Episode 209: Liquid Staking with Lido & Chorus One

Transcript

[Music] welcome to xero knowledge i'm your host anna rose in this podcast we will be exploring the latest in zero knowledge research and the decentralized web as well as new paradigms that promise to change the way we interact and transact online [Music] this week tarot and i chat with vasily shapivalev co-founder and tech lead of lido and felix luch cco of course one we talk all about staking derivatives or liquid staking we look at how liquid staking developed as an idea and how it

works on staked eath in the eth2 model as well as on live pos networks but before we start in i want to recommend you head over to git coin as we are in the midst of a grant clr matching round not only do you have the zero knowledge podcast grant up and a big thank you to everyone who has donated in this round so far and in previous rounds we also have a zk hack grant up and this time around we have an entire matching pool dedicated to funding zktec and tools this is supported by the zk validator and a number of other great zk focus projects so check out the projects building the future of zk head over to get coin and donate today i also want to thank this week's sponsor leased authority leased authority is committed to building and

supporting the development of technology to preserve your privacy and keep your data secure they do this by reviewing third-party software for securing vulnerabilities and by building their own secure software with specific focus on increasing the security of the data and the systems lease authority currently has several job opportunities including a tech lead to build a service around the zero knowledge access passes or zcaps a cryptographic authorization protocol join them to create a new privacy preserving service that enables the value of zcaps beyond their initial implementation while cryptographers are welcome to apply even some familiarity with how to utilize cryptography is enough visit leastauthority.com to get more details about the job listing read their

findings on projects such as tezos and mina and learn about their work on zero knowledge proofs and zk snarks so thank you again least authority now here's our episode about liquid staking [Music] so today tarun and i are here with vasily shepavalov who is the co-founder and tech lead at lydo as well as felix luch who is cco at course one a project that is leading lido for solana and is kind of an important partner to the lido project welcome both of you to the show hey thanks thank you yeah glad to be here so you're coming both from two different organizations today what we're going to be talking about is liquid staking of eth primarily but i was hoping to

actually use this to talk about liquid staking as a like a larger topic um let's first start off by hearing a little bit about you vasily and yeah maybe tell us a little bit about what you were doing before you founded lydo so before i started working on lido i worked in p2p i continued to work in p2p validator pretty big staking providers provided that i came to in february 2020 as a cto and before that i used to make an unsuccessful startup on in cosmos ecosystem okay yeah it was about nfts for before time a little bit early maybe yeah yeah

yeah yeah the problem was there were no energies on cosmos so i guess we had yeah was it is it on ether mint uh no just plain like we were doing a marketplace for nfts but there were no nfcs on cosmos so yeah there weren't enough oh okay okay it didn't have anything to do with the clovers nft project did it no no like the close relationship with that is that like we we know each other always be lists so yeah that's it okay before that i was uh an engineer and engineer manager in informational security nice but so the job though right before lido was working at p2p like another kind of large validator company org so you're

coming i guess more from the validator perspective when you decided to jump into lido so maybe tell us what lido is and maybe how that potentially relates yeah lido is a decentralized organization that builds liquid-staking protocols it started with a liquid-statement protocol for ethereum it now has ethereum terra and solana and has teams working on uh liquid seeking for polygon and paul cadot and maybe a few others in in in the works it hasn't started yet so it's a doll the sterilized organization uh because the topic of uh liquid staking is very touchy it's like

basically walking in the heart of blockchain security and it has to have a a clear governance process that is not uh like unilateral and should be very mindful of the ecosystems is working and like the larger world and the blockchain ecosystem in its entirety so that's why we we've chosen to start the daw got it but given that you were coming as a validator originally like did the idea come because you were working in the validator space and saw this need there's a link there i mean also felix yes of course one is a validator company so i feel like there's this strong

connection between the validator community and liquid staking what is that for for me uh the start of lidar was like pretty clear i came to work in p2p in february 2020 like 20th february or something like that and the middle of march i did a paper on like the first draft lido okay because like the first thing i did on the job was like to take stock of the uh of people who are walking it and you know in p2p and the setup and infra and stuff like that and the second thing i like written down the most important thing to happen in 2020 and the top one was launch of uh proof of stake on the theme which was pretty clear that in proof of stake it would be like the the most important thing to

happen in 2020 and the proof of stake of it on ethereum is is not great for not operating for professional not operators it doesn't have delegation bake it in yeah so it it's basically either you uh stake yourself or you have like a legal agreement with uh with not operator or you you do a custodial stake in like changes and stuff like that and uh with no native protocol delegation it meant that like some people will stay by themselves uh and some funds and not operators who are close to funds like there is handful of them will get like a lot of stake uh but most people who are not pros will go to

custodial protocols like uh exchanges and stuff like that oh yeah there was a rocket pool protocol in the walk just launched uh a few weeks ago or so and it also didn't work quite well for not operators because it required a significant uh self-stake like significant bond and it was just like not really capital efficiency for a professional operator so people who have a lot of capital really have a lot of uh technical knowledge and vice versa so like we thought and we to ourselves that we have to design a different protocol got it and that actually makes sense it's like liquid staking but because of the ethereum setup the fact that there's a lot of small

stakers 32 eth is what you need to be a stake to be a validator on ethereum but you can't really like add more into that can you like into the individual staked portion like if you're running a node and you're a staker that's how much you're going to put am i right you can start a second node basically again 32. so in in that case it's almost like the problem you're trying to solve here is because of the limitations of the ethereum set up for validation you needed a pooling system and yet liquid staking to me is like a larger topic but let's actually pause that because felix first i want to hear a little bit from you um tell me a little bit so you're from a different organization course one quick disclosure the zero knowledge

validator actually works with course one on a few of the networks that we validate on so i know you more from that context um but do tell us a little bit about your perspective as a validator and what lydo kind of is for a validator and how you're thinking about it yeah that's an interesting question i think as a validator or notepad in a space you originally have like a few parties that you can receive delegation from like let's say in the cosmos ecosystem where this delegate approve of stake exists or in tesos and um traditionally these are the vc funds or maybe like people individually holding their tokens or you do partnerships with let's say a

custodian or something lido i think is a very different concept where essentially now you're getting the delegation from this on-chain protocol and um that may have like completely different ways why they delegate to you or and it's also like yeah a decentralized organization so it is actually a kind of community of different also node operators but also like defy participants and a lot of other players so it's kind of interesting because now i guess it becomes a new avenue for for receiving delegations or receiving stake that you can use to security networks yeah i was thinking it might help like i feel like the audience tends to know this

difference of like proof-of-work proof of stake but maybe we can give a little bit of a brief on proof of state stake networks staking in general what the point is because i do think later on there's some questions that liquid staking brings up that challenges that a bit so let's start there on the concept of proof of stake and staking in general what is the thinking around that how does staking your funds actually secure the network the gist of staking which is not only used in proof of stake protocols consensus protocols but also in in a lot of financial applications in blockchain as well and even on financials and sometimes

like fp is that you put some value on the line and optionally either just lock it or maybe like put it at risk you perform some work and you are getting rewarded for that walk and for locking capital and if you misbehave you can be slashed that's also optional an optional part basically how the staking is incentivized is that you you have these rewards that come back to you um you are locking your funds and the more funds locked that sort of becomes what they call like the security of the network right like the amount the

value that's locked in is how much if you wanted to try a 51 attack or whatever the proof-of-stake percentage attack you need you would need a percentage of that whole total value in order to actually execute it yes you need to control that that amount over here i want to mention this now because i feel like later on when we get into liquid staking it does bring up some questions about that exact thing that security of the network but okay yeah so but let's start with the eath staking i already sort of mentioned this the 32 eth maybe can you give me a bit of a sense since i know that you're deep in this like what is the breakdown of the ethereum staking landscape right now and i feel like it might be different

from other networks where you might have larger whales who will stake all of their tokens from like say one address or two addresses here i guess it's very different so how is the landscape of validators in ethereum looking today the gist of it is like we we don't really know the ethereum doesn't have a delegation protocol so it doesn't have a registry of uh participants so what things we only know for sure is uh uh like basically doxed actors like exchanges and lido and uh some not operators who use specialized contracts and some of them like to reckon uh about the amount of stakes so that's one

thing and the other is like about fifty percent of idiom stick is just like addresses who stick okay and uh for the fifty percent that is that is doxxed like i said 17 and a half is lido okay uh i think about 20 or yeah that's different i saw your i actually saw your talk from eth uh what is it cc and it was like 10 then wasn't it yes whoa so it's grown a lot yeah okay 17 to you guys wild yeah day to day we actually have about 30 percent of weather of new at the stakes go goes to lido uh like on on the months or overage so it continues to grow i think about 20-25 percent exchanges it used to be more this number is uh is

getting lower there are a few uh big custodians and big non-custodials taking provides like stake fish is pretty big and bitcoin's use and i don't know staked yeah state is pretty big as well yes that's true and the rest is like unknown to us uh it's pretty clear that some of some of it is binance there are in in there like in there is this unknown region there are a lot of whales like it's uh you you can say uh see that some some addresses stake a lot right and uh some of them are buying on some of them coinbase some of them are big whales who stick with some not operators that you don't know but it's

basically uh not really known and there is a lot of like single addresses that might or might not be single operators got it quick question on that is like can a single address run multiple nodes like is that what you're kind of seeing when you say that the sort of binance single actor can own multiple address a single address can fund multiple validators i see but it's not like each operator each node is an address of its own right like it's not like um it's not like no validator is not an address it's a public key it has two two kinds of credential a public validation public key and withdrawal public key and one particular address can like have one of those keys for

multiple nodes yeah yeah withdrawals uh withdrawal credentials can be uh you can have multiple variations of the same with real credentials that's what leiden does oh that's interesting yeah i didn't i didn't realize that that was something you could actually see then that's cool do you know what's what's the total value locked already do they know that i think it's about eight or nine millions of feathers so yeah it's 36 billion dollars right now yeah 36 billion vote so it is i guess yeah seven percent of the entire east supply i think maybe it's also worth to say right that it's very low compared to other proof of stake networks where usually the native token will be like yeah above 60 to 80 percent of the token stake and

of course we expect it to grow in ethereum too over time but i guess i mean what's happened now a lot of what we're talking about is each that's been staked before there's a live network with a timeline that can sometimes seem like it's getting pushed back a little bit so i mean these are in a way like some of the more hardcore users and believers because once you lock it you can't unlock it right like this is like it's locked until the future ethereum is launched unless it's liquid unless it's liquid and that's where we can get into liquid staking okay so what is what does liquid staking mean i know the answer but i want you to tell

me uh felix did a whole paper on this in chorus so yeah sure thanks um so i think on the core it's like as as we said earlier you put up some value you lock it up and you receive like rights to perform work in the network that's that's taking in a nutshell now liquid staking or sometimes called like staking derivatives however you want to call it is essentially taking these log tokens and kind of issuing a tokenized representation of tokens that you put up uh for securing the network and then that was tokenized yeah kind of like claim on on the entire stake in in the pool or whatever it is can be

used again in d5 or yeah send around traded and basically allows the stake that has been previously locked up for securing the network to also maybe be used as collateral for other applications so let's say you want to take out a loan against your stake tokens that's basically what liquid staking allows in the decentralized finance ecosystem so when you talk about liquid staking and liquid staking tokens they are actually like newly minted tokens that are put into the market and the they're sort of like ious to what's locked i guess sort of yeah representation of what's looks yeah okay and the thing is like in

the ethereum case given the scenario of like it's locked it's not super clear when they would be unlocked i think this makes a lot of sense but i want to ask if the if the idea of liquid staking actually comes from before the sort of eath to roll out and all that like has this idea and this is actually tyrone i kind of want to throw this a little bit to you but do you know where the origin of the liquid staking idea actually comes from um i think the majority of it that the first time i'd ever heard of it you know of course one thing having been in finance for a while i mean financial concept is pretty obvious um and crypto people love renaming everything so it's like it's like calling a like securitized loan against

a yield bearing asset like liquid staking derivative is like a little bit weird because it's a little closer to just like more like securitized lending but the first place i really had heard of it was from sunny from cosmos and i feel like the cosmos ecosystem you know if we compare all of the proof of stake chains the cosmos ecosystem is extremely good at coming up with all the ideas everyone else implements and gets more adoption on so far other than osmosis could that be because they were also one of the earliest big scale proof-of-stake to actually do it to go live and to like actually you know have something to experiment with you could argue tezos could have done some of this stuff timing-wise

right but they they did not okay and and the cosmos ecosystem their forum posts are are like the bitcoin talk of proof of stake in my mind wow um and there's probably still ideas there that like i haven't rummaged through that could be implemented that haven't been implemented that are like kind of useful but i think the main interesting thing was that the cosmos validators seem to appreciate this point that they like they themselves individually locked up way too much of their net worth into the network and in a bear market that was not ideal for them which because they had other costs and stuff so that was sort of it was a very pragmatic um

rationale for for constructing it i do remember actually that time i mean i also the first person who ever told me about this was sunny in and i remember it was at z con one in croatia 2019 i think it was around june and i had never it like it was like when he said it i was like whoa do you know kind of which group or which part of the ecosystem the cosmos ecosystem really kicked that off so sunny has probably the main technical post i think from 2018 maybe maybe early 2019 that that gives a spec and it gives sort of like the interfaces for what it would look like i suspect if we asked him he would say that it was like verbally him and zaki

at some conference talked about it and then like it eventually got to that spec so it probably was invented a lot earlier but you know through the oral tradition instead of through the written tradition yeah um any time i'd asked arthur from tezus about it he was just like staking drivers terrible going to be like going to ruin our security of our network right and so it was interesting that in cosmos partially i think because of the sovereign chain aspect of things where people maybe wanted to borrow from like one chain that they were validating on to like validate another chain they were more open to it whereas in tezos it seemed to be like almost a persona non-grata type of idea i describe the tattoo like to the general

approach people in cosmos exists are very pragmatic basically uh it's pretty clear that delegation beats up like non-delegates taking and liquid taking beats up delegation as a product it's much better it means it will get adopted and it was pretty clear like the term liquid staking might have been invented in uh in cosmos and might have been mentioned in bitcoin talk maybe i don't know but where it was first implemented i think was exchanges like uh there was a number of proof of stake coins uh that were folks of bitcoin and they were on exchanges and stakeholding changes and people were getting staking rewards and exchanges and that's liquid staking just custodial like not not protocol type custodial type yeah so uh it was pretty

clear back then that liquid staking exists its uh user users love it and there is nothing can be done to stop it from from happening eventually and you can get a good flavor of liquids taken or you can get like a change flare of liquid steak and that's your choice and not like it's going through in all your security just like a prediction right it's not it's not a warning i mean i think the thing is this definitely and this is one of the points i wanted to mention here is this danger of liquid staking and tyrone wrote a paper that i've cited a gazillion times on the show was was it one of the first reports that you were making publicly to roon that's like you had

talked about like this liquid staking or staking derivatives as being very dangerous to the underlying security of a proof-of-stake network yeah i mean it was just more a thing of capturing the trade-off of what happens when you have staking derivatives so you know at the end of the day if you think about what proof-of-stake as the main protocol that's providing you a reward um sort of in some sense naturally needs to be providing validators the highest risk adjusted reward that they could possibly get part of the reason for that is that you want validators to be sticky you want them to kind of not leave the network and stay in the network because if there's this huge fluctuation in the

asset staked then the cost of attack gets really cheap right 33 of x for like a byzantine fault on our algorithm 33 of x still depends on how big x is and if x fluctuates wildly and gets really small then it's like easy to take over totally uh and if we assume validators are rational which i think uh you know since that paper came out i think defy has been a place where stakers are more rational than in for steak partially because people ha it's just like you know i think it's just harder to to kind of reallocate as fast uh but yeah i think the idea is that hey look if you're borrowing against your steak you're sort of synthetically getting you're sort of careless about your full

stake that's validating because you're sort of taking taking this loan against it and you might just be fine defaulting but one thing that was interesting that there's kind of this trade-off like staking god is do lower the security but they're also good at giving smaller validators access to similar returns to as and and similar risk adjusted returns as larger values because larger validators sort of have lower risk adjusted returns right because they they basically have less volatility they're getting more blocks on average okay right their volatility and realize rewards is lower right the smaller your stake you'd admit maybe your exp expectation is to get one percent yield but on if if

i look on a weekly basis i might have gotten point five percent then one point two percent then point six percent dot dot dot like what i'm making up in the number to make it simple right but if you're you're like fifty percent of network you're pretty much getting like very close to the the mean every time right so your your volatility kind of in returns um goes down the higher size you have but with staking derivatives you can actually sort of you know you can kind of get the best of both worlds for small validators and so that's that the paper kind of shows that's the trade-off like you're reducing the security but you're also making it a little bit more fair hmm but wouldn't big validators or validators with a lot of delegation a lot of stake wouldn't they also be able to play the same defy games or the same

like off main validation games with their liquid tokens if there are tons of like alternative yield options for their liquid staking tokens perhaps yeah okay that's that's possible but i i think actually the ultimate example of someone who is really playing in this design space more aggressively than anyone else and and i'm excited to see vasili and felix's face when i say the name is um because om you could view om in a lot of ways as having a lot of similar properties to staking derivatives except they're also doing this like they have this concept of protocol owned liquidity which is actually exactly the same as the thing from that paper

uh which says that you know if you have a proof of stake protocol and the primary market for the amm is owned by the protocol so like the the protocol provides the most liquidity to like a pool or or sort of it's part of consensus that like you know the biggest pool to trade eath for steak d is owned by the the layer one protocol then you actually can make things more safe uh and and om weirdly did this by their crazy ponzi game but but they they have a lot of similarities to staking derivatives it's actually quite quite interesting the silly what do you make of that i don't know if you wanted to respond um not to the om stuff

what what i wanted to to say here is uh there is uh if not for theoretical network for practical aspects of uh validators revenue is that liquid staking protocols can can be much better at distributing stake to not operators and can then then individual stickers because when people delegate they tend to choose like the best not operator they can and that is inherently centralizing like there isn't like a number of operators who are perceived at their best like three four five i don't know and they get like their stake tends to get snow uh snowballed and then then their changes come and like the top 30 or 40

of stake is like 10 lines or something like that uh people don't prioritize the centralizations taken because that's not the interest they want the best operator not like the most decentralized set usually individually they want the centralized set as a as a common good but don't have incentive to to contribute to it generally or if they do it's very weak and get disregarded usually so that's one part of it like liquid syncing protocols can have a better set of not operators than a bunch of individual stakers to the same analysis take and it's cheaper for not operators to get stake from liquid staking protocol

than to get it from delegators because you don't need marketing you don't need pr you need like to be included in the white white list and behave good from the like point of view of the protocol and that's usually cheaper than popularity contests but why i don't understand why it would help with distribution why having liquid staking would you not have to care about how much stake you actually have locked as a validator like don't you still want a lot of delegations and a lot of like your validator to be somewhat like well funded or do you like why would you not care we obviously do care it's just like uh if you if you're looking at liquid

staking as a as an operator it's a very different kind of client like it's a client with a lot of funds that it can uh can delegate to you but the process of getting this funds is not like the usual you don't have to to go to a dinner with the uh like crypto fund uh manager partner or something like that right uh you don't have to to run twitter ads you have to go through the whatever white lists process the protocol requires and instead in case of lidar that's like getting white listed on uh on peer review basically in care at that at the current moment it's not like the end state we want to have online in case of rocket pool that's uh like locking up some capital

and it can be uh easier and cheaper for for a small operator to get decent stake through the for through liquid taking protocol than uh the other way but it's harder to to get more stake through liquidity protocol on the other hand yeah so that that's sort of the question are you talking about sort of a like a pooling type like not the validator itself but the person who's offering the liquid staking i'm just trying to exactly understand actually felix given that you're a validator i don't know if you want to weigh in here on this part of it that interaction like i actually wanted to ask you this but like what is the role of the validator in this liquid staking model and maybe you can explore like what those different roles actually are

yeah i think i mean it goes back to like basically liquid staking as this big client like vasily said right like an aggregator that first gets a lot of stake pooled on their solution and then they distribute it across a bunch of node operators in some different manner and that can all be done programmatically potentially even right you could even just look at performance of the node you can do it like governance based you can say look the lino token lighted out will decide who gets into the set or you have a committee deciding that which is currently what lido does but it's also going to move away from that in the long run but in general you have a more i guess flexible way to distribute stake

and and can diversify more compared to like a single staker that probably will just do like one delegation transaction instead of doing 10 or like really evaluating the validators and i think also it's better than an exchange which might have like you know it's like a corporation that it wants to go to dinner again with the managing partner it wants to sign some contracts so it will have like you know three four partners max or maybe just one that they or maybe even have it in-house and and just have like you know this one validated partner instead of like liquid staking where you can really you don't have a limit like that right you could have like supported 200 node operators lots of smaller i think i understand actually now what you meant about why

this is helpful to smaller validators which is it's this idea that there's this pooling entity that then distributes it out to all sorts of nodes based on their performance not based on these relationships and that's why if there's a good performing node that doesn't have relationships it would potentially get the like a good share of this pooled stake although i guess this this doesn't really like going back to the ethereum example it's not really the case in ethereum is it because in ethereum aren't you still just running these individual 32 eth only nodes like there are you are you looking for performance of these nodes really one thing that was interesting at least providing some historical color on this and

i basically remember being at the eth research conference in february 2020 after the stanford blockchain conference and we're talking about this because i was presenting this that paper and that everyone at the ef or everyone who's doing each research was like oh we're putting in this 32 e thing because like it will guarantee a lot more fairness and i think i i tried to convince people that like hey look people will make a derivative and it won't matter and they'll pull together these things but like for some reason there was this like inherent belief that somehow putting in a hard cap would like

just dissuade the market enough and like have you know help individual validators which has not really i don't know it at least from my perspective that hasn't really seemed to be true i know what you guys think about that like their hypothesis i'm having about the good staking uh or about stake in idiom why it was just like ended up designed like like a dub design is that it was like heavily optimized to having a honest minority which kinda like makes sense when you remove delegation from the protocol and makes it fairly easy to get into body data set

like 32 it is no joke it's it's a lot of money but it's like much less than you need to have stake uh to get into a validator set of like cosmos for example or solano or something like it's less staked you need to be in the data set of uh of the protocol it means that like people who are naturally uh want to run an old like ethereum affectionate and enthusiasts and stuff like that they get an option and we have more individual honest minority stakes than would have got like the other way for all other kinds of staking standardization it's much worse like it's it's very clear that like the design of ethereum's taking like this

was along with the launch and uh the locking up liquidity and stuff like that it's just like a a way to to give exchanges head start basically i i totally agree with this i think in general even like normal delegation kind of the way it's implemented in cosmos where you have the 21-day lock-up period is also giving like benefits to exchanges where you can still have the token on the exchange and trade it there and it might be staked at the same time so yeah liquid staking basically just levels the playing field a little bit between non-custodial solutions and custodial solutions which is why it's so important um i want to understand a little bit

which liquid staking ecosystem is the most developed so far like even if there was and i think actually there are there is liquid atoms there's i've seen sort of liquid almost everything as erc20s but which network which staking network would you say is the most developed in terms of liquid staking do we have an example of and maybe it's ethereum to be honest maybe it's lido's ethereum staking but i'm just curious like do we have any data on like what this does and how people actually behave once there's this liquid token in terms of adoption it's definitely glider plus plus a theorem okay it's it's the biggest liquid staking token

like by by value on one hand on the other hand it's much much better integrated uh like there are a lot of d5 like a number of d5 protocols that allows take this collateral as a trading uh and stuff like that and there is some uh like it's not very big but some substantial trading against uh state and vice versa and people are using make doll and stuff like that i think that terrace billuna is pretty critical second and solana is probably the third uh in terms of adoption but maybe it's like vice versa because there are there is like just more value and uh more holders probably and uh

didn't check and like more history but on solana there are much more like a lot of protocols that allow the kids taking coins yeah i think the the interesting thing is in tara's case it seems to be really focused on increasing usc adoption more than it is about like borrowing against luna and using it in d5 i mean there there are things you can use anchor for but like not that many in ethereum it's it had there's the most integration so you could like use state death in a bunch of different d5 protocols which i think is is unique in the sense that i don't think the other staking derivatives on other chains have really i mean obviously in cosmos the

only one that has anything that you could earn yield on is osmo but in solana the interesting thing is it's a weirdly competitive market which we haven't seen per se i guess cosmos has two now right there's like pea steak plus there's yeah the the osmo liquid sticking um but i think in solana there's it's like a way more wide-open race of like a bunch of different staking derivatives there's lido there's marinade there was uh something else that is ocean or something it'll be interesting to see how the dynamics work when you compare like eth where it's very clear there's like a dominant um derivative that might be hard to unseat in a lot of ways

versus anchor where it's like there could be another one but like and to be honest there's no defy on luna luna's really focused for the most part like it's much more focused on like getting people to use ust and then there's solana where it's like the wild west where we're gonna see kind of like the the like cowboy wars of staking derivatives if i were to describe that that way yeah maybe one thing on that right is that also on solana it's actively kind of encouraged this idea of steak pools by the solana foundation and kind of a lot of the ecosystem members that there is some open source program essentially you can use to deploy your own liquid staking solution more or less of course lido is also open source so you could just fork

that but there is i guess more of a encouragement to use liquid staking at the same time i think just in terms of adoption of it in practice it's very far behind from from ethereum right like the percentage of stake that is staked through liquid staking solutions on solana is well below one percent or something i actually didn't look it up but it's compared to the 17 on ethereum like just lido right it's it's very far from that and it remains to be seen how that will change i guess the d5 ecosystem everything on sonata is very early still so i am really curious to hear what the difference will be too from like lido on an ethereum just the way it's built the fact that there isn't this way to delegate so this is the form this is you

delegating in a way you delegate either through an exchange you delegate through this but in the case of these proof-of-stake networks where there is delegation um i feel like that's just gonna be fantastically interesting or that's gonna be very interesting to just watch happen do you see any clues as to what you think might happen in terms of that like are people gonna switch their delegations away from vanilla validators more to these staking pools is there a benefit for them to do that even if they're like large holders it's going to happen why it's going to happen because it's already happening okay uh if you only count protocol in

protocol it's taken on terra for example 20 percent of all staking is in beluna because there there is something you can do with billuna you can like uh lock it for yield and anchor and uh then lock like aust for yield and like the whole defy putting up a lot of smart contract risk for for a better field uh so 20 already like it launched in uh less than a year ago okay um if we count in all forms of liquid staking then like there are like in polygon binance has 30 percent which is a form of liquid staking and in cosmos exchanges collected they have about i think about 20 15 20 that it used to be 25 it's less now i

think so liquid sticking there it's it's not a question if people will use liquid staking it's like a question of when more likely and when is when there are options for them to use it and that's don't if i build this mostly how much is the staked token worth versus the main sort of original token is there a difference between those two values or is it meant to match one to one it's how you design it basically the users really love when it's one-to-one yeah because because simply to think yeah uh the liquid staking should be simple that's that's how people are going to use it otherwise they won't that's why people who are making like

complex non-fundable liquids taking tokens so like two token system or something like that it's something that this will not get adoption because people don't understand it at all technical limitations uh forces basically to deploy right now with uh like it's taking token that appreciate in time with taking rewards in terms of like underlying uh stake tokens so like they should be growing a value a bit uh but in times of like fire sales and like some price turbulence and something like that the liquid taking token can can cost less because they're primarily liquidity for the native token steel on centralized exchanges with native token pass and people who want to exit into like into

usd they have to go through the native token and sell liquid token to get native token and not wait and kill and staking happens so like there can be some kind of flash crash in terms of templates but generally it tracks pretty close to one to one is there not some concern then that this will just be like a centralizing force i mean i i think you've already mentioned the exchanges as like they're basically they are centralized and they're now acting as in a way a staking derivative way very easy easy ux that would be like a centralizing force i think we've always heard that about pos systems and the fear that you know all the exchanges would basically be running the top validators especially if they're

offering staking derivatives that are competitive then they very much could but do you also feel from where you're sitting as lido like would that also potentially be a centralizing action if more people were to use lido staking because they get this liquid staking token out of it which is super nice and cool one to one if you can do that that's awesome so like wouldn't it just sort of take over away from the original protocol could it be that it sort of centralizes it around this pool only and i realized that light always built this in a decentralized manner potentially to counter this but yeah i'm just curious what you see there what would you say if like could it be a centralizing entity somehow

you know of course it could it's very hard to design a liquid-staking solution that is not centralizing like that's basically why i'm working on lido what i think that we don't get to select uh if liquid staking wins or not in terms of like amount of second has uh what we get to select is basically the flavor of liquid staking and i think that like glider in this final form is the best possible solution that can actually win so there are like some some solutions that are like kind of stable in uh when they have like the majority of stake but can't get it to this point but because they are not competing against exchanges other executive protocols and there are like liquids taken that

can't get off at all and lidar i think is like something that can actually grow into being a leading force and be good in this role like be good for the ecosystems that it runs in let's talk a little bit about its decentralization or like the like how you're structured like maybe just to understand how it's actually different from these more centralized bodies the current structure of lido is there is a governance on ethereum it's a token voting governance pretty standard like using argon for functions and their main voting actors are founders of the the people who weren't like in founding

a set of flight or uh they're not operators the holders to the uh threshold key we used to launch and a few early investors and a few late investors and like stuff like this they currently have basically full control of the protocol because it's fully upgradable the reason it's fully upgradeable is because like the ethereum beacon chain spec and merge spec are fully upgradeable and can change at any time and there is like we we have to uh to have a flexible protocol but that's not the end state one one other important thing that this right now look in the slide or not in a way that uh we wanted to work in final form is another operator selection

process which is basically right now white listing they're not operators using peer review process like we've got a lot of good note operators that can rate each other and read new comments to to get in i i don't like either of these like i don't like that uh lidar is full upgradable that that is not great and i don't like the periodic list process because uh it works in a pinch like it gets us a good note operator set but it prevents people uh from joining like it only allows for uh growing value data sets from already proven not operators which which prevents fresh blood from coming in which is not great so the the path for like for for being great for us is to

occupy as much protocol as you can to have it non-upgradable to have it like classified and like basically as solid as the ethereum specs itself like as safe to use and to invent a new way to deceive a stake that is like less white listing which is not a simple thing to do can you imagine someone just like forking lido on ethereum and just doing or on any of these networks and just like building a new brand would you want that like they could also have a different means of onboarding new node operators it would be a different set of people i think one thing to remember with both layer twos and with staking derivatives

uh of this form is that there's a lot of off chain logic that you would have to replicate that is you know not trivial to do right like yes the the smart contracts that are public are there but each validators like development devops setup they're sort of like key management setup all of that stuff is actually effectively proprietary to an individual validator and that is the hard part to actually build in a lot of ways the kind of core contracts are much easier in the same way that's for layer two the layer two smart contract that's validating the remote chain okay fine anyone can fork that but and yes that anyone can run the the validators but you actually have to like

get people to be able to run the layer two validator correctly in the same way you have to get people to run all the pool logic together so there's a lot of off chain logic that i would say is a bit of a moat that you shouldn't discount it's very hard to forklido it's it's not trivial uh for one like it's uh it it's hard to even like discounting all the off-chain stuff it's pretty uh hard to operate that that's one thing the other thing is uh lido is not it's final form so lighter right now is is like mean that you you will have to maintain and develop it and there is like not much team that can actually do this

so forking it right now is uh like taking up a lot of responsibility uh which it's it's not uniform basically finally liquid staking is is like i said it's it's working like in the heart of the security of the network and there is a lot of trust in it the trust and the brand and and stuff like that like you you can fork uh the code you can't you can't the the good work basically when you felix when you guys did or and i don't know if you've done or if it's still happening sort of this like deployment on solana were using anything like the same or was it actually something that needed to be kind of created from scratch because it's like a different system did

you have to rewrite everything yeah it's basically completely like tailored towards solana and how staking works there but okay of course a lot of the principles remain the same so essentially this governance onboarding of node operators we use a similar structure that lido already has on ethereum so we i guess lighter though it developed that uh for ethereum and and it's kind of being used for the other networks too for now and then i think there is like work happening especially on ethereum towards yeah changing that to a model that's maybe more uh kind of less whitelist yes especially said and i think that would then

or i mean that's how i imagine it like kind of be adopted by the other protocols on other chains like i guess that's not really clear how that will look but over time um some something along the lines of that i would imagine does the operator itself earn something and if so how on ethereum i guess there is the lidar fee that's ten percent five percent goes to validators and five percent goes back to the dow treasury so the ethereum operators don't really earn directly something i guess they have their ldo token which is the incentive and uh on solana or on these other networks essentially what happened is there is basically yeah some governance proposals that that pass that essentially give a revenue share of that fee so like one

percent goes to the just maintainers of the code and there is like some ldo token also okay there are two people working on lido directly and get data get getting paid for that's uh jacob who is our biz dev and isidoros who is our master for the datas so the at least part of the operators are getting paid directly by the doll so i think that model will be adopted later for all the operators but we'll have to see i have a question about l2s and staking derivatives and i don't know if this even interacts with one another if a lot of transactions are also going into like in and out of l2s does this

have any impact can you imagine it's actually staking derivatives also moving like are they are we talking like you're validating your tokens you get a staking derivative you then take your staking derivative you move it to an l2 you then lock it like i'm just trying to imagine how far away you're going to get from this original asset when with l2s on maybe ethereum to start and as does this factor into your thinking does it actually matter to you guys how it's used after the only thing that matters that has to happen on the l1 is basically staking related operations the staking the withdrawals uh maybe some compounding and stuff like that

everything else can be can happen on layer 2 and it's probably where we the situation we end up in because i think that running operations on layer 1 will be very expensive in like in the next years so we'll have to move voting to later we'll have to move the mint in the burning the transfers and stuff like that last two and trading will move there naturally and including trading derivatives so i'm pretty sure that like uh with the idioms layer to future a lot of uh what current lido currently does in on layer 1 will move to layer 2 but it's like not really clear uh what's the

selling point right now i see and also i guess it's like but going back to that idea of the liquid tokens do you worry does it matter like would it matter to your model to map what happens to them once they go onto l2 or do you feel like that's kind of removed from the staking derivative creator's responsibility it it doesn't matter for like for the security and like for the general structure but it doesn't matter for like business development perspective uh so it's it's a very very clear challenge to have uh liquid sticking adopted on layers cool uh i i think one thing that might be worth mentioning is that the security model will change with

layer twos in some ways uh in that you know layer two validators and operators have to oftentimes have to post a bond on layer one and there will be a question of whether they should be allowed to borrow against that in the same way that layer one validators are borrowing against their stake and so there's likely going to be this weird impact of the fact that it's very likely that there will be some validator who's validating layer 1 and also validating layer 2 and they also want to borrow from both of those which can lead to some weird incentive issues but i just want to point out that i don't think the story is uh quite told there yet yeah we need to actually have layer twos

where the bonding is working in production first before i'm very uh before i think people care yeah um all of them that actually work have like a lot of centralized scratches right now so it's really not clear how it ends up yeah i i mean for instance i how do you view these kind of like data availability committee things like starkware like evolving will they always be this kind of tiny threshold multi-sig that's like five people controlling all the data or it will actually you know scale i don't have a good answer for that i think like the like the sampling that you're walking on and uh

celestia is working on is like very promising that regard but we'll have to see five five companies multic is very effective hard to be dead of course of course of course of course uh but it is it is weird when you know if i look at dydx yeah uh there's like you know how many billions of dollars of volume a day that's going through the five-person multi-sig implicitly yeah like you you have to like start doing those calculations too yeah yeah that promise that they will do no movie that's pretty fun yeah yeah there's a lot there's always this type i'm just pointing out that you know the the story is certainly very far from done for layer twos and derivatives

uh but i think people just don't care enough and frankly we have to see some of the layer two collateral models actually like running in production you know before i'm a believer and like it's worth trying to figure out how to do derivatives there have been some like unusual or new kind of proposals and i wonder if we could talk i don't know if you have thoughts on this i think i'm going to say this right i think it was the super fluid staking is that what it was the osmosis at the recent cosmo verse sunny kind of gave a talk about this very different idea around the staking liquid staking to the validator the

actual like original token yeah do felix i don't know or maybe one of you can you explain what that was and what your thoughts are on that yeah i can try but i'm sure vasily will have some better insights afterwards so i guess the core idea of super fluid staking as i understand it is instead of like first putting like staking first and then putting the liquid staking token into the amm and having like pairs with that you are essentially putting the stake still first as a lp and then while you lp on osmo it's using ibc and interchain accounts to kind of still stake those tokens that are in the lp pool

on the respective chain uh in proof of stake so essentially the lp can still decide who he's taking with and um as opposed to the liquid staking token where you're kind of at mercy of the liquid staking pool now whatever is better there i guess it works for the specific use case of liquidity provisioning and still staking but of course you now how do you build borrowing on top of this and um yeah i guess it's just a very different model very cool definitely and i was super interested in it and i guess also like a showcase of what is possible with ibc is specifically right so yeah that's what i was wondering if it's like if this is so specific to ibc because of

the way that those movements are gonna happen i don't think that's actually true uh so like in luna you can do the same thing they just don't happen to do it that way because they want anchor to be separate um but any uh consensus protocol that has an amm as a part of its consensus rules can actually provide this like penumbra will have this in theory like cello and tara could ha could could implement this if they wanted but i mean the base idea is is kind of the the security model actually like this this design is actually closer to the security model of the the paper i wrote which is basically that if consensus controls the amm the biggest amm pool then you can

stake the amm pool to get a you know like let's say i'm sticking osmo atom right and it's a 50 50 pool then i can stake that liquidity in the protocol get 50 of the block rewards plus the fees right so i'm trading off the fact that i could sell all the atoms and buy more osmo and get the full block reward or i could stake the liquidity share and get fees from trading plus half of the staking rule and the idea is by doing both of those you ensure that the consensus protocol controls the dom is the dominant source of liquidity for that asset right that's why all the osmo is on their own chain right now and that for security reasons that's important but one thing i do want to

point out again sorry not to be annoying this is exactly what ohm does and like i i started trying to write out some math for a lot of like okay ohm's language is like literally just a like it's impossible to to follow their like incantations and magical like whatever devices but if you squint enough it's like actually a much more reasonable system than i thought i mean the fact that you know if you look on ethereum and avalanche and you look at the most cloned contracts the top three most forked contracts are uniswap um v2 the synthetics minter contract which is

to give lp rewards and the third is ohm and there's a reason it's so lindy it's actually like a it is a mechanism it's just that like the own paper itself is like written in a way that does not give you any you know you shouldn't feel that comfortable from the way it's written but uh osmo and om have a very similar super fluid staking and om are are extremely similar that that was the main thing to remember is that like in defy and invalidation you kind of see these things get built in parallel which is a a funny funny little thing i think towards felix's point about hey how do you do lending if the consensus protocol is locking up i think you effectively then have to just do like a staked like an st type of

model where you can borrow against the portfolio of the amm pool plus the block rewards but you have to have some function which lets the borrowers against the lp shares be like weighted differently than the borrowers against the full stake sorry uh yeah not not i'm not trying to advertise also a paper about that all right we'll try to add that to the show notes i i feel a paper about homecoming there there there is there's definitely yeah oh om is coming soon that that's the alpha leak i i just like was way more impressed once i read their code base also like i i think they they didn't they didn't realize that they're doing a lot of stuff people are doing in staking land like like sunny should sunny and

the um and om zeus should like talk to each other uh the thing is superfluid is basically getting a liquid staking derivative then like it's it's it's a parallel like the same product as getting liquid second derivative and then forcing you to lock it into to a pair or an mm pair in returns for some juicy uh staking rewards like extra on this which is reducing your optionality you can only use this take liquids taking derivative for one thing you can like only put an ammo but in return you get impermanent loss uh it's not important unless i know like everyone calls this and uh a bit of stake rewards yeah so so so you get some

like some portfolio risk and uh stick uh some extras taking rewards this works as long as like this is superior to just general liquids taking as long as there is reward the risk of just reward on this mm pair is better than you can get elsewhere which absolutely true for osmosis right now like there is no yield to get in cosmos ecosystem except osmosis so like super fluid staking is is the way to go that's the best way to get to get yield on liquid staking and you don't mind losing the optionality because you have you have zero optionality actually you can only like not stake or stake in superfluid and the soup fluid get gets you better yield and that's that's your optionality

as soon as you get more optionality and or sticking rewards are not that good like for example you you might want to lock this staked osmosis in whatever i don't know mass protocol with extras taking rewards on terror extra votes on terror that means that superfluid might be not the best choice we have because uh you'll refuse one option to get the other and the superhero the superiority of this liquid-taking solution is like is in question uh if taking rewards on triple fluid gets down it's also in question and if someone like tyron said uh someone builds liquid staking on top of superfluid it's also in question because then you can get extra yield on top of that yield and like blah blah blah so

i don't think the superfluit will be like a long-term thing cool thank you all for coming on the show thank you versus thank you felix thanks again tyrone for co-hosting um yeah thanks for giving us this journey from sort of the highest level proof of work proof of stake validators all the way down into this the details of liquid staking and what it means thank you thank you for the questions thanks for having us and i want to say thank you to the podcast editor henrik the podcast producer tanya and to our listeners thanks for listening [Music]