DAPPCON 2024: Staking Economy - Brian Crain

Transcript

everyone uh I'm really happy to be here it's my first time back in Berlin after like three years when I moved away from here so um yeah I'm excited to talk today about uh the staking economy and uh proof of stake so just a bit about myself so I've been in crypto since 2013 I actually got into crypto right when I moved to Berlin and I started the Bitcoin meeting up here in in 2013 uh and then I was uh I was a tender in 2017 so a COO at tenament so tenament was the company that started uh kind of the cosmos ecosystem uh and was you know one of the first modern or the first modern proof of stake Network so I was there kind of

at the Inception of proof of stake and you know it was already very clear that the future was proof of stake ethereum was working on proof of stake you know polka dot all these other networks were also already working uh on proof of stake so uh I wanted to start a company focusing on infrastructure for proof of stake so started that around six and a half years ago um yeah I mean aside from course one uh I'm also at the interchain foundation so this the cosmos foundation on the board there and have been running the uh epicenter so which is at this point the oldest crypto podcast um So Pro proof of stake so proof of stake is basically a

mechanism that is used to achieve you know agreement in a network about you know what is the valid state of the network and to validate all the transactions make sure that you know transactions are processed and the chain is secure and for that you rely on validators you know who have this role of proposing and validating new blocks and I was wondering is it possible to move this timer somewhere else so turn it CU it's hard to actually thank you um and then you know the validators are basically chosen based on how much assets they have locked as collateral and of course that gives this uh level of Economic Security um so just a little bit maybe about course one a few things so as I

mentioned we started around six and a half years ago uh and today we secure around you know 50 different blockchains and have around three and a half billion uh dollars staked with us um and you know we around you know 65 or 70 people and uh primarily focus on staking but there are a few other things so we also do a lot of venture investing in in kind of new projects coming up uh we have a big research Focus so we publish a lot of research a lot of this around new protocols but also around research related to proof of stake and kind of like the new things that are coming up there uh and we've put a lot of work into Opus which is our etherum staking product so just want to zoom out a

little bit and talk a bit about proof of work versus proof of stake so if we look today right then um if you know if you look at the entire crypto market cap it still basically does about half of the crypto market cap is proof of work uh but that's basically all Bitcoin uh and then the rest of the crypto market cap is is practically all proof of stake or assets that are actually issued on proof of stake chains so uh you know if you look at the eight the top 10 something like eight of them proof of stake assets and then there are things like you know usdt usdc which today also primarily are issued on proof of stake chains so we already have that basically proof of stake really secure

almost the entire crypto market cap uh outside of Bitcoin uh and of course even rollups and stuff like that well indirectly they're still since they're relying on the security of the underlying proof of stake Network at least once they have FR proofs and all of that stuff uh still relying basically on proof of stakes it's really become this fundamental thing of how we secure uh blockchains and you know why is that there's different reasons right but uh definitely one of the big reasons is that there's this huge efficiency Advantage right so Bitcoin uh pays around 11 billion to miners every year and in proof of stake you know the the entire proof of stake rewards every year

around 13 billion so on the surface it looks like wow this actually more right than for proof of work but it's kind of deceptive right because in Bitcoin all of the rewards and all of the mining uh uh rewards they go to the miners and the miners spend it on hardware and they spend it on electricity but inof of stake is different right most of the rewards they go back to the Token holders who already hold that asset so it's not really a cost to the Token holders and the cost is really just what is paid uh in commission to the validators and let's say we take something like 5% on average you know that means all of the proof of stake networks together maybe

spend something like $600 million a year uh you know for operating all this infrastructure and so if you just take this uh efficiency comparison here you know it means basically in terms of you know how much is being paid to secure an equivalent amount of economic value then you know proof for stake is around you know 8 and a half times more efficient than Pro proof of work this was actually twice as much just very recently before the Bitcoin halfing um but yeah in addition to that right maybe a different point you know you can argue that the security of proof of State yeah I mean yeah you can also think about you know what has the higher level of security I think from a game theoretic perspective it's also the case that proof of stake has you know it's

more expensive more difficult to attack a proof of stake network uh now in terms of you know the type of customers that engage in proof of stake is actually a huge range again there's a big difference from proof of work proof of work is a bunch of miners which is its own secluded industry but I'm proof of stake because it allows any token holders to engage with it you know we really have a huge range of different entities that engage with staking so that's individual retail investors it's foundations it's the core teams and it's all kinds of different institutions as well um and now if you look a little bit at this uh staking economy we dive a little

bit in here so you know the total stake value today is around 260 billion and out of that around 18% 19% is uh being staked through liquid staking protocols so liquid staking protocols basically they allow you to you know pull the asset and then it gets stakes from that smart contract that's especially popular on ethereum uh and it's it's not super big on other chains um and now if you look at the staking rewards like how do the staking rewards break down the vast majority of rewards they come from uh to coins that are being new coins are being issued with every block so that's you know almost uh

34s of it um but you know there are some other things you know that we have gas fees you know basically when people pay transaction fees and me now the gas fees and me are also very ethereum heavy right like most of the other chains they have pretty minimal uh still very small economic activity and uh and you know so so it's really inflation on most of the chains but there are some exception here for example if you look at this uh this 100 million Mark here and other I think a lot of that is dydx and you know in dydx is basically onchain decentralized exchange and the trading fees they get paid to the people staking so and this is around 100 million a year so it's

actually very impressive that you have a chain uh that's entirely secured through the fees that people pay from using the chain and they don't have any inflation on the idx Chain uh so there definitely are some other protocols and I think in the future of course we would expect this pie chart to change a lot right I think the inflation bit is going to go down uh and it's going to go down hopefully because these other things go up but also because the protocols generally have some kind of schedule where inflation decreases you know as as time goes on um now when you look at like proof of stake you also see there's a lot of

different proof of stake designs uh and probably the biggest sort of two categories of proof of stake design is you know ethereum uh on the one hand and on ethereum we basically know we don't have in protocol delegation right and basically each validator has the 30 to e and there can be unlimited number of validators uh so that's kind of the ethereum design um but most of the blockchains they have a different design right most of the blockchains have in protocol delegations and they have a limited validator set so uh I think sort of the Paramount example here is like Cosmos for example so let's say you have a maximum of 100 or 200 validators it's

something that each chain can decide and then uh anyone can create a and the ones that actually do the work the ones that actually active are the ones you basically list all of them by how much they have stake with them and then the 100 largest ones for example are in the active set um and then you know maybe one of them has like 5% of the voting power and another one has like 0.1% of the voting power and then the one has 5% you know will produce 50 times as many blocks so this is like really easy really convenient it works really well uh and uh and this is something think that basically most of the chains have adopted a model like that so that's you know salana apui Cosmos but you know there will be many

others that can be uh can be named here uh and then you know there's a few that have chosen sort of an ethereal model and then there are others that have you know some kind of hybrid in between uh in general I think it's a good question of like did ethereum uh stake design makes sense I don't you know it's a questionable thing I would say it definitely has created a huge amount of need to create like other things on top like smart contract systems and stuff like that and um yeah so in terms of the the different products right that people need to sort of for their staking uh it also varies a lot right so we have the delegation thing which is sort of the

the standard thing that uh that I just mentioned right you just make a transaction you stake with to validator generally every all the logic is handled on chain so the rewards are distributed on chain the validator can set the commission rate it automatically gets deducted on chain and you know it works really well it's not always like that you know some of them have for example that rewards aren't managed on chain like tasos or there are some exceptions but generally it work it works like that and it works pretty well uh but you know there's some other types of products so for example we have we do like white label validators where there will be some party they want to run a validator with their own brand their own Maybe commission rates and stuff like that and

then we can kind of run the infrastructure for them um but it's sort of you know it's kind of like uh you Val valid there's a service type product and then you know we have liquid staking liquid staking is also something again it's primarily something that has traction today on ethereum and I think it has traction primarily on ethereum for that previous reasons that there's no in protocol delegation and there's basically a bunch of constraints that ethereum has imposed that make the sort of normal staking experience pretty inconvenient uh and that's why I think liquid staking has a lot of traction there but it's also something that's gaining traction uh in other networks and it's also something that you know we for example uh do today for customers

using uh for example protocol called steak wise which is very elegant um and then you know of course you have other things like API products that easily allow uh customers to integrate staking offerings into their products so you know that can be like wallets or custodial products or like exchanges things like that you know where they have customers who are holding asset on their chain and they want to offer staking to them and they want to Outsource kind of the work of actually running the infrastructure to a third party um yeah so this is kind of the liquid staking thing right sort of as I mentioned right you can see here on the left side uh basically uh ethereum where there's a lot of liquid staking and on

Solana on right side right where you have only around 5% of the tokens are being liquid staked again I think that has a a lot to do that the salana staking experience is you know really simple it works well and so the benefit for liquid staking is more limited the benefit for liquid staking on something of salana is really like hey I want to use the token I want to stake it and use it in defy too and some people want to do that but it's not actually you know the primary thing that people want to do generally they just want to stake and forget about it and earn their rewards um yeah but still uh is it's also something where uh you know we we have

for example an offering this pretty interesting right because in the beginning like lier was really the dominant liquid staking offering but now there's a lot more flexibility there's a lot more products coming up so for example there's also an offering we have now where you could you can stake with course one but you can also liquid stake at the same time um so talk a little bit about me so me is an area that like had you know a lot of attention in the last few years I would say at the moment maybe a little overshadowed by some other areas but it still it's basic has to do with when a Viator creates a block they they have some influence on you know what transaction go into the block and that way you can basically generate

additional uh revenues and um and uh the company flash bought right they built the software to create an auction so that the rights to the block can be sold off the third parties and they can bid on it and uh and so this was kind of a controversial area but of course in the end it is something where you have to assume that the people running the protocols are sort of going to do the profit maximizing thing and then people designing the protocol sort of have to design the incentive that the thing works even if people do that um so ethereum has gotten very complicated too in terms of how blocks actually get produce it's quite

different from other chains and other chains is basically like you know we as the validator we get the transaction order the transaction to cre a block you know that's kind of it but on ethereum we've we've sort of taken this apart into different roles so the proposal would be like us as the validator but then we also have like a relayer and then we have a block Builder and the block Builder is basically the one who actually creates the block so the transactions get sent to the block Builder they create a block and they say oh this is how much this block is worth the relayer send it around and then the proposers kind of choose the one that pays the most and like broadcast that so that's kind of the way ethereum has has sort of played out um and and the Meb kind of also derives from optimizing

processes around that and uh and doing this in a sort of more efficient way um and this is something we've focused quite a lot on and uh you know we've kind of ended up building a sort of proprietary uh ethereum version um that does this in a more efficient way so we capture a lot of measure a lot of data about the network and optimize different parameters and then are able to generate you know higher me rewards so I think over the history of of running this we' we've been doing it for a while now you know something like 9% additional uh staking Rewards or me rewards on ethereum

um so yeah we also published a bunch of like stuff on this including sort of like an academic paper on um on the research behind it of uh of how this works so I don't have a lot of time but I do want to talk a little bit about reaking so reaking basically the the high level idea here is that you know when you're staking money is sort of Locked Up and some of it is at risk right some of it could be slashed if the node operator the validator misbehaves and that kind of secures the protocol but most of it is just there and the slashing risks in reality are very low right like we've never been slashed and uh so we've never

lost any money for anyone this way and this is not untypical right in general the amount of money that has been slashed has been really low so of course it's a good question to say hey we have all of this economic value that's being locked up here can we reuse this to do something else at the same time earn additional rewards so that's basically the high level idea of uh of reaking uh now this this idea has kind of existed for a while we have this kind of thing running on Cosmos there is something called interchange security that basically is already restating uh and of course at the moment uh you know probably the most hype project in ethereum is Project called igen layer that's trying to do this for ethereum

staking so you as a Staker you can either do liquid staking or you could directly stake and then you put your you sort of restake your e and then there will be different basically different blockchains or different Services called ABS that are then secured by this state e and where um where the user or the the Stak you can earn additional rewards so this is like one of the I would say one of the biggest areas of activity at the moment uh I think on a high level this category makes a lot of sense right it makes a lot of sense to say hey I want to earn additional rewards on all this Capital that's being locked up there but I think when it comes to you know the actual implementation of it it's super

early and a lot of things are not figured out and probably a lot of the designs that have been made maybe don't make that much sense so I think it's going to take us years to actually figure out uh of how all of this works and it's going to be uh it's going to mean a tremendous amount of change and evolution um especially around ethereum staking I think in the next years and and it's brought a lot of complexity to ethereum staking it's going to bring a lot of new products uh new types of offerings that people are going to build um let's see layer twos I think I'm going to skip this yeah maybe just a final thing to briefly mention uh in some networks it's not for all networks

but in some some networks validators actually also play crucial role in onchain governance right so basically it means that you know someone can make a proposal and then the validators can vote on the proposal and uh and that's kind of how the network can make decisions in a decentralized way this is especially the case for and you know there's different types of uh decisions can be a software upgrade it can be there's a community pool deciding how to spend the money it can be just some text proposal about I don't know what's this chain for or something like that it can be parameter changes so this is especially relevant on Cosmos networks they basically all do that also some of the other networks but you know most of

the activity we see in Cosmos and you know just an example of like the volume of activity here so last year we voted in 1,246 governance proposals so it's a huge amount of work too of like looking at all these proposals voting on them but it's really actually amazing the the the level of sort of decentralized decision making that's already happening today on proof of stake networks um you know using validators so I think that's it uh yeah there's a report on that if you're interested but uh yeah so I don't know if you have time for any questions or uh we do yeah uh we have a few minutes [Music] so who wants to start

all right yeah just just one second sorry and do you see any benefit in staking outside of like validators so for example you have a blockchain and you don't have validators there for example optimism if they decide to have um like yeah they they would for example decide to have staking of token like do you see any benefit of doing that if if they don't have a role for validators to kind of pay rewards to okay so I let me try to answer something that I think sort of on this topic I

don't know if it's exactly your question but I mean um sometimes staking gets used for like other things people put tokens in some sort of defi protocol and stuff but there's actually no no service being run no protocol being secured so I'm going to like ignore this but uh I think when it comes to things like optimism or layer twos right there we basically have the situation that these things generally are very centralized right where you basically have like you know one sequencer that you know orders all the transaction process all the transactions uh if they go down uh you kind of rely on them if they get censored or you know the government steps in they could shut the chain down and I think the thing that we're seeing is that all of these uh or or most of

these uh rollups they basically see this as a problem and they have a plan to decentralize this with time and the generally it goes in some sort of different steps right so first it's just one sequencer then they say okay we're going to have a set of like you know five different sequencers or something like that and you know it's it's a approved list that they work with you know a little bit like the Lial set but then I think many of them do want to go to a mode where it's like an open and permissionless system and I think that's when you actually what is this going to look like it's probably going to start looking a lot like proof of stake systems again you know where you say okay someone has to lock up a bunch of tokens to guarantee that they're not

going to do something malicious and if they do something malicious then they're going to be slashed and you need some sort of consensus between the different sequen just to say like who's the one that's like sequencing right now and who comes afterwards so I I think our expectation I would say has been for a while that actually the entire a lot of the roll up space is going to kind of evolve in the direction to look more like proof of stake networks and that we're going to have a lot of this kind of staking infrastructure function there as well and and and it's it's not just there right I think we have we have that kind of role in in other types of protocols too I mean for example you know we run also interoperability

protocols like Wormhole or chain link oracles and chain links and reducing staking as well where they basically again want people to like you know lock up tokens and they run the oracles and if they do something wrong they can be slashed so I think that's kind of like a general Paradigm that can be used for you know any kind of infrastructure operators to guarantee that they do it right and to allow a sort of open system where anyone can come in yeah sorry we don't have much time uh maybe just quick quick one okay just wait a second yes interesting numbers do you have an opinion about solo Stak how can they

compete yeah I mean uh it depends right of course it's easy to you anyone can kind of like run a solo Staker right and and then I guess the question is like you know how convenient is it in terms of returns I think uh you know your returns might might be a little bit lower but I think your cost is definitely higher right so your cost is going to be higher plus you have to sort of additional work around it uh and I think what is also the case is with reaking uh it is the case that it's actually becoming harder I think for solo stakers to compete you know because now if you say okay you want to restake

and you want to run a bunch of different AVS is all of a sudden it's like now you have to run a whole bunch of chains uh or if you don't do it then you will just make a lower rewards so I think it's definitely the case that uh I think solo staking is probably going to continue continue to be you know harder and less profitable with time but I think it's going to continue to be an option at least on ethereum right CU I think they designed also the entire proof of stake system to try to make it easy to do solo staking now was that a right call I don't know because I think it has a lot of other negative consequences but I think that capability is going to continue to be there thank you so much uh if anyone else has any more questions I think

Brian will be around so please approach him and thank you so much Brian for your great presentation thank you