Enhancing the capital efficiency of Liquid Staking Panel with Andre Cronje, Filipe Gonçalves & more

Transcript

all right welcome everyone to today's panel about uh enhancing the capital efficiency of liquid staking I'm Diego I work for Davos XYZ over collateralized stable asset and today I have the pleasure to have a very insane panel of of speakers I would say that we should start with a small brief introduction because we're short on time let's start with Nico yeah sure my name is Nico founder and CEO of tenderize we do liquid staking for various protocols before doing 10 rice I worked at life peer for nearly three years as a protocol engineer hi my name is Philip I'm a chief of defy at anchor anchor is a web 3

infrastructure provider offering liquid staking RBC nodes app chains and other things my background is actually more on finance so I used to be a wealth manager for eight years mostly in Swiss banks before before going full time into D5 and working at anchor does this work itself hey can you hear me awesome my name is Ariel from SSV great to be here I got into crypto in 2017 working for bancor where we developed the first automated Market maker and for the last couple years I've been leading the product at SSV Network where we're developing

distributed welder attack as an underlying infrastructure for staking applications on ethereum hello everyone um sorry that was a little bit loud is that better okay thanks uh yeah so my name is Jorge I am a blockchain and cryptographer researcher at the research team at nethermind I am also a business co-manager at the research team I have been working on blockchain for the past two years and before that I had an or I come from an academic background I'm a currently a PhD candidate in applied and Applied Mathematics at the University of Michigan and yeah but currently I'm mostly looking at blockchain in crypto and it's

been it's been great so far very happy to be here with you guys hi everyone Andre cronje um originally one of the co-founders of phantom eventually became one of the board of directors of Anna Foundation after that launched a few D5 dapps you're in finance keeper Finance stuff like that um nowadays just focusing on base layer scaling so nice to meet everyone great so the first question that I have for you and let's uh let's just like if you guys want to talk about the specific question you just grab the mic like a tool and we can proceed so the first question is what are some of the challenges associated with liquid staking and how can they be addressed to engage the capital efficiency of the process

all right I'll go so counter argument I think liquid staking is overly Capital efficient in that I think it should never have been invented and I think it removes the something at stake problem which is the whole principle of proof of stake and I think it over leverages the same assets by allowing you to let's take e for example I deposit my Eve that if you're supposed to provide network security but now I get Ace whatever it doesn't matter now I take that AC and I deposit that in other now I go borrow die against it so now I've just double dipped on the thing I'm supposed to provide security on so I am actually actively subtracting security from the ecosystem because this asset is

overly Capital efficient yeah I would definitely agree with that taking that saying that liquids taking fundamentally changes the incentive structure and the security that liquids taking is supposed to uh bring however um despite that fact uh we have currently protocols on the market that are able to are making it work or are finding alternatives to the original incentives uh structure so we can take for example of the case of Rocket pool in which they go for every node operator requiring to have 16 eat as collateral in order to start up a node and this approach can be seen as less Capital

efficient in the sense that if I want to start up a new validator with rocketpool I need to have that Capital available we have the case of Lido which relies on like whitelisting and reputation of the relevant operators and parties so this Challenge on how like Capital efficient the the resulting liquid sticking protocol will be depends a lot on how you want to solve that problem that Andrew just pointed out okay so we just in a way we just broke or we just modified the uh Financial incentives of liquid staking for node operators to behave correctly so you need to fix that you need to add something else um some additional incentive whether it is a bond of your own or reputation of

your own that you're putting at stake in order for the uh to guarantee that the node operators will behave correctly and whatever design choice you make at this stage is going to determine the capital efficiency of your resulting solution and there's a whole conversation that can be had and what's the best way to proceed but yeah that would that would be my point regarding this challenge um yeah so uh in my perspective I think it's very important to to have that kind of reference for it and when you have like defy composability and reusing liquid sticking I think that really helps the wool ecosystem to be a bit more Capital efficient because let's be honest writing D5 to attract users is

more excessively about attracting rewards and so on and you know taxes is one example for example to have liquidity and you know when you use for example ease let's say on Phantom on polygon or elsewhere like you don't really have a real utility for itself and it doesn't have a reference interest rates and you could just create maybe a liquidity pool against East liquid staking especially if you're not even on ethereum network and on on another Network the benefits in terms of capital efficiency for the decks it will be now it's earning you know for like half of the liquidity pool is or earning four percent in East liquid staking apy for example and and that makes also the decks spending less rewards to attract

additional liquidity so if you do not use the full benefits of D5 composability it's as if the reference rate is kind of starting at zero and then you need to basically every protocol needs to attract liquidity and users starting from zero but if you if you consider then the layer one or the layer 2 is having a reference interest rate that is lower risk than your protocol itself which is probably going to be the case if you have a text on top of ethereum network polygon or a phantom then it is actually a must that you offer a higher apy right then the underlying chain that is lower risk so I think it's really important and the main

challenge it will be how to make it liquid enough right so that you can make that D5 composability more important and easier I think the benefit for the chain itself is also quite significant because if most people stake right it's more likely that it's going to happen if the liquidity risk is lower and if the liquidity risk is lower the sticking ratio of the the token of the underlying chain is going to be higher and at some point you will see you know back in the days like Solana they had about 78 percent of all the token state for example so what happens when you don't actually have enough tokens freely available to fuel all the liquidity in

D5 that's obviously a big problem where you look at for example sdes on on curve for example there is like 1.6 billion and half are in ethereum they're just not dealing nothing in there those ethereum it's not very Capital efficient obviously so yeah I think it's really um to to summarize uh really important for the ecosystem because of that reference rates analogy yeah I I want to support what Andre said that's saying liquid's taking are highly efficient but the problem is that they are so efficient that we have a problem of stake centralization meaning that we have one big entity managing a big percentage of the stakes right we have

Lido where I think about 80 of the liquids taking market and this is problematic because they also have a very centralized infrastructure right Lido has a few dozens of operators managing all of the stakes so I think in order for us to mitigate these problems is to adopt more things that can help distribute that stake and reduce the risks in centralized operations is things like DVD that we're developing in SSV which can really help to have more operator participation in the networks meaning we will have a term Security in way more hands and have it more decentralized for all of us

I think there's been some interesting um few points here I think liquid staking doesn't necessarily subtract from the decentralization I think it could add to it if it's done in the right way when we talk about Capital efficiency in staking or liquid staking it's kind of two-fold one is that if you are a validator business today a lot of your cash flows are actually not liquid so it's very hard to scale up a validator business and build a more secure network together with better validators the other part if you look at the liquid staking landscape today is as mentioned Lido controls a big part of that market share it's like I don't know 35 validators for 30 percent of all

stake Deeds something like that which is obviously not a good thing and if we look at the other solutions that are available there are slight differences in the approach but in essence they are all picking like a small subset of validators that are available on the network they're essentially all just yield aggregators and the landscape of liquidity but also who you stake to is highly fragmented what we are missing for liquid staking at the moment is a base layer underneath that liquid staking natively to these protocols but that's kind of hard to build if your protocol is already live so what our approach is that tenderizes we are trying to create that base layer underneath a liquid stake fault and token separate per validator where you

don't share or socialize rewards and losses that's kind of our Viewpoint and that could lead to a more Consolidated liquid staking space more options available all with one protocol that is decentralized that the full core and is fully neutral and doesn't make decisions on hey we should stay to these 30 validators and leave the other 1000 out of the boat I think we should create a Level Playing Field for everyone and that's where we should start to increase Capital efficiency okay great moving on to the next question so I'll do sticking providers ensure that they are providing inefficient and cost-effective service for liquids taking and what kind of strategies can

they use to improve their offerings yeah I can't think of that one so I think what is happening right now for liquid sticking providers is to attract users and basically stickers they obviously dilute very heavily the token of the liquid sticking protocol so the governance token and currently it's kind of the easiest way to attract users if you want to be more Capital efficient about it you obviously need to think about the use cases right so you can obviously trying to list your liquid sticking token on a learning platform like Ave you can obviously you need to have the Dex liquidity pools for sure

because the main advantage is to offer liquidity immediately right when compared to unsteaking which typically takes a few days and it will also take a few days after the Shanghai upgrade for ethereum and I think that part is really important you you can also use it in other protocols that are a little bit more for advancedify users that want to trade on yields like Pendle Finance for example so I think that's really important is really to have a collaborative approach if you're kind of a growth Marketing Manager for liquid sticking protocol is really work with other D5 protocols have other use cases on top helping the other platforms to be more Capital efficient because if they

can create the liquidity pool for their own token let's say Sushi swap imagine Sushi does a liquidity pool with a like sdes well obviously they will benefit now from the East liquid sticking rewards and why doing it with Sushi East liquidity pool when you can do sushi sdes for example so that that will make them also spend less rewards for their own liquidity pools and yeah I think really to to have the collaborative approach is important to be more Capital efficient otherwise you will just dilute indefinitely the value of your liquid sticking protocol and if you go on D5 llama you will see that there is already like 60 liquid sticking providers so obviously there is that

kind of Winner Takes all approach and I think really the Partnerships with other big protocols that might want to use maybe another liquid stickering provider instead of fly dough can actually help to reduce also the dependency on that kind of Winner Takes all approach from Lido yeah I think it's a to what Philip said it's a big issue right um having a liquidity and having a market for the for the lsds is very important even after Shanghai will come out even though the risk will go down and but how do you incentivize that liquidity right so project right now we see they're spending millions of dollars

every day to incentivize that liquidity which really makes it hard for new projects to come in and start competing in this market so as Philip said we need to have more adoption more utility for those LP tokens within defy and our ecosystem so it will further incentivize the liquidity provision for those markets yeah liquidity providers are one part of the service providers or liquidity protocols for us at tenderize it's something that we built inside of the protocol so for us when we look at service providers it's more the validators that are backing liquid staking protocols if you look at it

today for them for the validators it's a funnel to attract more stake but what you don't see is validators putting their own money into liquid staking protocols because in many of these let's take Lido as an example if you as a validator want to put your own money in it gets split with the other validators in the pool and you lose any competitive advantage that you have so for us for service providers to become a bigger part of liquid staking is for them to be also included in becoming users of it and not just not just acting as a service provider and a funnel for them to attract more stake we want for example for validators to also be able to enjoy the benefits of liquid staking like collateralization or I

don't know other Structured Products like maybe delta neutral staking all right moving on to the last question because we're a bit sure in time and this is actually quite a popular question that has been going around a lot so how does the availability of liquids taking impact the potential price movement of ethereum in the light of the upcoming Shanghai update and how might this affect the incentives for staking yep so I think it's incredibly important to understand that liquid sticking it was created originally to provide liquidity to stick teeth because that was not redeemable you could not unstick ethereum right so obviously it's a very

important event the Shanghai upgrade because you will be able to unstake ethereum so that also changes a lot you know the benefits of liquid sticking and actually that's why anchor you know moved into other liquid sticking uh other chains quite early why because we understood that it was much more Capital efficient if you have a liquid sticking that is redeemable meaning that the the circulating supply of that liquid sticking token is elastic right so that's a much more efficient price stability mechanism than just incentivizing indefinitely liquidity pools for a liquid sticking token that is not redeemable so obviously lighter did a great job for that but they will

also benefit from this by having to incentivize much less rewards so yeah I won't talk about the eth price but what the Shanghai upgrade is very important for is being able to rebalance the liquidity pools so what happened like a couple months ago was that steak teeth was trading at a fairly big discount compared to eth well if you can't unstake and redeem that eth you can't add it back into the liquidity pool and rebalance that so the Shanghai upgrade is actually very important for creating a healthier and more efficient market for liquid staking underneath I think

without the Shanghai upgrade calling it liquid staking is a bit of a misnomer perhaps because that redeemability is actually critical to the process of liquid staking yes so I think we're we're said and done just right on time hope you guys enjoyed the talk and thank you guys so much [Applause] we can end up