific problem this is a problem for every single blockchain doesn't matter if it's proof of stake or proof of work it's always about the distribution of stake or hash rate and the distribution of the actual node operators which the node operators are actually the most important part doesn't matter about stake or has rate I believe the not operators are are definitely the most important part um and as you were saying with the social layer at the end of the day the social

layer is like the Bedrock the not operators exist on top of that but there at the end of the day if enough of the community got together and agreed on a change to the protocol the change goes through and this even happens to the holy 21 million Bitcoin cap if enough of the Bitcoin Community got together and said hey we actually want to increase the cap we want to add inflation to to bitcoin it's no longer going to be 21 million that would happen and there would obviously be a fork minority Fork where the the the community that didn't want that would go on but if the majority believes that this is now Bitcoin that becomes Bitcoin the same is true for ethereum same is true for any public blockchain out there yeah I mean the interesting thing I guess going back is that say we ens

Shrine it have this two- tier staking anybody can become like an LST basically the interesting thing is like anybody can just spin that up at that point right like right now to become a Lio is very complex but to become like a node operator and Shrine on the protocol you kind of just set your fee you set like your uptime based and like people can now again this is probably a race to the bottom because like if you're the best fee and blah blah blah you know you but I I still think maybe you could put some in protocol incentives in at that point or disincentives for centralization on stake probably getting a little technical here now one one thing I want to hit on and I don't think enough

people are talking about it is recently at least in the US and I think in a few other countries um it was deemed that so as a Staker you stake your 32 e and every like couple days you get um withdrawals that come in it hits your account and you you bring in your eth withdrawals in the US that's deemed a taxable event so even if you don't sell that eth and you just sit on it you have to pay tax on what eth was at that point for how much you brought in um the liquid staking providers are offering different ways to get not get around that but like that aren't taxable events so like wrap steak eth which is lios thing instead of every day you claiming

and getting eth the value of that token you're holding just goes up right and that's not taxable until you sell that that that's a huge Advantage like personally I've thought about just stopping solo staking and going to that because I have to pay tax like even if I don't want to sell my eth coming in for as a Staker at this price I have to pay tax on it so in a way I'm forced to sell at least 30% of my eat that comes in right um and I don't want to I'd rather just accumulated whereas if I wasn't a solo sticker and I went to Li on and I used rep stick E I don't have to touch it I just let it accumulate and I don't pay tax on it so I think and I I have a hunch that that's bigger than people

think like I think most people using Lio these days maybe maybe not most but a good portion are realizing this and that's one of the reasons and maybe just something as simple as like tackling these smaller things like that on the ethereum protocol side and I know like that's a us-centric view but I think I don't I don't know how Australia does it I don't know how Europe's handling it but I would imagine that's like somewhat of a common Viewpoint and I I don't know how many what percent of East stakers are you know in the US um I would assume like pretty good portion of it but I think these small things of like more asking not asking Lio to self-limit and asking Li to do these things but asking

ourselves as a community like why are people using LS right I think it's beyond just running a node and stuff like this and all that can get easier I mean I've been one of the biggest pessimists at the actual sticking process as a solo sticker like it it's almost a joke in my opinion like you know trying to launch your own so now dap node I use dap node now and I can't speak highly enough about them like my life's way easier of getting in and out of staking um but the actual like Launchpad from ethereum and like H it's it's a pain um so there's a lot to learn as a community of why lsts are taking over and I think that needs to be part of the conversation as

well yeah I think I can give just a few of my reasons here maybe we can wrap it up since we've been going for quite a while on on this topic that we could go for hours and hours we didn't even touch on things like me and stuff like that that uh that comes into it but essentially the reason I think Lio grew to what it is today and as I mentioned before Li's growth relative to other services stopped for the last kind of like almost 18 months but the reason why I think there was a few few reasons why I think ler got to where it was one and the biggest reason first mover right it was the first LST uh out there it was probably it came before binance staking I I think it even came before coinbase staking right so it was like the first

kind of place where you could stake without running your own kind of validators right one of the one of the first and it gave you the LST which is obviously being really important for people who want the ability to quickly exit if they want to sell their sth into the market or if they want want to use it in defi things like that right so that's the biggest Advantage they had second Advantage they had which I think is under talked about or under discussed is that they launched long before withdrawals went live so what this meant was that Lido's stake could only go up only the only way you could exit was selling s on secondary markets you could not exit um by by going to the beacon chain and saying Hey I want my eth back because withdrawals weren't enabled and the reason why I think this is a big

part of it is because think about all the stake that actually exited during the crash after the bull market and the Quint quintessential example of this is uh 3ac they had a lot of stth right A lot of it and instead of going to the beacon chain and withdrawing the eth directly they just puked it all on the secondary market right because they were were basically needing the money money because they were basically blowing themselves up but what this did and it's not just them it's a lot of different players but what this did was it didn't actually affect L's Market market share at all because by the time withdrawals came came to the ethereum main net the St uh um price was back at fair value so it had actually gone down I think at

most 10% so it was at a 10% discount to what it's supposed to be on secondary markets now if withdrawals was enabled what do you think was going to happen there people would buy St and then go straight to the beacon chain and say hey give me one e for my 0.9 St eth and then that's a free that's free money right it's free eth but you couldn't do that at the time so lios market share in terms of validated count didn't go down at all because of that and by the time withdrawals were enabled it was back at fair value so there was no Arbitrage to be had there so a lot of lto stake is actually grandfathered in because of that so they they those are the two main reasons they grew so much now the third reason obviously is because they made it

really easy for people to stake right it's a very easy process um but that is kind of falls off of the other other two falls off of the first thing about how they were a first mover as well because it's just as easy to stti with other services too I mean as I said it's easier with coinbase for example right um but but I think that the second point about how a lot of stake is grandfathered in is very under disussed and we actually have uh and and obviously lier has been growing on on a on a kind of like real basis where they the amount of e stake with them has been going up but on a relative basis people have been staking with other services as well right and there's so many other services now it's not just lsts it's also these um institutional Services as

well that are getting stake in from these in institutional players um and there these are the entities that people don't even know about so that's my kind of view on why Lio grew so much to this point and why they've kept the growth is because honestly they have a good product like I'm not going to deny that at all they've got a they've got an awesome product but at the same time their product is not a moat right their product is not something that they can that is that is very defensible I think what's defensible is St Lindy right it's liquidity effect it's um it's um uh I guess like Integrations within defi it's marketing it's branding but it's actual kind of product itself is is very commoditized like anyone can run a a node right anyone can be a node operator it's not a difficult thing to do at

scale it becomes a bit more difficult right but the thing is is that it's even even for individuals they could probably do this at scale too if they wanted to so it's not it's not that difficult so that's why I say that their mode is not actually the product it's everything else that comes off of that and that's what the other services need to compete on right they need to compete on marketing and branding and liquidity and and and Business Development stuff like that um and we're seeing that play out now we've seen that play out over the last kind of especially this post withdrawals we've seen it play out in a really big way and and there that's my general view on how Lio got to where it is today we'll see what it looks like in the future it's it's it's a and it's a

slow moving ship right to to turn this thing is like turning a massive cruise liner it's not going to be a fast process it's not like turning a bike so you it's going to be a thing that plays out over many years we may get or may not get various different uh protocol upgrades that address these things like the two- tiered staking stuff and and other such things like that like the um the max effective balance increase which I think should help a lot as well because another big um thing that that that we haven't mentioned is also the fact that these Al teers can compound their stake whereas solar stakers can't compound their steak unless they are making 32 eth like a day or something to make 32 eth a day from being a solar steaker would require a lot of eth so with the um max effective balance

increase you essentially compound your Stak automatically and and there's no need to wait for 32 e so all of your rewards can get compounded and it could probably be done in a way that is tax op optimized too where you actually don't get taxed because technically you're not taking possession of the eth right it's getting just restak with what you already have so from that perspective I'm in massive favor of that max effective balance increase to help solo Stak is because that's one thing that actually does help solo Stak is and also for a Network Health perspective as I mentioned before we don't need the number of validators that we have today we can actually reduce that substantially um yeah those those are my kind of final thoughts I don't know if you had final thoughts on all of that yeah I I will just wrap up by saying I

agree with you that max effective Bal change has to happen because as someone that runs multiple validators it's it's ridiculous that I have to wait to get another 32e to like and to your point like that is a huge benefit like that is one reason I've thought about withdrawing and going to liquid staking I mean these are all kind of compounding things and if you can do that in a tax advantage way with that change I mean it's huge so I mean this has been a good discussion I mean I think I feel like everybody in the theory should listen to this I'm like biased but I feel like we kind of covered everything in an hour episode which is hard to do um but it it's important like be loud about it so that people like say hey this is what's

going on but at the same time like Twitter's problem is no one goes and educates them right so it's good to talk about it all and cover it all yeah definitely and as we said at the start like it's there's a lot of nuance through these discussions that people Miss because you can't get Nuance on crypto Twitter and even if you do you're probably not going to understand it because it's it's like a one-way thing you're not actually discussing this with with the people that are saying these things and and you and and there's a lot of bias there's a lot of tribalism it's it's just not not a great way to to discuss these things but I'm of the firm belief that like 99% of the stuff that goes on on Twitter is like irrelevant or completely irrelevant to to reality and people should maybe not over index on

what they see on Twitter because that doesn't really reflect reality uh that much in my opinion all right well yeah I guess we'll end it there so thanks Eric for the discussion I hope people have enjoyed this we'll hopefully be back in another couple of weeks if we don't rug again but we'll always be back we do we do enjoy having these discussions um but yeah it's been a good discussion today about a topic that I think has just dominated crypto Twitter at least over the last couple of weeks and I hope people learned um a lot from it and uh learned that there is a lot of nuance to these discussions so yeah be just keeping that in mind when reading all these sorts of things