DAPPCON 2024: Issuance QA

Transcript

welcome everyone uh we're going to talk today about issuance there has been a quite important proposal by Anar and Casper that has not have a great reception uh online and all that we are here we believe that this proposal is very beneficial for ethereum all its stakeholders including solo stakers so the point of this session is to try try to bridge them the the knowledge Gap that we believe is is happening of understanding why the current situation will be problematic in the future and hopefully once we have come to understanding of what is the problem then we can potentially talk about what

is a desirable solution so I think we could start with some need presentation what you think just to sure sure sure sure yeah and I think maybe just to briefly say right because um I mean I'm I only joined the session last second because I I heard about it and seemed seemed seemed nice to to be as well um yeah I think I think you know the the the reaction that we got with for this proposal definitely showed us that we kind of you know didn't go about it in a good in in a good way we clearly didn't explain our thinking well enough doesn't mean that our thinking is right you know just that could be that if we explain better people still disagreeing that's fine but I think at least it showed us that we definitely have to like do much more

work and like at least explaining where we're coming from and then seeing whether people end up agreeing or not and so the idea is to really like uh instead of like focusing so much on on the specific proposal of what to potentially change right I think that doesn't make any sense if we don't if it's so if it's like just unmotivated right so I think it really makes more sense to just like forget about the specific proposal or like at least like not focus on it too much and like really talk more about like do we agree that there is a potential problem on the count path yes or no and like what might this problem be and what right and so because then we have a basis and if if we disagree and like if there is if there's no problem to begin with then

why change anything right so so really focus more on like is there a problem or will there be a problem in the future um that would warrant any type of change and to be fair the the support that I have for this proposal is actually because I think this proposal makes way for a less bad future than the current um issuance curve for solo sckers not that I think like one improves things for solo takers but it makes way for improvement that I think would be less likely without it right and yeah yeah we we can have in I think actually like if anyone offered me an opportunity to just freeze the count situation I'd do that in a heartbeat I think right now staking is in a very healthy spot so it's not like about any specific need to change things today

it's really more about like trying to anticipate where are we going and in the future basically what what might change and so yeah do we want to uh is this does this screen screen sharing work or not otherwise we can small technical difficulties here but uh I'm sure we'll we'll we'll fix that in a sec um otherwise we also I do have a laptop with me I could we could switch over as a backup at least yeah anyone watching the live stream uh at least d lion tweet did a tweet you can reply with your questions as you come up with or if you have any topics that during the last time online there has been a bunch of discussions and you want us to to take more time into it please please do or people in

the audience yeah and also maybe I can take the time while we wait to just briefly say because also on the I think on the little cover thing slide for for our talk it also says you know Ana EF and like as always I think sometimes there is this mis this this perception that like you know the f is arguing for this the f is arguing for that that's not really how research works at all like I'm this is my personal opinion like obviously kasp and I worked on this together so it's also at least mostly kaspa's opinion clearly there's some nuances maybe where we don't fully have the same opinion but basically we the two of us we have like worked on this together um I have some colleagues that we know we were able to convince and that they now have hold similar opinions

but that's not like I'm not representing them obvious and then much less representing like the F for anyone it's really I think this is something the we and the community should talk about that's all really um but uh I mean we can also skip slides and just draw yeah and if we're in the mood can we open the drawing app well no the problem is not the slides the problem is the screen sharing at all so I have pieces of paper and markers but I don't think that would work well for the stream right I mean I mean summary what proposal is yeah I mean so so again like I think I'd rather Focus first on like why would we need a

proposal at all right and so um so basically like the because I don't think I think the slides are nice to have but we can we can we can get back to them later but but we can just start chatting so so the idea really is more to say hey right now we at like 26 27% of e Stak right that has grown over time when we launched we were like a very small number like over time it's we keep seeing more stake and so the question was just is that going to stop is it going to continue and if it's going to continue is that a bad thing right or like what what are the consequences and so basically the the idea is that um when when when the beacon chain was first designed it wasn't really designed around the idea of liquid Stak it was

designed more around the idea of solo staking right and so solo staking of course inherently is a somewhat like it requires some minimum like skill it requires some minimum trust into your own like abilities to to securely and and and and reliably manage a node so there was inherently the idea was there's only limited portion of the overall eth holders that would be comfortable being solo stakers um and so initially the idea was just the the the the intuition was just yeah there's always like some sort of maximum amount of e that would ever be staked just you know for practical per reasons and now with with the Advent of lsts which again lsts are great you know I don't have anything against lsts it's a good way for people that also want to contribute but not necessarily have either the enough eth for like 32 e or something or

just don't have the technical skills required to still participate right and get some sort of upside so it's it's not like there's no inherent problem in like uh liquid staking directly but but the the effect of liquid staking has been that basically now all of a sudden there's no longer this kind of barrier to entry so much like anyone that can basically just take the E swap it to Ste or whatnot and like have participate and so especially as over time like the lsts get more and more der risked which in a way is a good thing right they basically their governance gets more robust they they they really put a lot of effort into trying to be as secure and as like basically risk-free as they as they possibly can you you you just imagine like more and more East flowing in and that's not just something we imagine of

course we see this right like dayto day there's more e flowing in it most of that most of the new state coming in these days is going into lsts not solo staking right and so so then the question becomes like how how far can this go right like how how far can can this can this curve continue to to to grow um I guess yeah we already talked about it basically like and and if you if you look at like what's what is the protocol willing to pay for stake like yes it gets less as more people stake but you still you know you still get some money for staking even if if we were to go to like 60 million Stak 80 million stake 100 million e stake there would still be you know rewards paid out so it's it's not clear that that

basically that the trend stops so basically this was our first observation so there really kind of like two separate observations observation one was just like there's a good chance that the stake over time grows to a very high portion so that's really that's kind of observation one and then the observation two is like is is there any anything wrong with that right like does there have to be anything wrong with why why would there have to be anything wrong with that and um and we convinced ourselves that we wouldn't we think that basically a situation of say 80% e Stak is meaningfully worse than it is today and uh we have like a few different like categories of like what um I mean yeah I can you know again like point being here that like solo staking inherently has

like um trade-offs so not everyone can or would want to be become a solo Staker I'm like super grateful for everyone who is a solo Staker today but not everyone would ever become a solo Staker so there'd be an inherent limit ssps don't have that limit right so that was kind of those were what what those slides were about and then we basically come to the section of like the concerns we have and I guess this is maybe now where we TR have to try to convince you all because I think at least so far I would assume that at least it seems plausible that we could keep going up quite a bit higher right in terms of stake it's not like infeasible it's not like guaranteed it's not guaranteed that we go to like 80% stake but at least there's nothing in inherently making that impossible

right and so so now I think maybe where that's more controversial or where maybe people don't necessarily agree or we have to like make more like explain more our thoughts at least is like why why would this be a bad or why could might this be a bad thing um also I don't know I'll just like keep talking but you all feel free to jump in you know I will just say like so we started off with what 15% um yield when when we were trying to incentivize people to stake and as time went on like when when the beacon chain started when the beacon chain launched there was a high percentage of independent operators who were who launched then ever since then that percentage of independent operators has gone down it's mostly um liquid staking protocols that are are throwing

in new stake people the point of staking is to secure the chain the chain is secure that is that is true right now um and people argue about like what what the minimum number for that is PE I've heard numbers anywhere from like 1% stake to 15% stake as the minimum viable um stake to to secure the chain um but we know that we don't really need any more than today so but by letting it go anywhere Bel above today what we're doing is we're catering to validators and we're saying like the ethereum protocol is meant to serve validators when that is inherently not true validators are supposed to be something

that serves the network and um I don't want to get into like minimum viable issuance but like by by allowing it to get much higher than it is today not only are we serving validators but we're also enshrining a structure that um benefits the current beneficiary like the current beneficiaries of that are going to fight harder and harder to keep that so if we're at 27% stake right now and we're having this this much push back against any change which there are valid reasons for some of this push back um but imagine how much harder it's going to be to implement any change at 80 or 90% Stak when that 80 or 90% Stak are very moneyed entities because most

of the new stake that's coming in right now is liquid staking protocols and they will fight hard to keep that because they're going to be benefiting from it but yeah let's let's do first why we should change anything at all right but but I just want briefly say because I think people people always jump to this minimum viations and yes I think basically one one aspect of this is saying that hey staking is supposed to be more of a service and it's not like the protocol is not just there to create staking yield but if it was only this honestly like I think I wouldn't be so convinced of all of this I think yes that this is would be concern and we should talk what should be the relative priorities but really to me this is one out of out of many concerns and I think

ultimately even for stakers going to 80 90% stake would not be a good idea and so that's what kind of the these other points are also for so like I just want to say I agree with you but I think basically like even I think for a long-term oriented Staker this should not look appealing um and and and yeah so maybe do we want to briefly like go through the the different sections and any so basically the point here is those are kind of we we like again cband ey when we looked into this like we saw like a bunch of different um dimensions in which higher stake is looks worse for to us at least for the protocol the idea is more like hey if maybe two or three of those are convincing to you then you at least should should like share some

concern some of our concern right and then we can talk about does that mean we should change something or not or something but that that would be Next Step um you don't have to agree with all of those right so like we can we'll go through them and then in the end we can maybe like you can you can think for yourself like is this what what portion of that seems seems reasonable to you um the first one is the the one that's directly focused more on like the actual kind of situation and and benefits for solo for for for for stakers in general and so so remember how we talked about this curve a little bit ago right like it's like this is how much the protocol is willing to pay for stake and so that basically even at high levels there's still money to be distributed so there's

still incentive for new people to come in the problem is actually this picture is in a way misleading right like I think everyone has this intuition of like say if your bank pays you 2% of of interest every year but inflation is also 2% you don't actually earn any money right like all the bank does Bank does is basically it just gives you back the money that otherwise inflation would would eat up and that's actually the exact same thing thing we're staking as basically everyone ends up starts staking it means that really now everyone's balance goes up by 2% every year but that's meaningless because it's that that's basically at the same time inflating the overall ether Supply by 2% so you don't actually earn any money right so basically if if only a small portion Stakes then basically staking is

like a redistribution of the people that don't stake and they pay via inflation for security and they pay it to the solo stakers or like the stakers in general which is healthy it's a very healthy thing basically I I for example most of the ethi I hold is not staked so I I'm very happy to pay you know an inflation tax to the people that do stake and that basically secure the chain that I'm using right that's a good thing um as everyone Stakes there's no one anymore to tax right there's no there's no one that basically actually pays for anything here it's really just like an accounting thing everyone Balan goes up by 2% without anything changing um so so so really basically what what you'd have to talk about is like the inflation adjusted yield so basically like how much does your balance actually

go up if you take into account the overall inflation of of e right and we did this we basically took this curve and instead of basically so this is the nominal one and now this is the exact same curve and you can see on the left basically the the old gray line was the line that was not not adjusted and now you can see on the left the lines are basically identical because yes if only few people stake the dilution the inflation doesn't really make a big difference but of course if you were to go to like all the way to 100% stake all of a sudden you wouldn't actually earn any real money anymore yeah I don't quite understand uh you want to grab the mic for lives I don't quite understand this like isn't a a huge part of staking just the exposure to underlying

asset and in terms of real yield what counts more is none of this but what the underlying assets going to go up or down isn't it a lot more influential if you if you real want to if you really want to call something real yield shouldn't be accounting as well for the actual price of e right so I mean here we just basically comparing different classes of of of eth holders right and so the idea is this is all um denominated in eth like you can also already just have the upside of just holding e if you think there's upside you know like um of course that's that's a thesis but you can do this by just holding eth the question is what extra benefit do you get by going from there into into into

staking right and so um in this picture basically there's still this gap between staking and not staking remains large so basically because if you don't stake you you you do have this kind of inflation penalty so in a way you still like stakers are still 2% better off than e holders but if you just think about you want to grow your overall share of of the of the total e Supply basically you you're kind of treading in place um at at if everyone Stakes then you know at the beginning of the year you hold like 0.002% of all Ethan existence and at the end of the year still hold 0.02% of all eth in existence so if the eth price overall didn't change then Al like your balance basically your like the value of your e didn't change right

so if the if the E market cap didn't change then also your the value of your of your e didn't change um so really this this is basically just saying like in a way I mean in a way it's like very like once if you think about like a little bit it it's really easy to just build up intuition around this it's like similar to how I mean I like this analogy people always like oh it's too it's too militaristic or something which fair enough but it's just a really good analogy so you know like some countries have a draft where basically like young people have to like go serve in the military and that's basically how they defend themselves and then some other countries are like no we're not going to do this we're just going to pay like a professional military or something right

um and and we pay pay for that by taxing the people that now don't have to go themselves defend the country right um and so in a way this is the same question we have here for ethereum do we want to have a like a professional group of people that do the staking and secure the chain for us so that would be at the current the current sitation is basically we have these experts these amazing people that basically just like spend their effort like their their attention to like secure the chain and they're paid by taxing everyone else via inflation and giving it to those people right and that's I think a really good system right because it means that if you're like more unsophisticated you just want to use the chain you want want someone else to to make sure it's secure you just pay by like whatever the

account uh um we can see the count dilution is maybe at count levels it's 8% a year or something you basically pay pay a 8% per year tax for security and and the people that actually do it earn something if we instead go to like 100% now we basically in the draft world you don't actually earn any money you don't you know earn money for it's it becomes a duty so now everyone basically has to participate in securing the network but no one earns anything from it so that's kind of because there is no Source like like money is just like a purely like distribution kind of thing system right you can't create money you can't create value out of thin air with money you can only like redistribute who has which resource and so once everyone Stakes there's no redistribution POS possible anymore yeah

I think to to to your point here at the extreme of the Corp what you think it's happening is if you don't stake you're just not making anything and then people that choose to stake make 1% but that's not how it works what's going to happen is that if you don't stake you will lose 1% and if you stake you would make zero so you have an incentive to just join the staking um I don't know corpse disrup just so you don't lose any money and just stay the same yeah I'm I'm guessing we're going to get there uh thanks for the explanation that that's a lot clearer um the the problem with having like a professional uh I guess

we're going to get there at some point right but the problem to having a professional military as well is that you you get um you get a population that's maybe not attached to their like there's benefits to having to drafting people normal people to to go to the military as well right to to just keep with your analogy I'm actually military it's probably bad my analy but but there's benefits to having a population that knows how to defend themselves a population that um that etc etc etc so there is benefit as well in terms of the centralization and the emerging properties that appear in the spectrum of the centralization for having okay let's let's continue in your analogy so okay not my analogy your his analogy

um if you if you are here and you are like okay I don't want to lose e then I have to stake you don't do it because you love ethereum and you're like wow this an amazing opportunity to stake no you just don't want to lose money so you will take the least past of resistance you would not solo stake you just put the money whatever it's just the easiest way to not have to pay this tax so it it doesn't apply like in the draft you either go to the military or you or you go to jail like here here because you have this path of lead resistance through lsts that's what kind of breaks the model and yeah so really I I really think because again I think this kind of sometimes was lost in this debate like we really like the people that stake

here right now like those are amazing people right like that's not all solo stakers I think like the Sol stakers of course especially are amazing people but even like people who stake by lsts again nothing against lsts right now those are people that like look at the system they make a risk benefit tradeoff they look into taking risk they look into operators they understand what they're doing and they make like an informed decision once we go to like here or like I mean I don't know you can't see my finger but like in the middle somewhere in the middle it's more and more just people who just want free yield they don't understand like what are the staking risk who is even the operator set those might be people you've heard maybe heard about like you know this is all just public information but like the

these eth ETFs that might or might not be approved soon um that basically they were at least looking into potentially just staking by default right if you're a pension fund you invest into something ETF you don't understand like what they're doing and whether they're staking and whether the operator set is honest or not honest or can be trusted or not you just want a little bit of extra yield so these people become much more mercenary and over here basically it becomes really more like a o God I have to join this now just to not lose money so basically like the quality the average quality of your staking set and like the the the who they delegate to becomes worse and worse and worse as we slide there I I have a yeah okay but so you mentioned that um it's all risk free as you probably know it's

not risk- free and um we know we we we all know so um even if they don't know it's not risk- free there is quite a bit of risk and to be perfectly honest even currently the 3.5 it's not that great there is you can do in defi a lot more with your eth um you can we were discussing yesterday right you can take it uh but then you lose the e um uh exposure but uh High interest rate bank accounts like thfi it's around there 3.5 4% when you Falls below that it doesn't really make sense to to stay because there is the risk and the risk is is is is actually really big and perhaps know

not on good but we need a slashing event that will knock some sense back to people that are stating either via lsts or solo stating because it's really not risk- free okay maybe it's a good time to Jo jump to point three what wait I want to I want ask first the the other people here how much does this make sense to you so far like how how well do we feel like we understand the problem and like the the things that we're going through right now any questions it's logical right you just follow the trend this is where it you and what we can do with it right but also I really like jump in here like I really love that that point right like because I personally I think exactly

like I'm I'm I'm on I'm on your on the same page with you there like staking should never be presented as just like some risk-free yield someone just hands you right it is you you get compensated for both the duty of like actively running a Noe and doing things but also for the risk you take of like slashing and everything and the danger is that the more you basically get to the right side of the curve the more this is people who don't actually understand this this is people that just like already I don't love the situation look I don't want to I don't know maybe I should but like you know on coinbase that is just like an earn button you just click the earn button like that's not necessarily like super informed decision I don't know like so maybe this is not you know like whatever I'm sure

this is all still very fine at all but like it's already like a little bit more on that Spectrum towards just people not fully understanding the nuances of what they're doing if you go like to the very right this will happen more and more so we I worry and like maybe now you you can talk a little about like this this protocal security point and how this could get even worse as we as we yeah that's a great point with coinbase it's not earn maybe or maybe lose all it's just earn no actually they they have insurance for this so it's like again like I don't want to sorry because this is like I'm not criticizing any entity or anything here it's really just like my personal no but I think the point is when you go to like this e ETFs it would be you have money on a pension fund that

will put the money on some cre some intermediary that it will eventually land in conas and then somewhere so along the lines that is definitely some disclosure that maybe you lose your money but it's just it's so detached that um yeah does it credibility so what what concerns me the most for this is the the point of proof of stake is that you have Capital at stake if they misbehave they conflict finality the chain is secure because it's underpinned by this huge amount of capital that will be destroyed if they V violate the Casper FFG rules however if we have so much Capital basically all the Set uh like Unfortunately today most of the

users of ethereum network are Financial users so the set of holders and the set set of users is very intertwined if now everyone has to stake to to not pay this inflation the set of users would be roughly equal of the set of holders which will be roughly equal to the set of stakers then when we have some Unfortunate Events of like a mass slashing due to some client back or something do we have a credible threat of slashing like can we seriously go to every single holder of ethereum and say I'm sorry but 40% of your e is gone is that a greatable threat um actually he had a good point and is suppose that we have like 100% of each stake and then everyone has to pay this

40% tax then it's no no that's not the point the point is like if some big portion right like if of course everyone would lose 40% it doesn't really matter but like if say you have one big entity that controls 70% of the stake right and now they have a mass like they get slashed right then of course it's very different because the 30% that actually didn't do anything wrong they would you know like you they would rightfully say Hey you know this you know these people need to be slashed but then do you actually have the governance power to to if if then like there's a huge outcry and all these people like especially because again in this future it's not the people that made an informed decision it's just basically they were kind of pushed into this and they'll come and be like I didn't do anything

wrong like I wasn't the operator like I didn't you told me like Bic staking is the default now and like now I lost so much of my money please baar me out and so the the problem isn't even necessarily the question of would we actually bail them out I think it's more the perception of already because you said right it's not risk free the question is would the perception always like is there risk that over time the perception becomes if there's one dominant LST I might as well go with that dominant LST because surely they would be bailed out they are so big now like they're just too they just become too big to fail right like the the entire like financial crisis situation of like those people clearly if they were were to ever get slashed it's already a problem with majority clients right like I heard people say in private

that like well as long as As I Stak using G if something goes wrong clearly they would you know just like maybe they would even canonicalize the GU Buck just because it's so big you know and of course that's a horrible idea you know like I don't I'm just to be clear you know like let's just say it here on the record like we like I would fight tooth and nail to not let this happen but the perception is already there and is harmful and this would the same risk exists with like big as big lsts big ssps theps basically the the acronym for the people operating the LST staking service provider but they for example um probably that's not what you meant but um if uh so those professionals they run multiple clients they they separate

their their stake on M they're really well maintained so that they are not that affected by a client bu they're smarter than a solo St I I would disagree because they actually they took way longer to switch off a super majority clients and they took a lot of peer pressure to do so and it was only very recently that like even coinbase switched off of and they're they're supposedly one of the most professional teams and but so like when a solo Staker says okay I switch to nethermind let's say uh you know they just really switch to nethermind but when they big guys do that because I have talked with some of the operators of of of Leo and of from coinbase when they actually did that they they really went from what I understand at least um and created you

know those multiple uh machines that are running and somehow communicate and can you know drop from one to the other like solo sters at least I I don't know how to do that I just I run machine I I make NE mind or I I I I make G and use G you know like really silly but uh they they they have advantage in everything they have entire teams of of um devops right you you you are just a I mean I'm just a Dev I'm not a devops guy but I I I can use Linux I can run I think but I when I say that I switch to a minority client I really just switch my entire setup to minority client I don't have you know multiple set up where where I

can have um I don't remember the word but when something redundancy yeah redund yeah and I mean so so just to briefly say this right like I think in general we have to acknowledge in the ecosystem that we are at a point where it is going to be an uphill battle to keep solo staking like viable at all like you know like obviously we are all very committed to like like solar sticking is clearly the most healthy thing for the network um and it is just the unfortunate fact that in many dimensions it's just harder like it is as you said right like a lot of these kind of professional ssps have an easier time having redundancy all these kind of things things that are just just get easy if you have so much assets under management that that the extra cost for

these redundancies just don't matter so much for you whereas for solo Stiers they might really really matter right so I think but still I want to say like this is what what makes sense but consistently large operators have up get slashed and did really silly things so one one professional operator uh revealed his keys last week like or exposed his keys but let's assume that I think ethereum is still in an in an early stages uh for these things if everyone just professionalizes and they their job correctly then yeah we kind of scoot yeah but but I do think basically in a way like this is almost like a separate open research question is there things we can do to make Soul staking even more competitive right and I think we should push as hard as possible on

that front as well like there's also all these ideas like for example I'm not sure how much you've heard about like B based ideas around rainbow staking where basically the idea is more hey let's actually just acknowledge that there are different types of staking participants and maybe we can just like differentiate a little bit more what responsibilities we give to different people so for example I think I personally think a very natural fit for the set of solo stakers is to have a role in helping with um sensorship resistance right and basically like um um you could imagine the future some we have these inclusion list that like are a potential future upgrade to ethereum it could be that like it's mostly like a a task for solo stakers to to collabora like um um um create these these lists right and and

then you could have other duties that are basically better fit for other players and that way you could basically carve out more of like a specific role for solo stakers where the competitive disadvantage is not as meaningful right so there's definitely ways there's ways to make the situation better for solo stakers but in general we have to acknowledge that the trend we're on right now it's going to basically be harder and harder to compete that's not great like I don't love that it is the current situation right I see the current situation is we don't end up with very many solo stakers even I we uh East ster Noble did like a survey last month and we have seen that a large majority of our 33% of the solo stakers who responded are still Genesis stakers

so that means that we onboarded a ton in the Genesis event but actually haven't made meaningfully meaningful strides since then well I wouldn't call it not meaningful but it is yeah yeah exactly like in terms of in relative terms how much we onboarded LST since then of course exactly the rate of new solar stickers coming in keeps dropping basically um and and you know this slide also like we don't maybe have to go to through it in too much detail but basically there are also specific reasons why this kind of this competitive disadvantage would get or at least we we see those you know like again you don't have to agree but like we see some reasons why this this competitive disadvantage will specifically get worse as there's more stake to go around right because you know all these things that are easier for for large operators to do get even

easier as they have more assets on management because then the the the relative cost of like running more redundancy becomes less per e that they have under management right um also um as we looked at this kind of picture here up here right of like basically that that as the real yield basically kind of goes away more and more of what you earn at least the real yield paid by the protocol right more what you earn is this kind of tiny bit bit in between between the solid line and the dash line which would be the the me right in the future this could also be reaking yield and all that kind of EX we call this external yield so things that you get for being a Staker or get access to for being a Staker that doesn't come directly from inside the protocol um and

so as as more and more of that comes from of the yield comes from external sources now that also means that as a solar Staker you also like have increased variance that comes with that right like me often times is nothing at all and then every non so often you win the lottery right and so some sols actually like that like I think we have heard that from Solis like actually it's great to play the lottery you know like but that changes once the the basic yield the guaranteed teed yield goes more and more away actually that then maybe people are already less willing to play the lottery because it's nice to have Lottery on top but Lottery is the only form of income different story exactly yeah yeah and of course not everyone shares that sentiment in the first place right not Everyone likes to

to just play the lottery without without even you know like again like quote unquote Lottery it's not you know it's not exra gambling but you know what I mean um and and even worse we will have to see in the reaking future we're heading towards is there maybe some type of yield that just like you can't reasonably get access to at all as a small Staker right it could be that for some some of these avss want to only bring in like big professional operators and don't care about the the the the the little guys right so so this kind of external yield is another like really big problem especially if it's a small sliver on top of your normal yields anyway it's fine but this if this becomes more and more of where all of your income comes from different story um and then last maybe let's first

briefly talk about this tax implication thing because it's a little weird to talk of taxes here and like otherwise like a very technical kind of you know like conversation but it actually is something that's really unfortunate I think because um so many jurisdictions the way they actually tax in tax staking is that basically like the the the the rewards you you earn while staking they are basically treat as income right whereas your normal just like the the capital that you have loged up that is just you know like whatever capital gains or whatever that that that how that's treated just like normal appreciation if the E price goes up you know the base thing just like increases in value the problem now is if we go to this world like you still even here nominally you still get 2% of rewards

per year the problem is that only basically offsets the inflation so it's similar like in your bank account if like for example there's 10 % inflation you know as we had last like a few years ago and you earn 10% of of of interest you still have to pay Capital Income Tax on those this interest even if it literally just offsets the the inflation so basically now you basically you you you pay taxes on something that's not actually real gains and so that's like another way where basically solo stakers get hit by this whereas um lsts can be structured in a way where basically that's hidden away right like it's one token it's one token and under the hood there kind of the portion of what is new Rewards was what is basically existing Capital that kind of shifts but because you only hold the

token that's abstracted away you can't abstract that away at least it's it's I don't I'm not aware of any design that can obstruct that away for solo stakers so again a bit of a Nuance weird Point taxes whatever but we've we've heard this concern specifically raised by some solar sters we talked about this already and so it seems to actually be a reasonable concern um and then the last one last point and that actually by the way also gets back to what left teris said um ear right of like well 3% maybe that's already the minimum of like what what you need anyway because otherwise you could just take your eth and to other productive things with it yeah right you can use it in defi instead and this is true today but that's kind of to this point of liquidity Gap to LST widens as

they gain ad option we have like an entire separate point on this network effects of money there's a big concern here that like this is the this is out of all the five concerns this is the one that has the most of like a flipping Point like some some sort of like point of no return character here where basically right now today eth is the useful asset and you can use it like all over the place in ethereum right um and then if you instead hold an LST like Ste CBE um r e those you know it's still nice that you can buy and sell them at any moment instead of with solo staking you have to basically wait for the queue to to to unstake but you can't really use them that much while while you hold them right like like the liquidity on

like Unis pools for for Ste or I or CB much less than for e and also you can't take out cdps on maker or like all these kind of things right so basically like it's much less useful than eth the problem is right now even like the most dominant one like Ste or something right like the it it maybe has 10% 15% or so of all eth under it 10% I think roughly I don't know um and then there's still 75% of just unstaked eth right so there's much more eth in existence than Ste and I'm just using steth because right now it's the most popular one right like um so of course eth is the one that's used as default everywhere but once that ratio no longer is so clearcut one very dominant the other not

right like you can imagine once we have 50% stake 60% staked at some point the dominant LST will have just as much liquidity as e as raw e right and so then all of a sudden for the defa protocols it's more more attractive to support that asset as the default asset or for UNIS pools Unis pools will have just as much liquidity on that pool as they have on the eth pool we've already seen this like for example just yesterday literally yesterday um zyn announced that now you can pay for gas on zyn using Ste right so yet another place where like basically now it's just as useful as as e right and so this the problem here really is that once you hit this point then two bad things happen one it's just it's no longer you no

longer basically have this extra like deterrence effect of like well you lose the usefulness of your eth when you stake and so you really need to see some Rewards to be able to offset that instead it's like no no no as long as I go with a dominant LST I still have liquidity as just as before so nothing even gets worse for me right like instead of eth now I have you know I don't want to if I keep saying Ste it's just because you know like it's not because I specifically have anything against Ste I actually think out of all the LSS it's probably the best you know like Ste re E I think the decentralized ones are really the good ones you know but like still just to take it as an example now all of a sudden holding Steve is just as attractive as holding

eth so you don't need to be offset by 3% even if it's just a tiny bit of yield on top why not why not take it you know and not only that this can even flip right once you get to that point now basically there's nothing stopping further rushing in so once we have like 10% raw e or 20% raw e and we have 70% the dominant LST now all of a sudden the default is only this LST and like raw e becomes less and less useful you could have l2s like for example the blast L2 right which you know people have opinions on anyway I don't want to you know like I'm I'm neutral so do what you will but um they only like basically they take your e and then they just stake it all by default

and they don't even tell you about it right like basically on the L2 side you still see an eth balance but it's not actually eth it's actually under the hood Stak e so get more but you get more Yi than bu by yeah exactly it's like you get free money you know like so all Rush In And like trust the multi anyway um so so the problem is that this becomes really really unhealthy and the bigger problem the bigger problem the one that I'm really worried about is at that point all of a sudden The Runaway effects of that dominant player become huge right do you really want to hold the LST that's useless while everyone else gets you know can can still trade it for their favorite nft you know and you're just stuck with it in your wallet and you can't use it for anything no of

course so the moment the moment one of them um how do we unlock this okay okay the the the the moment the moment one of those becomes dominant now for for all the other LST holders it's an easy swap just go over and participate in that staking but also for solo stakers you know like basically they see all those LST stakers now be in this beautiful world where they can still use the the LST just like they just for money like any like like raw e and they are stuck with liquidity right so the Gap both the gap between this dominant LST and the other LS but also the dominant LST and solo staking becomes wide and wide and that's that's why the situation look today again that's why we started the

session with saying if we can just freeze today's situation into place beautiful right like I have nothing against I think actually it's a very healthy situation we're in today the problem is a future like this would look very very fundamentally different I don't know I think we kind of went through most of the points does anybody have any questions okay uh we we identify the problems and I think I I don't think anybody would say that these are not problems like we all agree I'm just not sure um how reducing the is curve in the way that the particular um proposal um does would actually solve this because of course maybe I misunderstood

it because the there was not an easy to digest document let's let's say and maybe maybe this is also a problem with uh why we have all this all this pushback the the maybe main point would be from what I understand we would even go to negative issu on or am I wrong in this there would be a point where that's not the current proposal okay okay right so I mean yeah yeah I'm not sure if we want to go into the proposal yet wait we we we can I mean if there's I do I do again like I don't think we would want to have the focus of the session be on the proposal but I do think you know given that I mean we did propose it so we it's also like weird to now just act as if there was no proposal right so I

think it's good to acknowledge that there is a proposal I mean can I give can I give my take first please please go okay so there are all these different things that we could do to like Target some sort of um ideal percentage and that is sort of like that could be an end game that could be something that we go after um after what the current proposal is but what the current proposal is is slow things down intends to slow things down by in by uh lowering the incentive to stake so that we have more time to create that without creating um more more incentive to fight against issues changes so this this current the current

proposal is literally just it's it is extremely um mild in my opinion all it does is lower the lower the curve and he can talk about that yeah no so I definitely think of course by the way I do think we actually not just didn't just make a communication mistake you know because that almost sounds I feel like that's that's almost anytime I say this I almost feel like I'm not taking the community serious because it's like oh we just didn't talk about that right no no no I think we actually made a mistake in terms of we should have really just been like first hey this is a problem we see do we agree right and only if we agreed even then start moving towards the talking about potential solution stage I think that that was just an actual mistake we made I think

because the problem is in the research of course it kind of De co-developed while we were still thinking about the problem we also like thought about potential Solutions so so anyway um the the the situation we ended up in is just that basically we saw that hey we have ideas around like how to solve this in the long term right this is kind of where these targeting ideas came from for example I can I think I have some slides in there like you know like just to give you like an idea of what what this idea was so the idea here kind of was to basically like have some sort of curve that you know like basically instead of only slowing down to the right it really would drop up drop off sharply at some point right so basically to just be like hey like we can't have

more than 25 30 40 whatever we would choose as the the right side um um and Portion like percent of of of each state right so that was kind of like what we thought hey this might be a good long-term solution and then we looked into like what would be the steps that would be required to to ship something like this not that we would be planning to just ship it right of course again this is a community decision but at least even just like how feasible is this and we it it and it turned out that this depends on like a lot of plier work that has to be done there's like all this all this work around um like me capture and burn because otherwise it has really negative consequences for for for how this looks otherwise there's there's a lot of basically we looked at

like how fast could we get to the world like this and the answer was more like three maybe four years from now and the problem is three maybe four years from now if we keep if we on the current trend of e flowing in we could easily already be at 80 90% right and the unfortunate thing is we can still do it we can still ship this in 3 four years again if we end up agreeing that this is a good solution we haven't talked about the specifics of the solution yet but if if this was a good idea we sh we can ship in in 4 years the problem is if we are at 80% stake and then we ship this basically it means that somehow we have to get back down to like whatever 30% St or something and the only way to do this

is to like push stakers back out how do you push stakers back out you make it so uncomfortable for them that they voluntarily leave which means you probably have like a year or two years of where actually stakers lose money or something right until they all or like most of them are gone and I think this is where we lose solo stakers and this is the future that I I would really really like to avoid because I think this would be really bad for solo stakers and so giving ourselves more time this yeah giving ourselves more time to um to figure out the solution without having to go straight to this is is what I am advocating the most for right and so basically that's exactly so we looked at this and we were also like o is there something we can do in the

meantime to just do like slow things down and that's where our short-term proposal came from and I think the short-term proposal was the one that like Drew all the attention and was also the one that we spent the least time on we literally like after spending like three months on this we basically were like we spend like a week on like is there something we could do in the meantime and that's where this kind of short proposal came from and that's basically I'm not sure if I have a slide on this at all maybe maybe I have a slide on this I'm not so sure no I don't have a slide on this um but basically this this uh short-term issuance reduction was kind of just meant as like a hey if we just do a onetime reduction that makes staking less attractive and that way

basically people rush in at a slower rate right that's what definitely admittedly less well thought through and also it comes with all these drawbacks of in the it it in makes things worse in the short term right so this is I would definitely say also the one that we felt the most unsure about and we were more like well we just propose it and then we ask the community and if the community agrees that slowing it down is such a priority that making it a bit worse for Solo stakers in the meantime is worth it we do it and if the community is like no no no we should really just figure out the end game and let it run in the meantime then we just do that right that we we really we weren't even op we weren't even strongly we didn't even strongly believe that it would be a good

idea we just were like let's put it out there as a as an idea but then that's the one that like caught all the attention so really the intent the like like there's the long-term solution that would I think just be a generally very different way of doing staking and we just had this idea of slowing things down in the short term I still think it might be a good idea obviously like the closer and closer we get to like pectra the less realistic it would be to like do something like that already in pectra right um I still think in principle trying to do something maybe that also it's an open design space we could also adjust the proposal to not be at all a reduction at current levels it could be that at current levels identical staking rewards and just if we grow closer to

say 50% they drop up more sharply or something right there's like a big design space it's more like a hey Community do you think it would be worth trying to do like some more like short-term adjustment to slow things down so we have more time to figure out the long-term approach that was really the intention and I think we did a shitty job at communicating that so um uh I I actually saw only the the first one the big one that you made with the negative care I don't know the the other the the mid um term solution how it's supposed to be but I mean we I think we all agree that there is something that needs to be done because otherwise we do have a like very serious problem with lsts and God when igen ler opens their AVS rewards that's when we

will see a lot of changes then I think that we actually need that data to see what to do because um I I I I am interested in taking also and I have also natively restak some and it's terrible for a solo Staker to natively restake so I'm 100% okay that's too much less than 100% certain that it will be dominated by lsts because as a solo Staker it doesn't make any sense at all right now I'm working with their team like they are they're listening to to people and they are they are making uh a way for they're changing their contracts right now to make it better and easier but still it will be a lot more expensive than um right now it's prohibited like it's not

not it's terrible just really don't do it but once they do the AVS they will also make changes to the agent PS that they have and then it will be a bit better but still not as good as LST LS is just you know just St it and when we see the rewards from that we will know actually what are the rewards what is the actual reward that someone can get from staking because with the with with the um right of the care of attitude as you said before of just pressing the ear button then you just add the AVS on top if that's just like 0.0 something per B okay but if it adds another if it doubles the the APR there uh we will have a problem because then we will see a huge um inflow I think when the

proposal was made we had this this huge um the income input in input Q not input uh deposit queue deposit que wow yeah sorry I'm I have reached an age where I can't even speak I I know the feeling H so the deposit queue was really like crazy back back then uh right now it has really died down but I think that we are the Calm before the storm and the storm is will come when the AVS uh start working but I also don't know what is a good solution because as some criticized that that negative um um that that negative isance um care proposal because solo s would immediately drop off like I I the moment

it goes very low I mean negative I wouldn't let it go close to there but the economics of scale that big operators and Big L ests have is like that they can actually take the loss for a bit and they will stay there they can even go negative we can't like that would be impossible so I don't know how to I don't know how to solve that and this is my one of my biggest issues with that that proposal yeah yeah yeah so so just to to to to briefly address I agree by the way also that like for example with reaking I think I mean and just to briefly point it out because people keep always thinking that we are like super hostile towards like Lio or towards IG or something that's not at all the point right it's not 's fault I mean obviously

they should try to focus as many resources as possible on making it easy for solo stakers to participate So to that extent maybe you know like they could do better but at the end of the day like a lot of these are just underlying economic forces that it's not their like it's not flash B's fault that M exists it's not Li's fault that lsts exist it's not 's fault that reaking exists right these things just exist and these protocols just surface them and do their best to make it available you know to everyone but they are just unlying differences right so so there's a question how much can we level the playing field for reaking for example I do I'm in the camp that I think reaking as a hype is a little bit overblown and that probably at least in the short term yields will actually be pretty low so

hopefully it will not change too much of the existing situation right like I I hope we will see so I agree with you we just have to wait and see um in terms of because um you specifically talked about like this negative issuance and everything um I do think maybe it's worth it to like briefly maybe if we go can go back to the slides and like briefly talk a little more in detail about the the the specific long-term proposal we had right because again it's not even necessarily that we need the community to like agree that this is the right long-term solution I think it's more important to like first just agree that we should at least try very hard to find Solutions here right like if we can all agree that at least there is a problem here I think that's already like

a huge win and then it could be that this is a bad idea or at least this needs to be adjusted or anything so but even then I think it's worth to like talk about the details of this idea right um the intuition that I really have is more hey we on a path where everything get will get worse and it will be much much much harder for Solo stakers in general to stay competitive this doesn't help with all of this it makes some things some things better I hope it doesn't really make anything even worse but it will get tougher either way like this is basically like it's not like a Magic Bullet definitely not right like it's it's only trying to like some portion of the problem I hope I don't think it actually makes anything worse and like that's why I would want to like

address briefly this like no yield negative yield situation right so so first of all I think we already talked a little about this nominal real yeld thing right as we go to 80 90 100% staked um of course we would never get to quite 100% but I think 80% even 90% could very well be realistic the part of the yield that you earn that comes from the protocol already goes away right because again like everyone gets diluted by the same amount that they get receive as rewards so it just goes away right it really the only actual earnings you have as a stake at that point is that you get access to me that you potentially get access to reaking that's kind of where all your remaining profits come from at that point and of course just normal transaction fees like the tip but that's

not a lot right um so that's already kind of the path we on it's already a bad path right um the idea with targeting basically is just to say hey we just instead of saying we like defining just how much we pay and we look where we end up in terms of participation it's the other way around we basically just like we we target a specific range of participation so for example in this picture just to give you an intuition right this would be you could look at this and you can immediately see that on in this picture we would end up somewhere between 20% and like 30 35% stake right because basically to the left the rewards would be very high so we would never kind of drop below 20% or something but to the right of course you we can't ever reach

50% stake because at that point you know the curves have already vanished out of the picture to like minus 50% no one wants to pay minus get minus 50% of rewards so so we would be somewhere in the middle now there's two different um versions of this if we are able to get external yields under control what do I mean by this if we have something technology like meev burn if M burn execution tickets they can also capture some of the reaking yields because basically what they do is to become a proposer now you have to basically win an auction and so you pay whatever you can extract by being a proposer and so that would implicitly get meev that would also get at least the types of avss where you need to be a proposer for

so like pre-c confirmations that kind of yield that would all be captured by that mechanism similar to how 1559 captures transaction fees it used to be that transaction fees went directly to the people that proposed the block and now they go to the protocol same thing could happen with me and at least that portion of reaking that could also go directly to the protocol what that means is that the nice thing is now because you don't earn external yield anymore well people don't stake for free right if there if there's literally no benefit for for staking anymore you just you wouldn't stake so the actual equilibrium yield would still be positive and actually we even have it's a little bit of a confusing picture but we even have like some picture where we basically compare long-term equilibrium without and with staking and we kind of show it's like

just one specific example case but we basically showed that under some you know plausible assumptions basically you would end up with here just in this example 1.4% real yield under targeting and only 0.5% real yield without targeting so actually like and again the intuition really is that like at least as long as we can remove external yield from the picture well actually you do need an incentive to be a Staker so in this targeting world you would actually end up with more of a real yield than without so it's not about like negative or zero or something you actually end up with a bit more yield than than than without it's still going to be less than today unfortunately like I think that's un voidable if there's a way to avoid it like I'm more than happy to do this as well but I think it's unavoidable but at

least you still come up with some end up with some reasonable amount where all this like talk around negative issuance comes from right and that's I think very unfortunate this is this is a the where where are we here here there this would be the situation if we can't get external yield under control say that's for example why when I was saying earlier it would might take three or four years to roll this out specifically because me burn execution tickets that's still a few years in the future right so that's why basically we were never intending to ship this without these features first because if if what happens if you ship this without these features it still means that the total yield you earn as a validator has to be positive because otherwise people wouldn't be there but now because me is still something you earn on the side it

could well be that like the part that the protocol pce might turn negative so it could be that because even if the protocol paid zero it might still be that the incentive to stake is too high because of all that me you know and we don't only want like 30% people staking not like 80% so the protocol might have to charge actively charge for you to be validated just so you get access to that sweet sweet me and that sweet sweet reaking yield that's a really bad situation because for large lsts that works out well right they smooth it out all out right they they just average it all out and as an LST holder you still get like a POS small positive yield you know because they pay for being a Staker but then they make more more than that back in me but as a solo Staker now

you're in a really shitty situ ation because you might have to pay like 2% per year just as an example 1% 2% per year just to be just for the privilege of helping to secure the network I mean that's insane you know like quote unquote insane like but it it and then you basically you have to make that back by with me but if me is spiky you might just have a bad year you might like you're only proposing six bucks in the year none of those come with Big M now you actually lost 2% in that year that's a really bad situation right so if L you know like it could be that over time maybe the maybe we decide that that might still be worth it for some weird re you like for example if the other concerns besides just solar staking viability would be so high we could

still chip this even without me burn or something I personally I don't think that's a very appealing option I think this really only makes sense once we get this external yield under control because then the base rewards the protocal pace are still positive but that's kind of how this where this entire negative yield story came from right basically if we were to ship to rush shipping this before we get external yield under control that would be the result and I will say that result seems even worse for solar stakers than if we do nothing and and so that's not what I what I'm personally arguing for do we have any questions do yeah love Terris will you pass the mic back

thanks so have you guys considered the economic impact on ethereum if we get to the point of forcing people to stake to not lose their e which I think it's very important to knowledge right what what do you mean by the the economic impact yeah the price of ethereum cring ah well I mean obviously I don't want to talk about the price of ethereum right but I will say okay let me let me try to be diplomatic about this the one point we didn't even talk about right like because I I'm almost like tired of this it's like this you know whole MBI thing of like oh you know blah blah because yes I kind of still I I I'm somewhat sympathetic to him MBI you know I think why over overpay for security I just don't think in my list of concerns of why we should not just go

to 80% stake MBI is literally the last one the least important one right at the same time of course yes how attractive eth is as money and what not it does make some difference in the world right and like I think one one other part of this is if we end up replacing eth by some LST right the default money of ethereum again like whatever that means being money whatever just if you don't like the term money just think of the default token the default whatever the default based token of an ethereum if that is no longer e but Ste or i e or CB e right to me that means that like now ethereum just is in a worse spot right like as a user in one world I have like

a completely neutral token it has it's directly at the base of the protocol there's no risks other than the chain risk itself right it's like it's the native token of the chain in the other world now I like I have to pay a yearly fee on the token I have some governance that can make decisions on the token like there is some some contract risk there's some operator risk basically now there is no neutral token anymore in the entire network I would argue it makes e as money or as a token less attractive so I would expect again like I don't know I'm not in the market of making predictions about market caps or anything I would predict that that would make ethereum ether as a whole less attractive I personally at least I would

probably be like well I guess then Bitcoin is the only really neutral token we have in the ecosystem I would I would buy Bitcoin bankless has a bankless has a really good episode on this um about uh the m0o money M1 money and how like this essentially turns us into an abstracted version of eth that is basically not much different than banked dollars right but I think it's important to to to like really acknowledge that you don't have to buy into any of that side of the St at all to be worried here right like even if you think all these like eth money people are completely insane which fair enough you know I think that's not a completely unreasonable position to hold you should still be concerned because of all these other things that I think are even more important but at the same time I do

acknowledge that if you actually do think eths money is at least like part of what makes ethereum attractive then I think you should be extra roid well and some someone someone asked me uh if if the entire global economy works fine with M2 money why wouldn't crypto well the point is like what the what the hell are we doing here are we just reating the the same Financial system in in in a in a decentralized blockchain what like it doesn't make any sense like the problem is that we have a curve this curve from Genesis that is allowing these to happen so it's we we don't have to go there we don't have to have ethereum as M to money and everyone just having to rely on one entity that could screw the whole system and then having

to do a bailout the we don't have to get there and the main difference I see or one of the big differences in in 2% the and 1% the iPad will crash but um so so to keep these pictures in mind but um one of the big differences between I I see between crypto and the Legacy Financial system I don't even look banks are not evil right like a lot of this is just like people trying their best in like the somewhat technologically constrained system and the problem is if you have if you want to store your money somewhere you can't really opt out of the system you can choose a different bank a different bank you can in principle keep it in cach under your like mattress but that's not really viable option so you can't really opt out the problem with this kind of system

is now you also can't really opt out yes in the in in all likelihood actually this the situation we end up in is that like a lot of people choose to have their e intermediated anyway it might be in a layer two which has Bridge risk it might they might hold it at a custodian which has custodian risks but this is opt in this is like you can choose to do this or you can choose not to do it you can always basically go back to the Baseline yeah are we not are not charging well maybe it's also not not discharging now we will find out tune in on the next episode of we still see a picture um but but basically the important thing is basically like this this would turn the opt-in nature of taking only the risk you want to into like a this is the risk you have to

basically take by default so that's I'm personally super passionate about that I think it's insane if we create another system where basically we have a base layer that you can't opt out of you can that's basically like some base kind of trust setup where you can't just be like nope I'm going raw yeah I think that would be really bad do we want to make liquids taking protocols the next Banks I have some online questions that we we can address uh so Lis LA on Twitter asks how shall we think about how much Economic Security is sufficient present and long term and how do we assess that we are overpaying for staking I don't have a good answer for that right I think this is like almost the

uh the fuzziest question of all of them um I mean you know you might have heard talks in the past of like say um John chab chabino of like proof of governance and these kind of things but basically like the point being like yes there's some sort of minimum level of security where basically you need otherwise of course the entire system is is too fragile and can break at some point it basically security really becomes more about Vibes you know like at some point you just have way way way enough security anyway and it really is just more about is there any credible scenario in which this could still be the weakest link in the chain and we are we are so past that point right the question is if you wanted to attack ethereum today would just buying up eth and voting for for a double

slashing for a double slash like for for for a double signing would that be the best way of attacking the chain and clearly clearly that's already no longer the case right it doesn't you can't you wouldn't get be able to get away with like billions of dollars invested in an attack like that um a Just For Real World implications you know that kind of footprint people will find you and people will AR you you know um and then also that's just cheaper things you know you just you can literally just go and like bribe the three four five six seven biggest operators like that's there's like so many more realistic attacks at that level if we're already talking about like billions and billions of dollars of cost for an attack there basically like there's some threshold like once you above it we you're already no longer

this is no longer the weakest link of the chain the problem is of course yes it's a little dissatisfying that we can't have like a specific number it's it would be nice if like 177.23 5% stake is the minimum and then the chain is secure that would be great it's not the case like my feeling is probably like anything about 5% would already be sufficient for security probably you don't want to cut it that close maybe you want to at least make sure we always have 10% maybe at least 15% even or 20 like just some level where we just like absolutely certain that it's like way way way above what we would possibly need well I I want to say it it depends on who is handling that 5% stake like if it's running if if one operator is running that 5% stake and he

happens to like cookies very much so if you send him a pack of cookies he will send you the private Keys then that's not a very safe 5% well and it's not even so I think sometimes focus on sa safety of the system also obscures other things like for example I think I'm much more focused for example on sensorship Resistance and I think decentralization of the staking set is much more important for that than just the pure double signing um vulnerabilities because that that one is a almost like a theoretical concern as long as we always keep some minimum level of security like sensor resistance and like and that part of the of the concern set is very real and I think there really decentralization matters so much and that's why I mentioned this before

you'll hear this probably over the next year or two much more rainbow staking I really think basically um um splitting out different types of responsibilities and really really trying to focus on decentralizing those that matter the most like sensorship resistance I think is probably the way we should go on ethereum but but like I'm much more worried about that than the security of double signing yeah so uh I want to grab on to that and basically say that in every question about staging I think that it ends up always into um we want more decentralized more basically solo stakers uh we want to incentivize that and then okay let's do that and then how is the question and every time that we

ask this question the answer is we can't and this is something that is like annoying like there is no way that we can't we can identify solo stakers without being gameable but you don't have to identify solo stakers to be able to incentivize more decentralized forms of staking for example what what was what was it that that um vitalic said okay maybe do do we buy byy location or something like that I mean big operator can also just you know buy different locations and just you know like it's still a li operator it's still coinbase or whoever are you talking about the correlated offline penalties yeah yeah okay probably probably this one yeah I mean I think unfortunately like eventually this is an unwinable game trying to like

specifically identify from inside the chain who are decentralized and who are centralized actors and treating them separately differently the moment you do this you're just incentivizing the game of hiding who you are it's not in the short term there might be some gains to be had and that's why I still think pragmatic things like this um cor correlation penalty I think that's a good good thing just like to temporarily give us more breathing room I think in the long term we really just like yeah I I absolutely hate that it's so hard to like keep solo staking viable but like you know like we can't just like put our heads in the sand and just ignore the fact we have to like come up with what is a long-term viable solution what is a long-term like what is a system we can

build that has the best properties that we can get without like being a fairy tale end like with while still actually making sense economically for everyone involved um I I think actually this is a a an area of research where I wish more people were to come were come in in contributing I'm not working on that myself so much actively like I'm trying to help here and there like I'm more focused on like ler 2's account abstraction like this issue and stuff a little bit like I have colleagues that do this a lot like again bab is doing amazing work I think he's honestly like the number one person that comes to mind for me who's like really pushing very hard I think vitalic has been like quite um concerned about this and has thought quite a bit and the fact that we still don't have an amazing solution even

after vitalic thought about it for a long time already should tell you that at least it's it's not like there's an obvious thing that we missing out on right like we need more people thinking about this and unfortunately you know look ethereum is very unique in the kind of broader proof stake world for having this like huge focus on solar stakers most systems have like dpus some sort of just like they just acknowledge that it's impossible and they just do some delegation and call it staking slashing right they don't even do slashing you know it's like ethereum really kind of tried to go down this path and I think it is unclear how viable it is and how much like what is the the thing we have to retreat to that g gets us the most of like still the benefits of what we have

today without being unsustainable and it's yeah I I wish I I really I'm very optimistic of I'm an optimistic person I hope we can find a good end game there but it's it's definitely one of the main things that does worry me about the future of ethereum and uh one one point to so vitali's idea he he's strictly correlating offline Behavior so you as an operator you can still decentralize on terms of geography which is good but for for sensorship resistance what importance is the like decentralization of the jurisdiction of the entity running the note and this is just I think impossible to track Like H how sounds fun

no yeah you can you can still basically you can if you could you got have system so basically if you're the one person that adds like a transaction to like a Crist or something and no one else saw that transaction maybe you get a bit of an extra reward or something you know you could try to basically have these like anticorrelation systems also for for sensor resistance and in a non- gameable way it's kind of hard but you know this it's again it's something we should do as much research as we possibly can but you mention something I don't I don't know how that works but you did mention something about um separating the part of the duties and I mean then I suppose if an operator is in a specific jurisdiction they would have to follow specific um uh lists of of censorship and then if you don't

follow that then you say okay so this guy doesn't so we can somehow include them in some kind of um extra reward or something if you want to reward people who don't uh don't censor so is that something that could be visible on say probably it would right yeah I mean in principle it it can be like definitely and like it's also by by the way I mean I'm I'm not actively working on this kind of sens of resistance topic either like so so I'm not not not an expert my understanding from just Twitter is that right now there is no jurisdictions that put any restrictions on what you can include and cannot include in Block so this is more like a potential concern about about the future um yes you can definitely like make some sort of incentiv system I also think there's just like it's a very open

design space so so for example I personally don't even love so much this kind of like inclusion list approach I think personally it makes much more sense to try to have like something that's closer to like say a mle attestation thing so basically like as a validator you just basically look into your mol you just report to the chain what you see and then the chain processes that and Aggregates that across multiple validators and basically like then chooses have some algorithm to choose transactions to include and to run so it's no long you're not actually including them I think actually having individual valid datas include individual transactions is not an ideal pattern um but basically it's an open design space I think this this kind of this general idea is like just called rainbow staking of like splitting out the responsibilities I think that is

very promising just because you can find some subset of Duties where basically solo stakers will forever be competitive and I think that actually that might not be just around cens resistance right and just also like say in general like on on attestations of some sort right like basically just Embrace this idea of like well if we can't keep them competitive in all regards Maybe we can just basically give slice just cut off the parts of the duties that they can't be competitive on have like a more have some sort of system for that and then have like keep all the rest as decentralized as possible I think as a general design principle that seems promising to me but again not an expert on that specific research area I have another question online from Anton he's asking doesn't this proposal

lead to an even worse position where large operators operate under negative base yield and are forced to restake leading to restake e taking st e position they're going to restake anyway they if they can maximize their y they're going to maximize their year they're not going to stop at some point and be like Oh 2% is enough yeah and that's why at least I I think again do I think there's no world in which we could chip something like this targeting NE this targeting curve but before we get externally under control no it's definitely feasible to imagine that but that or sequence of shipping features definitely would be the one that would hit solar stakers the hardest because then you basically end up in a world where validators would have like a negative base yield and would have to

make it back by reaking by by and that is just much harder for solo stickers to do so ideally this never becomes a concern because the first thing we ship is just a way to basically exract that out as we did with transaction fees with a 1559 like burn mechanism and then we can ship this targeting mechanism and we still have a positive based reward that the protocol pays and we don't run into this really thorny issue of negative base rewards do we have any questions here yeah I I have one online so the the fed or at the Mandalore 9 on Twitter asks do you think we can actually model this if external rewards are not

controlled for example reaking again ideally we first control external rewards and then only do we ship something like this the downside of this is it means that we now have to wait for a couple more years to get there and like we already I think we're trying to like I'm at least I'm saying I'm I'm like trying to Fast Track our research to that point as soon as as as much as possible but it could still be several years if we as a community don't yeah but again that that doesn't uh apply to the current proposal correct yeah um so again there's two proposals there's like what should we do in the long-term proposal and then there's the hey this is something we could do in pectra proposal the this is what we could do in pectra that does not have anything to do with negative yields

that's just like a reduce the rewards a bit but I just I think a lot of people are are sort of mixing up the the long-term um solution which there are like a hundred different variables in and like nothing has been decided and the fact that this next proposal the actual one that has been proposed for pectra is doesn't doesn't involve that at all right and I mean honestly I would actually be quite curious maybe also with the people here like is there like what's the general feeling because again even for something like that could be in say or the one after even like some one of those more like short-term slow things down proposals even there there's like a big design space it wouldn't have to come with like an ISS introduction at Curr levels at all you could just

imagine I don't know do we still have an iPad to work with um do we how do we we have the maybe briefly briefly draw basically how how that could look like you know and more as like a a caricature yeah like of so basically yeah so you know if you if you imagine right like uh how do I you want block y there go so you know if you imagine this is like today's issuance curve right what you what you could basically do is our account proposal was something like like basically this so it basically oh oh wait no um how do I yeah yes as you might might imagine I don't have an iPad myself so basically

well something like this it was basically already half like or it starts a little higher think but you get the idea right so it's it's already like meaningfully meaningfully so maybe it was more like something like this but basically it's already meaningfully low at count levels right so so there's of course this kind of onetime reduction not like I understand that's pretty opinionated that would make the situation much worse for Sol stakers today still we thought okay maybe that's a good idea just because it at least it's a onetime worsening but then you kind of you slow down this continuous drift into a worse situation but if for example people were like well we should do something but this is too harsh for example one thing oh great um one yes um wow I feel so much like a boomer one

thing we could do is we could basically have a curve I mean this is of course a little bit this is going to be a little bit like a a caricature just so you get the idea it could basically be the the absolute same and then we just say hey it 30% or something it basically just like drops off much sharper something like this you know where basically it's like hey same rewards today is just if we go below above 30% it Bally starts dropping off much sharper this could also be a potential like big design space the question that I would be curious about like you could also for example it could be that people are like well definitely not pectra pectra is like insane it's like so close it would be the end of this year like that's way too sharp but maybe the one after or

something I'd be really curious is there like do you think do you think basically like we should never do anything before we have figured out the very long term and basically like instead just risk sliding up for four more years and then ship the the dong solution long-term solution or is there anyone like how how do people think about like more pratic in between um solutions to just to try to slow things down because that was actually a question we had and I feel like because of all that Twitter drama we never got to really ask that question so I'd be curious if someone has an opinion on you guys got understand the question like should we do something in the short term to slow things down while we work on long-term Solutions or is this just

like way to disrupt and we should it's okay to take the risk of having to do this painful coming back down as long as we don't disrupt things now would it really slow things down H would it really slow things down because the as long as the M or risk taking yield is still higher will this stop something right so basically what you're saying is if we look at like actually what's happening is like that this is like the real like so this is like like you know the curve with me and then even in the red case you would still have the curve that looks basically like this you know so actually it's still pretty high even um that's a problem like because

right now we can't really we don't we wouldn't want to go below zero for obvious reasons right in in in any short-term change if you don't go below zero even in the base rewards and then you you add me on top it could still be that like that in sum is high enough to keep pushing people upwards it would be meaningfully less so it would be meaningfully less meaning that hopefully it does slow things down I also do believe that there is more and more um validation in like trafi coming in and more and more validation of ethereum coming in and so when people are making the decision like do I want to hold eth do I want to take this extra risky step that 1% or 2% difference is going to be a factor for them when they decide that especially if it's people

running with like customer or investor money I I think I really believe that the equilibrium point is here with the current curve or the with any curve like any cve that doesn't go negative the equilibrium point is here but I do believe that as you saying there there has still people have to be okay with earning 0.5% so reducing the curve it can slow things maybe just enough so it can make a difference honestly one alternative I see to actually chipping any of this would also just be to like and I think that's kind of the base thing that we should do anyway it's like really to get this message out of like first of all staking is not risk-free yield it's also not like the the risk-free rate of

return like I've seen this meme a lot you know like how basically on in in US dollar like the the the um um the treasury bonds like that's kind of called the the risk-free uh rate of return because that's kind of something where you know the government can never default on its on its debt so you that that's basic money that comes with the extra money that comes with no risk attached and like people are calling staking yields that thing as well for ethereum and that's really really harmful it is not like left teris was exactly right when he was saying like at the beginning of the session like it's not risk-free it's it's you know it's like it's a specific Duty you do it comes with responsibilities it comes with specific risks you take on like we have to kill that Meme you know

I'm sorry bent language but like you know we have to like make sure that goes away we have to make sure that ETFs understand staking by default really bad idea if they want to at some point and if that's allowed in the US or whatever like if they want to someone have a stake e ETF be my guest but like don't just take your e ETF stake under the hood and still call it e ETF that would that's really that's really really problematic same thing with layer twos don't just stake customers e by default that's customers and users users e by default that is insane like you're risking you're putting their money at risk you're lying to them about just like risk-free you get some 2% extra e while you're just while it's just sitting there that's not the case you are putting their money at risk don't

just do this right like just establishing those social norms unfortunately I think the history has shown that like you can only go so far with social norms at some point economic pressures just break through social norms but maybe if we can create enough of like a like a wall for like that type of behavior enough of a red Line in the Sand and basically just have social pressure on lay Twos for example to not do this maybe that's enough of like keeping this this this from happening right for at least a long time um enough time for us to to do this things so I think either way even if we end up chipping something or something in between like this this type of explaining that explaining that you this it's not free money it really is not it is a Specialized Service that people do that sophisticated people like

solo stakers even like LST delegators right now do and they get rewarded for that Duty it's not free money so that's really I don't know maybe that's enough but I don't know sorry I could some just I get passion about this but also because it's like look we made mistakes communicating all of this of course like I understand this like I mean I very painfully understand this it was also of course a little hard to go through that Twitter thing of like everyone just assuming we were trying to secretly ruin ethereum or whatnot right like I I'm super passionate about the future of ethereum as well this could be like we could be wrong about all of this we could be wrong about the problem description we could be wrong about the solution description totally open to to all of that but but let's let's just at

least engage with the arguments so so that's why so I apologize for like whenever like I get too passionate about saying any of this because I'm like I almost feel like I feel like I I have to I have to use the opportunity to to vindicate you know what we have been doing on this sorry about that just U I just wanted to add up that uh I mean yield is like everybody's addicted to a yield right and if you try to just cut it off well then you have the Obion syndrome so I guess we're at this point so it's kind of hard to go against I don't know if should call it maybe human nature but it's just everyone's addicted to it so it's going to be hard it's going to be a very hard task to uh communicate this the best way

possible I me doing great but that's still it's a and and I have heard people come I've had people come to me and say hey rationally you might be right but understand that having some just extra yield floating around is a very nice marketing Meme and please don't kill that you know please just like the market will never understand what's actually happening like let's just have them the heck have their like vibe like yield and and you know like accept that people are not fully rational about these things I don't think that's how we should run the protocol like I really don't like I think that at that point like we had this like you I think you said that right like are we just rebuilding the existing system like no we we shouldn't and so again if we are wrong of course we should not do any of

this but we shouldn't decide not to do any of this just be just for the memes or just for the for the marketing yeah you can you can have rational people doing rational economic decisions to destruction yeah that can happen yeah also I think I think it's funny when when you have this tiny yield it becomes like a reverse Lottery where you are for sure winning a tiny bit maybe losing everything yeah I mean yeah yeah also again like it is a complicated topic I'm actually not even my conviction like I relatively High conviction that this targeting approach is the right thing to do actually and that comes partially because we have also like I've with some colleagues that have thought about other

parts of staking like barab with rainbow staking dunat has thought about staking balic of course I have had some some conversations with also like it always sounds so much like EF whatever it's not EF like I've also like same same with like John chabo like like some of the Lio people like like people from all over the ecosystem I've talked talked with them and like are there maybe alternative approaches we could take maybe this is not the right approach right like often times when there are ideas of like what alternatively we could do it kind of ends up boiling down to the same base principle like for example V had this idea of like instead of limiting the the amount of the the the participants you could basically have everyone come in but then you rotate through the active validator set or something but that really kind of

comes out to a similar thing because the more people there are the the less often it is your turn and so the less often it is your turn the the fewer your rewards are so kind of is the same targeting mechanism there and like dun had some ideas around maybe you only make some small portion of the Stak slash but then basically that actually becomes the actual stake asset and and then the rest is only delegate delegation and then that small ster set again has some sort of targeting mechanism so so far it seems to me like all the alternative approaches people come can come up with kind of boil down to the same base principle just with extra steps of making it more obscure but I don't want to make it more obscure I think ethereum should just be like no this is what we

have to do if if we then end up agreeing that this is what we have to do and then we should have the cleanest version of that mechanism not the most obscure one that is the most politically palatable I don't think we should ever ship anything just because it's politically palatable like we should all come to community agreement I think for now we still enough of a coherent community that we can come to community agreements on things like use that coherence to really understand all together like what is the best thing here like this is only a starting point this is only supposed to be starting point figure out what actually is the best way forward and then chip that and not make compromises of like for for political reasons I really like that's what I hate about politics you know that's what I really

hate about politics that they always just do pragmatic tra offs of like what can they get away with that's not so how I would think we should run ethereum I don't know Al Another criticism that you can see on offline online is a lot of other proof of stake protocols have very high levels of staked native token and people claim oh if they are doing and it's going fine why shouldn't eth do the same and uh I mean there are many cter points to that I think with it over there um there is one that I think people uh Miss and it's kind of funny so some of these projects the token allocation is not very good and it's also bested um so if you happen to have

a very large allocation that you cannot touch but you can stake the staking rewards you can buy houses with it right so yeah I'm just saying like there are different incentives and as ascar is saying we we we should not uh compromise and have a solution that can make ethereum like survive on the end game without having to play with issu every 3 four years and also some of the takes of like well it's just nicer to just have the story of free yield comes from some other ecosystems right where people are like no we understand it is equivalent actually but it's still a nicer story if you can tell people if you come to our Network you just press the one button and now you just earn extra money for

free you know it's just a nice story to tell people and I understand that but it's it is a fake story and so I don't think we I think we are kind of in a way like also in in crypto space I think ethereum is the the one the biggest mode we have is that we make the most principal decisions I think and so I think here again we should make the principal decision and not the the the the the convenient one but yeah I mean again takeaway is not I I also like I don't know really what the solution is this is just an idea like takeaway is just we really see a problem here like we just trying to convince the community that there's a problem here so that we can then over the next year or two years so have a conversation about Solutions and um we

are C and by we I really mean cban me not like anyone else like kasba and me we are terribly sorry about like how we presented this is like immediate jumping to one potential solution we saw which totally overwhelmed everyone listening to that proposal which yeah really bad communication I guess if I was bad at communication I wouldn't be an ethereum researcher it's yeah yeah I have another question online uh is. asks I think the main problem with solo staking is opportunity cost you lose ability to use your stake as collateral as long as we don't solve this solo staking percentage will go down yeah like this is a fundamental problem like the the the the the the

fundamental problem is you can try to make it kind of semi liquid the problem is you can't really do this without removing slashing because anything that's flashable It ultimately boils down to how much do people that hold the thing that is down liquid trust the operator and people for better or worse they do trust big operators like I if I hold Ste I kind of trust that okay maybe one light operator might misbehave accidentally but like they have 20 and then it's like whatever you know 19 of them will be honest and I only lose a little bit of money if I hold left terorist e you know I don't I mean okay I kind of happen to kind of trust left terorist you know but like Al only kind of you know like what if what if you know yeah it shouldn't trust him too

much you know or like Lion e like o that one I would stay away with like I would need a huge discount to by that you know and you know what I mean it's like this it's I'm a light operator by the way oh you are yes it's actually really fun okay but point point being is like there's a there's a fundamental limit of how much you can make solo staking liquid because of that trust thing ex unless you remove um slashing and that's kind of what dunat dunat had some ideas around like this kind of alternative approach of just turning e also into more of like an enshrined delegated proof of stakes system but again I think that kind that's that's an interesting thing to

explore but I think it does boil down to something that ends up looking very similar to targeting but yeah that's the it's hard like I feel like often times the debate are like people keep pointing out but this is a bad thing and then all I can say is like yep I agree it's a bad thing next you know like it's an unfortunate situation I think yeah yeah with the with the with the solar sing debate they will always be uh a monetary premium to move away from solar taking to some some take e or this famous earn Bon just minimal effort minimal cost uh but solar staking exist in ethereum because there is an an altruistic premium many people are

willing to to do a small small sacrifice in terms of I mean there there's also there's also an increased um sense of self- sovereignty you aren't relying on on anyone the risk is lower you control your Capital you don't have a smart contract between you and the beacon chain smart contract um so I do think that that ends up being um a good trade-off for that okay then we'll call it psychological premium I juston it's not irrational it's not irrational yeah I don't I don't think it's right to like call solo stickers altruistic because then people start relying on their altruism and I think that if we call them altruistic actors and rely on their altruism we do lose them okay so so I do I do think it's worth trying to keep the objective

economic Gap as small as possible so that even for rational solers it might still be the right choice to remain solo stakers and to me the biggest risk to this Gap really is the one of like LST liquidity I think once we have like 60% Stak and like the LST is the one that like ends up that's the thing that you use to buy your the latest nft that's the thing that has the highest liquidity on Unis Swope to me this kind of flipping Point really is what I'm personally the most scared of might not might be unfounded but at least that's what I really want to prevent like I don't care so much if we end up with 20% state or 30 or 40 or 50 on 50 is starting to get like a little uncomfortable but like 20 30 or 40 I would really wouldn't mind so much I'm

really worried about 50 60 70 where like all of a sudden lsts become really amazing and solo staking still has this liquidity issue so liquidity okay liquidity is one thing but um uh so for example that you mentioned it's already very very useful in defa in many places in you're going to get the standard 3 point how much is it for lsts instead of the 3.5 let's say that is in in Native staking but then you put it in another po okay you have you have the the defi Legos but still you actually can a lot more than the you're not only liquid but you also get like there's pools that you can get 12.5 like 15% okay they have there is various

risks and there is not as much tvl there but you can do a lot already with the LSS and this this is probably what um the the guys online mentioned that with Native staking like with normal Staker solo sticker you just can't do anything you just rely on maybe a you know Holy Mary MV block Hil Mary yeah MV block and I mean every single problem of our system seems to to go back there how can we make solo stting better and I think that this should be the object of any any part of research I I mean I'm not saying that um I know how to solve this and I don't think that anybody in this room knows

but if you identify a problem and you say okay this would be the target then probably this should be the reset towards yeah I mean I think from you know remember I assume you remember this kind of threat that Peter had recently on Twitter right of like kind of where he was a little I think some frustration broke loose of like how we kind of how things go in ethereum and to some extent I could I I agreed with with that and like I felt the frustration but also like with things like me right there's one one question of like do we like this yes or no and like sure we can talk and like it's probably like it's not amazing at least some like the toxic part of M is really not great that it exists right the problem is at some point you only

have the choice of like do we keep going into research mode forever and like we just keep not finding a solution because it's like intrinsically just either impossible or just too hard to find a solution right or do we at some point just say for now we acknowledge it exists even though if we don't love it and we try to mitigate it as much as possible and I do think basically we need to do both we can't just go into like research mode of like how do we keep s avable forever if there is nothing to to to be done if there if there's no perfect solution there we have to also acknowledge that reality in the meantime and try to make it as harmless as possible and we are running out of time so we probably have to wrap up now but like there's a lot of things

we didn't touch on at all like there's DVT there is like for example I do think things like rocket pool also now the kind of the the community module of like uh light or whatever that's called but basically like more individual stakers are involved all these are good good approaches so big design space we have to keep working but yeah we should do all the approaches at once we are at the end of the session uh if I if I want to do one takeway I want to tell people to read the vitalic post the near and Midterm future of improving the ethereum Network's permissionless and decentralization it's really good it covers a lot of the things that are in the pipeline awesome cool yeah let's wrap up so thank you everyone for participating the audience and the online questions and beautiful Anar nio and milon big

round of applause for [Applause] everyone and thanks especially to you too like I only I heard about the session like two days ago and I was like oh I'm also in Buon let me let me try to join but like it's really those two I think that have been driving that and like I I'm sorry that I ended up keeping Tech talking so much that's that's what we thanks especially to those two like that's been amazing an amazing session thanks everyone