The End Game for Liquid Staking | S5 Premiere

Transcript

all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-hosts today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode [Music] all right everyone welcome back to another episode of belgroup this is the inaugural episode of season five you're joined by me and my co-host and good friend miles O'Neill miles welcome back to the show my friend oh it is it is great to be back um you know I've been coming in a little bit on these weekly roundups

um but you know really missed our uh our time doing the app chain season and really diving in deep into some uh some really interesting themes and um you know I think we've got another great season prepped uh you know ready to go at this point yeah and you know what I love giving us compliments so I'm just going to say that app chain thesis that we did I think that was very timely one of the key themes in that action thesis was this converging architecture between ethereum and Cosmos so sort of the same challenges that the roll-up Community are now facing was already faced by Cosmos a little while ago and I think the the theme of season five is gonna turn out to be equally timely so we're going to be talking about season five is drum roll please the end game for liquid

staking and this one's going to be very interesting because frankly liquid staking is something that's very core to the security assumptions of many of these different blockchains and frankly in the bear Market we're recording this you know that's actually July 3rd day before 4th of July of 2023 and liquid staking is kind of one of the only hot spaces of crypto right now so for those of you who haven't tuned into previous seasons of belker miles and I are going to go very deep on the topic of liquid staking over the course of seven episodes technically Nine episodes including this one the intro where we're going to cover the major themes with you of the season and then we're going to do a recap for you at the end but throughout each one of those seven episodes we're going to be pulling in experts that are very in tune with some

of the major themes and kind of poking at some of these big ideas and right now what we're going to do is lay out some of the big ideas for the season and then you know Eight Episodes later we'll see which of those were right and which ones we've changed our mind on so before we get into those major themes I actually want to start with a little bit of a history of frankly the early design of ethereum and the history of proof of State liquid staking as a concept so thank you uh typical uh from a couple of different things but liquid saving actually did not originate in the ethereum ecosystem actually the very first paper that was authored on liquid staking was authored by one Felix lutch who is the CEO at chorus one and this is actually an idea that came out of the

cosmos ecosystem what he called delegation vouchers and I was actually surprised when this paper came out this was 2019 which else isn't really that long ago expensive for such an such an established important corner of crypto stay Lido I think has the most tvl of any protocol on ethereum but the history of liquid staking I'll sort of dive in here and then you can jump in and correctly when I inevitably get something wrong but one of the early core propositions when ethereum was switching from a proof of work chain to a proof of stake chain was they wanted to make sure that it didn't get concentrated and specifically something that they were concerned about was the creation of staking pools and what they didn't want to use almost a hyperbolic

example is to have 100 or 50 or 25 extremely large entities that was controlling an outsized amount of the ethereum state so what they wanted to do was make sure that that didn't happen by not selecting a delegated proof-of-stake mechanism so ethereum is very careful about what gets uh brought into the actual ethereum protocol unlike Cosmos where there is an in protocol delegation mechanism ethereum decided to not have that they instituted the minimum 32 ethereum that you needed to stake which has stood till this day although there is a proposal I think Mike neuter is written to increase the max balance of ethereum nodes and the idea was that this was supposed to sort of signal but

also be a design decision to encourage self-staking and I think the postmortem on that is that in some ways that's been effective but in some other ways that's been very ineffective at the same time because now you have these dominant liquid staking protocols like Lido that have effectively overruled that that design decision and now you can get delegated proof of staking from this not in ethereum intrinsic mechanism but through Lido instead now miles I mean yeah is that a pretty accurate summary and maybe you can tap into I think so why why this came from Cosmos originally and how inside of being Cosmos absolutely so in when in Cosmos you know they are explicitly the change are designed explicitly to have you know 150

validators 200 validators right um it's permissionless to enter those sets but you need to be you need enough stake to basically be in the top 150. um and you know ethereum looked at Cosmos and did not want a validator set of 100 150 or 200 ethereum wanted hundreds of thousands of validators um and they wanted them to be individuals right which were a lot they're a lot harder right to censor by say like the government or something like that right and you know what actually came out of this design is that it made you you know basically using a centralized exchange to stake on your behalf very very attractive right you no

longer had this 32 each minimum you no longer had to set up your own Hardware you could actually have liquidity right you could actually sell your eth on the centralized exchange while getting staking rewards right and so the unintended effects of this design Choice was that ethereum was that huge risk to having you know a handful of centralized exchange really captured the majority of of of the network um through uh basically through retail delegating to centralized exchanges to stake on their behalf and that wasn't even worse you know that would be an even worse outcome than say having 100 or 200 validators right um and so

there was I guess maybe I'll pause there meanwhile over in Cosmos land um you know there was a lot less activity there was just a few different chains but each chain had a very very high staking rate um and at the same time they were trying to bootstrap the beginning of some defy activity right and so the opportunity cost on Cosmos was that you know it was very very high for for for unstaking and using your um your tokens in D5 right and so coswell's knew that they needed to basically unlock all the stake liquidity in order to bootstrap a defy ecosystem

um but on ethereum you know they had a very different set of circumstances right D5 was already pretty pretty active it was in it was it was in the early stages of development um but they had this an existential risk that you know before the beacon chain even launched officially it would be controlled by a few a handful of centralized exchanges and so that is why you know the idea took off on ethereum when it actually originated in Cosmos um you know Cosmos didn't have any Deep Fire really at the time and so the pmf was found on ethereum and and at the time you know the ethereum community was very supportive of light up because they also saw this risk

um and Lido was you know the one chance basically to avoid having a centralized or you know really mitigate those risks um and so yeah that's maybe a little bit of the history of why it actually took off of ethereum um when it originated in yeah so that's just such a good summary and just makes me think about some of the beautiful Randomness and sort of path dependency of how these things evolve but yeah basically to summarize everything that we're saying there were two pressures here one there was over in ethereum land we were trying to design a system that couldn't be captured by a couple of large deep pocketed actors so there were a whole bunch of design decisions some that were made successfully some that were made a little bit less successfully to prohibit that from happening the goal being

hundreds of thousands of geographically spread individual solo stickers then over in Cosmos land they were actually struggling with something that ethereum is starting to think about right now which is because they started as a proof of State chain they had a much higher stake rate from the early days and the amount of yield that you were getting from staking was quite high so the challenge for Cosmos at that period of time was how can we make people not sacrifice opportunity cost for staking but then also go do these other D5 things and that is what led to this idea of liquid staking delegation vouchers and then of course liquid staking became very popular in ethereum because the ethereum foundation got very concerned with a couple of entities the coinbases or Krakens or you know eventually maybe

finances of the world basically capturing the validator set of ethereum because they just made it much much easier to delegate state two so now what that ended up giving rise to was Lido which is again not to put words in the mouth of the ethereum foundation but I think it's starting to move into the popular conscious of ethereum native so something to potentially be concerned about because it's taken a very core function of ethereum which is how it secures itself through staking and sort of made it subject to a different set of security properties and governance sets so we're going to be getting into exactly what that is but number one I think this all kind of tees up the one of the main ideas that we're going to be exploring which is what is the future

state of liquid staking going to look like and I think one of the ideas that we want to try to pull out there is what are some of the returns to scale that you get when you're when you're at liquid staking issuer and for me you know I'll kind of go through a couple of the ones that jump out to mind for me but then maybe you can hop in and correct me number one I think is a very classic Network effect akin to kind of like a telephone or currency which is basically just how useful is this liquid staking token in other ecosystems and how liquid is it one of the main properties of one of the main advantages of liquid staking is first of all just instant liquidity so once you stake your ethereum you can instantly move out of your position through this secondary

Market of something like Steve and that's a that's a very compelling value proposition the other value proposition is sort of the opportunity cost that the original folks in Cosmos were trying to solve for so once you've staked your eth you want to still be able to get some amount of capital efficiency from that so you can take your stake position and use it to LP uh in a in a D in a um decentralized exchange for instance so you know from from the perspective of a a liquid staking token issuer what you want to do is make your liquid staking token as useful as you possibly can and the more useful that token is the more liquidity there is for that token and there's this sort of reinforcing positive flywheel effect that you get

from those Network effects absolutely and I would also add you know I think even potentially even more so than liquidity or Integrations I think the you know what differentiates uh different liquid staking protocols is also trust you know brand and security right and those have Network effects very very powerful Network effects as well you do not want to be the the first user of a new liquid staking protocol right if if what you care about is that you know they're you're not going to lose your eth you're not you're going to have liquidity right and then you're going to be able to use it in defy um and so you know these compounding Network effects lead to you know what is likely going to be a winner take all or

winner take most Market structure um and we've already started to see that on ethereum in particular and you know I think maybe looking across other ecosystems where it doesn't look like a winner take all Market structure I think there's some interesting you know we can kind of dig into that later why why it's so popular in ethereum but I think it does you know really go back to ethereum at the time when staking just started right when you had no ability to unlock and withdraw your your stake ethereum so yeah I couldn't agree more yeah I completely agree with that and safety we're going to be getting into and just sort of the the sort of governance structure of a liquid state and token issuer the other Advantage is

to scale that come to mind for me are sort of more traditional uh returns to scale in terms of businesses so if you think about Lido and as a sort of two-sided Marketplace in between delegators of ethereum and node operators who want to actually validate in the network you kind of think of this model as almost like Amazon right classic two-sided Marketplace between let's say people who want to buy stuff and a network of vendors and obviously those two things have to have kind of these virtual effects if you can bootstrap supply and demand at the same time so in the Amazon example the more users that you have the more suppliers and vendors that you're going to bring into your network because you have that demand and the more you know products that you can sell the more

people that want to buy and there's this sort of virtuous cycle that gets a flywheel that gets kicked into effect and it's very similar thing for for Lido or any of these liquid staking token pliers the more user demand that you have the more bargaining power that you have for node operators the more quality node operators that you get but the more that you can increase the rake on those node operators and just to double click on that uh one one thought that came to mind in I think the tension that arises with with Lido and other liquid staking protocols is that you know from the Network's perspective they want basically the validators of these liquid staking protocols you know they want as as many as possible they want it to be permissionless on board right but then

think about you know what that does to a user and say going back to that analogy with Amazon what if every Merchant could you know permissionlessly on board to Amazon and then users on the other side you know don't have the quality assurances of of you know basically having a more control and you know higher standards in order to actually enter the supply side right so you could say it would be like a some customer of Amazon buying something and then their package never arriving because they just let anybody come in and be a supplier right including scammers and so I think that touches on the tension that we're seeing with Lido at this point where they're huge right but they still have this you know

whitelisted you know uh validator set right not just anybody can join you have to basically be an Institutional validator um that meets very very high standards um and now we're finally starting to move away from that but you can understand why that was so important in the early stages and and even if it's you know basically I kind of against goes against some of the Network's values and principles um Lido would have never grown to the state that it is today had you know it been permissionless and lots of people lost their money because you know they basically onboarded a bunch of validators that were scammers or just you know uh operationally and you know incompetent basically man miles that's such a good point I don't want to go too

too far down this rabbit hole but we could probably do a whole podcast on this about just two sort of these network based businesses you could make the same analogy with the App Store something like that where Apple doesn't just allow anyone and they have a very set you know sort of standard for you know the types of applications that you want because what they want to do is give users a good experience I think the same analogy with Airbnb actually in the very early days Founders the founders of Airbnb Brian chesky he realized that people weren't signing up to you know rent airbnbs because the pictures were crap so he actually would go you know from person to person and help them take better photos all these examples of unscalable things to create a better experience on the demand or user sides of these marketplaces I think that's a

really good analogy and we should pick at it throughout the course of the season I think there's a lot of a lot of meat there so Miles and I are going to be diving deep into what is the ultimate Market structure for these for these things look like I think going into the season to just wrap this part of the discussion up I think both of us would be in the camp uh this is not going to look very much like a fragmented Market structure and this is probably going to be either winner take all or a winner take most just because there are such obvious returns to scale that kind of seems like a a natural monopoly type situation yeah I agree I mean the more fragmented the market is the more you know that degrades the actual value prop of liquid staking um but then of course the more you know

monopolistic the market structure is the higher the concerns are you know basically of that third party having uh de facto control of of the network even though it's not you know it has a completely separate governance um process and and stakeholders right right and so I think that kind of leads us to some of these other themes that we want to get into and and how to you know the social scalability aspect right of of growing these into a winner take all sort of end State yeah absolutely so maybe that segues pretty well into topic number two this season which has largely been dubbed the self-limiting debate you've also referred to it as the social scaling debate but it's basically the idea that Mido or you know I apologize

if it seems like we're mostly talking about Lido Lido has the vast majority of market share for liquid staking we're going to be getting into detail with some of the other major liquid staking providers as well but within the specific example of self-limiting this is actually popped up with regards to Lido I think there was a proposal a little while ago that Lido should self-regulate basically as it got over a certain percentage of the market share that it should somehow cap that I'm not I'm not a gigantic fan of that idea what I do think is an important framework to set up and frankly one of the reasons I think I'm so interested in doing the season is Lido sits at a very unique place in terms of dows and protocol governance you know we did season two of the show on governance I kind of walked

away with a bit of a framework for how government should work in crypto where the closer you are to base layer infrastructure in being crypto the more decentralized it's important to be and the further away you are from that base infrastructure the lesson coordinate is to be and it's very obvious and frankly it's been talked about an enormous an enormous amount how dysfunctional Dow governance is today and I think it's because people still don't understand or have this idea that if you're a game you know a crypto game it's probably not as important for you to be decentralized as the governance of something like ethereum and oftentimes maybe even you know decentralized exchanges are pretty good

one to look at because there are really critical reasons why that should be decentralized but the organization of a Dao often seems directly at odds with creating the best decentralized exchange for instance oftentimes I feel like you and I miles are just like man if they just ran this thing like a company we'd just be getting a better product here wouldn't we Lido is very interesting because decentralization is actually a core part of the value prompt because Lido is so core to the functioning of ethereum as a protocol it will actually allow itself to grow larger if core parts of the protocol are ossified and if members of the ethereum community are you know it's sort of limited its surface area in terms of

what it wants to do as a product and it's you know sufficiently decentralized itself that will actually de-risk a lot of this fear of kind of being co-opted by a smaller set of governance uh if that makes sense so yeah as opposed to being core to the functioning of the product the the decentralization is actually a core core part of the value proposition of the product itself yeah as we just kind of walk through right the sequencing of you know decentralizing the protocol is extremely important because if Lido had come out from day one with you know a maximum like basically maximizing for decentralization and governance minimization we would never be right in this in this have this new problem love Lido becoming too successful um and to your earlier Point yeah I

don't think you know it's going to be healthy for crypto broadly to you know have the president be if you are so successfully that you become a monopoly the entire you know network will revolt against you right that's not going to bring in the entrepreneurs that we need right um but I would just go maybe just a double click on on why liquid staking is perhaps different than other you know governance the governance of other D5 protocols um again it's so close to the metal of ethereum um that you know the biggest version of Lido is going to be one where you have mitigated all of the governance attack risks and you have mitigated all of the technical you know security risks right

um so that's really where Lido stands today and I think we're talking about Lido but I think if we see you know other ecosystems where developed in a similar fashion where it looks like there will be you know a winner take all provider I think they will face the same problems that light out does um I mean we'll get into it later but eigen layers in the same boat right and so really like what the perfect world outcome is for any liquid staking protocol is that you do have a monopolistic market share but you also have the full support of the network stakeholders and and user base right and to get that second piece right unlocked is you really have to mitigate all of the governance risks and all of the

technical risks um and so that's where Lido is today you know with things like giving steath holders the ability to veto certain proposals that could be malicious right to the network um that's where they would like to be going in a few years when they basically ossify core parts of the protocol core contracts and you know make them immutable right so they could never be changed through governance again these are things like the withdrawal contract um and potentially even fees we'll see exactly you know which areas they they do ossify completely yeah and that that's a great point I think the staking router and dual East governance are really great place to dig into is this

kind of a precursor for how these liquid staking token issuers might try to decentralize themselves one other framework that I want to give listeners is you know you could actually look at something like Corporate America or the stock market and differing levels of Regulation to give yourself a framework of how to slot protocols like Lido what I mean by that is there are certain companies that provide functions that are very close to the social contract or the metal frankly of how Society works and they're subject to different regulations and considerations that non-essential products like software or business software for instance are a great example of this might be utilities so utilities similarly to how Lido is called how ethereum functions utilities

are cool to how we all function as human beings because we all need running water power electricity that kind of thing now those sort of utility providers they're also natural monopolies so if we didn't regulate them at all they'd be the best instances on earth right miles how much would you not pay for heat you know if you're freezing your butt off in the middle of the winter the thing is we as a society have said we don't actually think it's good we don't want these utility providers to just be able to charge whatever they want because no one wants to get their eyes gouged out for their electrical costs so what we've done is said we are going to set a limit on how much capex you can invest on an annual basis and kind of give you a margin that we think you should be

earning and that's what you'll get and the benefit of Utilities in that framework is that they're quite safe and they have a gigantic Tam I mean everyone on Earth really needs them but they aren't these crazy ironing companies uh you know hiring stocks that you know the tech companies are conversely you could also look at something like military or you know sort of weapons technology providers as another example of something that's very close to the functioning of how Society works also very heavily regulated those governments are very lucrative government contracts very lucrative or long term uh and actually those stocks have done quite well but you know I do want to just poke at this because it's sort of the VC argument of oh The Tam is enormous right but there are other

considerations outside of just ham including you know the rake and growth opportunities and stuff like that yeah so the damn the dam is so big that it actually ends up becoming a utility um which is not a good outcome right but I think picking and choosing you know which it will be interesting to see how it develops right because it could you just reminded me of you know surge pricing for heat would be really bad but surge pricing for Uber and Lyft is okay right and that's because we want a competitive market in those areas and so liquid sticking is one of those that is right you know right on kind of the Border um but because ethereum didn't build it natively into the protocol you know I think that's basically an admission that

it's going to be you know uh there is going to be a market for this and people will make lots of money so it's either you know if if you don't build it into the protocol then that's that's basically what's going to happen regardless um and now it's just how do we basically let this Market evolve in the healthiest possible way and and don't let it actually end up yeah destroying the network yeah absolutely very well said so to sum up the themes that we've talked about thus far as Market structure what is a few feature Market structure of liquid staking gonna look like on ethereum and and outside of ethereum then there's this self-limiting debate right so how big can these protocols really get before members of the community say hey we're starting to get a little worried about this now I

want to introduce two new themes in one here one is a little bit more high level but highly relevant within the contact context of liquid staking and then the other is a little bit more concrete so one idea that's going to keep popping up I think time and time again in our conversation is this idea of the principal agent problem so the principal agent problem is problem if you're a student of corporate governance or you've been a manager at a large company or a shareholder you're probably relatively familiar with this but it's it's a pretty well studied problem that kind of deals with the the differing incentives and objectives in between principles so let's say stakeholders or shareholders in a company and managers who are acting as agents on behalf of

these shareholders and you you in theory these people should be going towards the same thing but if you actually dig into it they have different set of incentives and this could come from a number of different reasons so one could just be differing objectives so agents might actually pursue personal benefits at the expense of shareholder wealth you see this crop up very popularly you know this concept of Empire Building or paying yourself lavish salaries or doing things that are you know you're extracting a lot of wealth instead of building it on the behalf of shareholders maybe it's for ego reasons or whatever it is the other is information asymmetry so you can be the most you know active shareholder on the planet and read everything that the company puts out you are simply not going to know as much as the agents and the day-to-day managers of a company so

those are some of the reasons why the principal agent problem exists and you know you start to see this as well in crypto actually so a really great place that the principal agent props up is in liquid staking frankly because you as a delegator of ethereum you are simply not going to know as much as the node operators you know that's on the other side of the network for Lido or the day-to-day options operations of of Lido you aren't going to audit you know the Security Contracts or anything like that so there's already kind of this principal agent problem and frankly I think the original designers of ethereum proof of stake understood this that was part of the reason why you didn't have a delegated proof of system to begin with

that was why ethereum people were very concerned about the extentialized exchanges of the world taking an outsized control of stake in these big staking pools and now it's cropping up to again today in the form of Lido and their dominant liquid staging providers CBE could also be a part of this conversation as well so that that's going to be a problem that is you know keeps cropping up within this this conversation and the the third the fourth or more concrete version of this is actually restaking uh so restaking actually exacerbates this principal agent problem because it just introduces more opportunity but also more complexity and information asymmetry than even just sort of vanilla liquid staking so anything miles can I

turn it over to you here and just you just give a sort of brief high level of of what restaking is and where it fits in the liquid state and conversation yeah absolutely and so uh restaking is is basically another layer of liquid staking or of I guess there's a lot of different flavors on on top of the um on top of the protocol and so the general idea is you have you know an enormous amount of uh Capital that has been locked up to secure ethereum and then you have you know an enormous amount of Roll-Ups Bridges oracles all of these other highly critical um protocols that really are need to function well for the network you know

for everything to work on the network for a D5 to exist um but they have a much less economic security than the underlying Network right and so how do we find ways to unlock all of this existing stick Capital to secure all these other very very important you know whether it's Roll-Ups or Bridges or oracles protocols on the network um and so there are you know a lot of different flavors of this um but I would say like the the least involved flavor of restaking is that you know I've already delegated my stake to a liquid staking provider um in Lido or rocket pool or CBE or another and now I want to basically take

my existing you know staking voucher and redial gate that to an operator of these Roll-Ups Bridges oracles Etc and in exchange for you know basically taking on double slashing risk right so if the person I re-delegate my stake to does something wrong I get slashed if the original validator that I had delegated it my stake to does something wrong I get slashed right um in order you know basically taking on that additional risk I'm going to get rewarded with say you know fees of the roll-up uh tokens of the roll-up missions Etc um and so in the best case scenario this basically is a huge unlock for the scalability of

ethereum we bring the you know the ability to export distrust right at the L1 layer um or export the economic security of the L1 layer to the l2s and all these other critical areas um that you know is that would be a very happy there's a very happy path outcome there and then there's a very scary path right um and I think that that we can get into it later but you know it's very similar to Lido or freeze staking becomes um you know as prevalent as people think it could be or as as prevalent as staking itself right then you're going to have not only Lido but you're going to have another third party like eigenlayer whose governance you know is just as critical as the governance of

ethereum itself right and so I think we already see this you know there's great bankless pod the other day with vitalik and uh and Justin Drake and a few others who I would basically you know we're trying to get ahead of this problem and they're airing their concerns now um whereas with Lido they it really it wasn't until lydo was clearly going to become the de facto winner take hole um you know winter uh liquid staking protocol and then you know the whole self-limiting debates came out right uh eigenlayer hasn't even launched yet and and these you know core ethereum community members are already speaking out um their concerns and I think but I like the analogy of we should treat it

like AI um and I couldn't agree more but I think it is you know challenging given the nature of Open Source um uh development right even if eigenlayer or eigen layer in another basically are as careful as they could possibly be um in in implementing this and and you know slowly onboarding capital and being very very you know um very very diligent in terms of who they actually onboard to you know the restaking side and which Roll-Ups and what the security of that looks like it could just be a fork that comes out right that is plays things a little bit more fast and loose um and then we end up with with something you know like very bad

situation so um yeah I think there's a ton of similarities here yeah I completely agree with you and we're actually going to be hearing from sriram himself who is just just really strikes me he's got a lot of the qualities of Founders that I really admire in crypto and that you know you're absolutely right metallic himself he actually came out with a post on his blog May 21st this year called don't overload ethereum's consensus which many interpreted as sort of a direct shot at at restaking in some of the the security challenges that poses for ethereum I think SRI Ram responded very very well frankly just openly answers any questions from the community heart is definitely in the right place so we're going to be hearing from him in this season I think one of one of the things that helped me

understand this this this topic is if you actually think about things from the perspective of a validator and you sort of view these different sort of sidecars for additional Revenue that validators can can recognize so one of those actually is med boost where you have this off-chain Marketplace for Mev and a lot of that ends up getting paid to validators assuming that we don't have the med burn that's an additional form of revenue for them right that's great restaking is a very similar concept so if you have sidecar one and that's Mev boost that's an additional source of Revenue boom restaking is going to be another source of Revenue that you can run as well and the problem with that and where this where this goes back to the principal

agent debate is before as a as a solo Staker you're just underwriting your own knowledge and Hardware right there's no principal agent problem as soon as you get liquid staking then you're actually underwriting another node operator and Lido so there are two sets of you know uh security dependencies that you don't fully understand then with restaking suddenly those node operators can be running all sorts of different Hardware that frankly you know you you just can't possibly have information to and I think on top of that one of the things that we're going to see for like what staking tokens is actually this race and pressure for yield right so right now it's the bear Market there's not a whole

lot going on frankly outside of liquid staking but eventually when the market comes back everyone's going to be chasing yield the same way that they were during the last cycle and I say that only because chasing yield is the most consistent Trend in finance over the last you know Millennia so I think that's going to happen again and then what you're I think gonna get is these different liquid staking tokens they're all going to advertise a different amount of yields and they're not necessarily going to say where the yield is coming from or what are the risks associated with the yield and the one thing that we know about retail is they don't fully understand the stuff and they'll just ape into the the highest variable apy so that's kind of my concern is that you probably have a little bit of an adverse selection thing

where maybe even if eigenlayer is very careful and all signs point to the idea that they will be you're absolutely right miles there might be a clone of eigenlayer in the future who plays a little bit more fast loose doesn't disclose some of the risks and ends up taking a lot more risk and Retail ends up funneling into it and we've had numerous examples of protocols and companies that that whole cycle has played out with in crypto so I think that's the that thing to understand about restaking and we're going to be diving deep into this whole problem with with SRI Ram himself yep exactly I think you know we're going to hear all these concerns around the amount of human involvement that is required in order to actually curate you know which um who is allowed to you know use

aguiler to restake to curate which liquid staking tokens can be used for restaking um and of course that is all very very necessary especially in the earliest earlier stages but similar to liquid staking you know I think as the winners emerge the networks will demand you know them to evolve their their governance and their basically their protocols designed to reduce human involvement to basically you know ossify some of these these core contracts so yeah I see a very similar Arc playing out here the last thing that I want to touch on here is a little bit less of a theme but you know we thus far we've been talking quite a bit about Lido Lido has the most market share by a pretty wide margin today but there are other competitors in the liquid staking Market which have

been pretty successful at stealing market share and they've had very very very different designs right so CBE could be an example of this frax would be an example of this rocket pool would be an example of this and I think one of the we're gonna have a great episode near the tail end of this season where we're going to hear from the leaders of some of these liquid staking token protocols and it's going to be more of a tactical sort of uh you know we're going to kind of get tactically into some of what these Protocols are doing to grow their market share including everything from distribution I think sort of a cool trend of how liquid staking token providers have been able to grow is they sort of get in bed with a source of distribution right so one of the the original reasons why Lido took

off is how they listed it it was the first liquid seeking token to be issued on Ave and you had a bunch of Legions running sort of these recursive leverage trades right and that's what really helped it take off you've also seen kind of a curve is another great example of that because of the rebasing sort of a token construction of Steve as opposed to something like CBE you know it isn't supported by uniswap but curve does support it so you've sort of seen these very more tactical sort of distribution oriented place that these protocols have made and I think we really want to dodge into that you know also even just the the structure of these protocols proxies uh you know frax is a very aggressive sort of vertically integrated structure in play at the liquid staking market and I think you and I want to get

a sense of is this going to play off or is this going to play out for them or are they taking kind of uh too much risk exactly yeah um and then the last thing that that I want to get at is we are we're going to talk a little bit about there are some very interesting experimentation that's being run with liquid staking derivatives so basically and maybe I'll carry out this by saying we both think that LST Phi is a bit of a misnomer that is to say if your entire advantage of the D5 protocol is that you just take on liquid staking tokens as opposed to the underlying collateral you know the majors already do that right the obvious of the world the makers of the world they already accept that so you know if you're if you're a protocol that's listening to this and you're

thinking you're going to build the large sustainable business based only off of taking like what staking tokens is collateral yeah you might want to consider something that's a little bit more of a moat it might be a good bootstrapping mechanism in the beginning but I don't think a sustainable business that strategy makes if that makes sense yeah no I think I think that's fair I've never really understood the term LST Phi um I think you know if it just refers to people using their liquid staking tokens and defy that's that's great but it's been around for a while um I think what will be more interesting is to see you know how does usage on Roll-Ups evolve right um what it could can how are these you know basically going to be secured with these Bridges right or can they be

natively mint on minted on a roll-up I'm I'm honestly not sure we need to we need to dig into that um and then you know what are some of the other really interesting I guess innovations that you can do to unseat somebody like Lido right so even outside of ethereum I think stride has has the stride team stride um is in Cosmos and they've really kind of taken the early lead in liquid staking and coswas and core to their value prop is something called rate limiting right so they I basically set a limit on how much you know can be staked or unstaked every day um and so if the limit is say 20 of current stake that would you know mitigate the risk of

something like a security bug happening and somebody's stealing all of the the staked assets right so what are these you know Innovations in terms of security what are Innovations um in terms of you know differentiating on yield and what is that you know how does that balance out with with the risk um I think we'll see lots more experimentations and unfortunately I think we'll probably even see um you know liquid staking tokens of restaked positions uh there will be another third party that comes out and you know offers like some basket or you know a tranched offering of all these different restaked tokens and you can have your liquidity do um so we'll see that play out but you know at what point does this get

dangerous and something blows up and then we kind of revert back to you know super conservative right I think we all know that the you know basically the the table is set up very well for another for some sort of blow up in the next Bull Run uh when people will be hunting yield sort of a superfluid restaking operation if you will and I I agree I I Echo your concerns there so I think that's probably a good place to end it just to sum up for those listening the the major things that we're going to be digging into this idea of Market structure is an idea that we're going to return to time and time again both trying to sum up how it exists today versus how we think it's going to develop in the future this idea of self-limiting and especially some of the

Innovations around sort of the staking router and Lido dual Steve Steve governance that that sort of thing or Steve Lotto governance we're going to be talking about the principal agent problem that's going to be a recurrent theme across a whole bunch of different issues we're going to be talking about restaking some of the Innovation that's going on within liquid staking and then finally we're going to move outside of ethereum to talk about how liquid state gas taken often in other ecosystems as well can well I think that's a pretty good summary of what we're going to be talking about this season either one I'm pumped I think this is going to be great I'm excited to dive into it with you getting all the nitty-gritty details timing couldn't be better we've got yeah eigen layer will is is on mainnet and we'll you know be rolling out its launch

over the next year um and yeah couldn't couldn't be more excited for the season retire Amigo all right I'll let you go and I'll see you back here we're going to be talking to hasu for episode one get his take on some of these ideas thanks [Music]