Ethereum's Staking Debate: Decentralization vs. Security vs. Yield | Hasu & Vasiliy

Transcript

I think you could argue, I mean, some people are basically painting the scenario where re-staking would get this massive kind of extra yield coming in uh for validators. Uh when I don't really see it at all. I think it's actually very hard to come up with useful things that validator can do that would be like widely accepted and like create so much value that they have an impact on on the yield uh of such a big network. We've teamed up with the Wormhole Foundation, stewards of the Wormhole protocol, the leading interoperability platform powering cross-chain transfers for 200-plus multi-chain teams. Claim your unique Wormhole NFT just for Zero X Research listeners today. Pair is an innovative pair trading exchange built on top of Symbiotic. Users can trade

trending narratives with one click from blue chip narratives such as long BTC, short ETH, right to the with versus bond. The hat stays on. Symbiotic's intent-centric architecture enables deep liquidity sourced off-chain and brought on-chain, and combined with Pair has democratized access to complex trading strategies typically reserved for institutional traders. Marinade is a staking protocol on Solana and the only stake pool that delivers auto rebalancing, MEV rewards, and automatic downside protection with new protected staking rewards. Optimize your SOL stake with Marinade by hitting the link below.

Avalanche is a smart contract platform that has a novel consensus protocol, subnet infrastructure, and the Hyper SDK toolkit, which allows web 3 developers to easily launch custom, powerful blockchain solutions. You can start building today by checking out the link Before we get into today's episode, just a quick disclaimer. The views expressed on this podcast by either myself or any guest are their personal views and do not represent the views of any associated organization. Nothing in this episode should be construed or relied upon as financial, technical, tax, legal, or other advice. All right, let's jump into the episode. What's up everyone and welcome back to another episode of Zero X Research. Today we're joined by Hasu, who's the strategy lead at Flashbots, as well as being an

advisor to the Lido DAO, and Vasily, co-founder of Lido. Today is Thursday, May 9th, but this episode should go live next week on Thursday, May 9th 16th. As a reminder, you can use code 0x research 10 for 10% off your Blockworks research subscription. Let's get to it. Um Hassan and Vasily, thank you for joining us. How are you guys doing? Um we we're good, thank you. We are like it's uh nice spring weather out there, so. Yeah, agree. Can't wait to get back outside. And by the way, I'm a big fan of the podcast.

Happy to hear. I'm a big fan of Uncommon Course, so likewise. Um before we get started, do you guys want to give an overview of like what ETH issuance is, how it works, and what are some concerns surrounding it recently? Uh okay, I I I can start at least, like um Uh so, since the merge happened, um the uh only source of ether issuance is in form of staking rewards on beacon chain. Uh so, when uh ether stakers stake their ether, and then not operator uh runs a node, and like they provide the services to service to uh the Ethereum

network they attest the blocks, and they propose the blocks, they uh can provide some information on slashings uh happening, and they get a reward for it. Um this reward is like pretty small. Uh ether issuance is pretty low. Uh right now, you uh uh if you frequent crypto Twitter, you might have seen the uh ultrasound uh memes. Uh but, the gist is like it's pretty low issuance rate at this point, lower than Bitcoin, lower than uh most other um uh crypto tokens that uh have proof-of-stake or proof-of-work mechanics.

Uh that is basically the only source of new ether coming in the system right now. Perfect. And how has staked ETH dynamics have changed quite significantly since the merge? How does that affect issuance? Um, what are some implications that it has on the issuance curve? I don't think that staking dynamics has changed significantly. Like the dynamics are more or less like they the stake growth continues. It kind of slows down sometimes then picks up at times depending on the a lot of things honestly. The like current state of the market, the

additional source of uh, um, uh, rewards on your stake that etc. etc. And it just like slowly creeps up. Uh, currently it's about like slightly less than 30% of ether staked. Uh, and it continues to grow slowly. Uh, the current like right now drivers of stake growth are you can see it in the dashboard. There are a lot of them. Uh, like most of it for the few for quite a few months right now is restaking driven. Like people farm the points and like airdrops and

uh for uh, future restaking protocol and like current restaking protocol protocols and uh uh most of the stake that coming in right now is like focused on restaking. Uh, I think in the the there is still some some demand that is like mostly unchanged coming from people who just want to stake. Um, and I think there is taking demand will like go down a bit and just plain staking go up a bit. Uh, Mhm, with the um, uh, the when they're like there is slowly uh um

creeping up the amount of other institutional stake. Um, institutional will probably mostly select the boring and uh, safe ways to stake. Got it. Um, I'm curious so you mentioned ETH currently has I think a little less than 30% uh, stake rate at the moment and you mentioned you think restaking has been a a huge driver in that number ticking up currently. I'm curious going from here as you look at other proof of stake networks like Solana I think has over 85% stake rate, Cosmos over 60%. Do you think Ethereum eventually gets to that end state? And I guess if so like if you see the the stake rate of ETH growing,

what do you think is going to be the main drivers of those going forward? Yeah, uh, so this is a very packed question. Ethereum is uh, one like there are on one hand like in general what are the end games for staking? Like there I think at least two maybe more. Um, this is where where the like any networks can end up in regards to staking. And there is also uh, like path dependence for some some some kind. Uh, Ethereum is unlike uh, every other proof of stake network uh, in uh, the fact that how it came to be uh, a proof of stake network basically.

I'll start with the second part. Uh, ether uh, was mostly distributed uh, when proof of stake uh, came into into being. Uh, before where when beacon chain launched and then when merge happened, uh most of ADA was already uh distributed. Uh almost all of it, and it had been for years. So, uh unlike most proof-of-stake networks of uh late that like launch with staking enabled, and there is basically nothing to do with the token but stake, ADA is very different. It's like super financialized. There are a lot of uh economy built around ADA. Uh it's great collateral. It's great uh you

need to hold collateral. It's great like something that uh store of value or something that you can just hold for um uh for for a time. And there also was a lot of risk uh coming with staking in the uh uh like in the first years. Uh basically, we didn't know when the unstaking would be possible. Uh if proof-of-stake uh would like it was almost sure that proof-of-stake would happen uh and continue to uh happen for ADA, but there were people who were saying like proof-of-work is the best and like this is a fad and this will uh be rolled back. Um so, uh

it started at almost 0% of ADA staked, and then it clo- slowly like uh grew up to uh current 27, and uh speed of growth is like is not super fast. This is also uh in part due to technical limitations. Uh The um uh uh deposit queue uh can um become longer and like prevent people from staking when they don't want their ADA to be stuck for 2 months doing nothing. Uh so, this is unlike uh networks like Solana or Cosmos or Tezos or um uh like any other that like when they

launch there you can basically like transfer and stake, and there are two things that you can do in the way that I do. On other you could have done like a lot of things before you could stake and they they were in competition for for a long time. Um Yeah, and in terms of end game, um my personal theory here is like basically you can uh uh select many uh directions as a community like um that can select many and um many directions and there are like trade-off between them.

Um for example, there is a pretty like most of the stake network they select as an end game the state where most of token is staked. Uh this has its um um um benefits that it it's a pretty strong end game for for staking and pretty strong state. It's an equilibrium so like when it's 60% staked it's staked way uh unless um the network will change a lot. And it makes sure that the uh people who do the duties uh that um they have to do when stake like for example propose blocks, maintain

validators. Um maintain network liveness and and safety they are like mostly super aligned with your token holders. They are the same people when they like materially intersect. Um you can just kind of uh uh um draw the understanding then when uh the stakers do something to screw up the network, they do something to screw up their holdings basically.

Uh and these people materially intersect so uh a lot of security in proof of stake comes not from uh, their staking mechanism and not from uh, like slashing. Solana doesn't have slashing for example Avalanche, but these networks are like pretty secure in practice and like have been running for for a long time um, without uh, uh, um, like non-technical issues basically. Um, but from the fact that your stakers, your block producers, your validators, your like network network participants are aligned with the token holders and uh, um, this works for a network in a in a

good way uh, uh, and then there is a like end game that um, um, uh, Casper and Anders from the Ethereum Foundation and some other folks are uh, uh, proposing that is basically a minority of ether becoming in stake with the uh, that stakers are services provider to the larger community of ether holders and ether holders are the primary uh, uh, like they are bigger and larger and more powerful than stakers and stakers are just like a subset of them that is pretty small and pretty weak in political sense.

Um, I don't think that anyone has actually tried that. Um, I I can't remember a network that works like that honestly. Um, I think it's also a um, uh, a setup that makes sense uh, in some way. Um, but I think that it makes uh, uh, like when when you separate and uh, pit against each other holders and stakers, you get like a not very stable situation unless they are constantly like politically uh interlocked and like uh, uh clash all the time.

Um because like uh in uh imagine the more and most extreme case of this. Like for example, like 0.1% of other stake. Uh if uh that happens, then most block producers and attestors um are uh the the most uh revenue they get is from MEV in this case. And that means they are like uh very motivated to extract their MEV revenue and like very unmotivated to um um work with the network uh on network's goals.

At 25% it's not as pronounced, um but it's more pronounced than that like at 50%. This is a spectrum and uh at large percent staked, you mostly have uh stakers and holders aligned a lot. And at low percent, you mostly have them like pitted against each other. Um so yeah, that's how I see it. There's uh I mean, there's very little actually to add. I think this was a very good explanation, Vasily.

Um I think one thing that I'd highlight is between the two scenarios, you kind of choosing uh Well, let me put it a different way. There's kind of multiple like frameworks to look uh through on this problem. And one is it's a kind of choose your principal agent problem that you prefer. Right? So, in the one case where you have very little stake, then you basically have uh you know, the agents, the the the stakers doing something on behalf of you know, the principal which is the ETH holders, and um the the overlap between the two is very small.

And so, the principal agent problem is very strong. Um but on the other side, uh, you may have a principal agent problem when there's a lot at stake, uh, for example, between the biggest liquid staking provider. Um, and uh, the ether holders are kind of the the network at large, right? So, you basically get like different forms of delegation and different ways to constrain them. And I think it's been generally my view that the the principal agent problem between, uh, a decentralized staking protocol or, um, and stakers is more manageable through investment in decentralization and decentralized governance, and so on, than um

uh, in the kind of the the low percentage stake world. And the second, I think, and really just kind of to restate what Vassily said is is this, uh, you know, idea of of competition, right? So, uh, if you kind of model this very extreme scenario, then the competition, uh, the the competition and the competitive pressure, uh, for the different validators is super high. And what this means is either they, you know, as Vassily was saying, yeah, they they compete, for example, on extracting malicious forms of MEV that are uh, basically currently like out of bounds, uh, for operators.

Um, or even more simply, you just compete on price, right? And so, you might say, uh, who's the cheapest uh, provider of staking? It's always someone who runs all the validators on a single centralized machine, uh, aka Coinbase. And so, you can say, "Hey, we want 1% uh, if if you want 1% of um, of Ethereum staked, then I can give you a near 100% guarantee that the only party staking will be Coinbase." And so, that has implications on the network in terms of, you know, alignment again between these parties.

Uh, it has implications on the regulatory fragility of the network around censorship resistance and so on. And so, I would definitely agree there's like no you know, there's no easy answers here, but I think this idea of this kind of you know, taking these these ideas to their kind of logical conclusions uh by you know, just like really kind of tuning up the lever and like you know, making kind of a very extreme version of it, I think you can see what they are trending towards. Wormhole is the leading interoperability platform for multi-chain bridges and

applications. With over 1 billion messages sent and 40 billion in value transferred, Wormhole leads the industry in cross-chain message volume and total value transferred. If you're a builder, Wormhole has an extensive suite of tools and infrastructure to securely build multi-chain applications. You can use Wormhole to power DeFi, NFTs, governance, and so much more. And Wormhole supports over 30 blockchains and six different runtimes. Claim your unique Wormhole NFT just for Zero X Research listeners today. Fill out the form, prove that you've listened to today's episode to receive a Wormhole app, and you'll get an email over the coming weeks to claim your limited edition NFT. Pair is an innovative pair trading exchange built on top of Symbiotic. Users can trade trending narratives with one click from blue-chip

narratives such as long BTC, short ETH, right to the WIF versus BONK. The hat stays on. Symbiotic's intent-centric architecture enables deep liquidity sourced off-chain and broad on-chain. And combined with Pair, has the market-size access to complex trading strategies typically reserved for institutional traders. Marinade is optimized Solana staking. Stake natively or liquid stake with Marinade and get the same high-performance delegation strategy that thousands are using today. Stake your SOL to over 100 of the best Solana validators. The delegation strategy is a first of its kind and only possible on Solana. It delegates your soul to the network's best validators with no smart contract risk. In addition, Marinade has just built a new and improved delegation strategy that

delivers maximum performance with auto rebalancing, MEV rewards, and automatic downside protection with new protected staking rewards. And this allows for maximum decentralization for Solana, too. Optimize your SOL staking today with Marinade by hitting the link below. The age of interoperability is here. With the launch of Teleporter, Avalanche becomes a seamlessly linked network of many sovereign blockchains that communicate so smoothly, they feel like a single chain. Teleporter is an EVM-compatible cross-chain communication protocol built on top of Avalanche Core Messaging. It allows any EVM chain on Avalanche to send messages, assets, and data to one another in a simple, fast, affordable, and secure way. Teleporter and Avalanche Core Messaging provide a

new foundation for how Avalanche blockchains can communicate and how developers can easily build cross-chain applications out of the box. Build anything you want, any way you want, on the eco-friendly blockchain designed for Web3 dApps. Check it out by clicking the link below. Before we get to talking a bit more about the issuance, I kind of wanted to ask a question about Coinbase ETH as well as well and how it relates to Lido. I um as far as I understand, like, what are the biggest frictions for um as far as I understand, there's kind of this institutional demand for Coinbase uh staking through Coinbase. Um and I'm kind of wondering what are the big frictions for Lido and like serving staked ETH um to institutions.

Um I'm not the like personal point for this uh for for Lido. Uh so, they should delete second half account here. Um but my understanding here is for uh like institutions are different, uh but when we are not talking about digital institutions, basically, uh that are like slowly uh the the uh like more conservative one that are slowly trickling in in the like crypto in Bitcoin in uh so then like Ethereum etc. etc.

Um they are pretty conservative. Uh so uh their main goal is not to earn more, but like to um uh screw up less, basically. Um uh so it's mostly about uh safety from technical perspective, from uh regulatory perspective, from uh from market perspective, etc., etc. Uh so they want um when when they have an asset, they want it to be liquid, they want it to be safe, and they want it to be uh regulatory safe as well.

Um Um That makes uh um uh like work to uh present other staking to institutions like like multi-pros approach when you need to make your product safe, you need to make your product uh or your protocol or like if we're talking about Lido DAO, uh safe, and you need to figure out um uh uh the regulatory side, and you need to figure out the like informational security stuff like that, and you need to explain it to like people who

uh might be using your product or protocol. So uh these are the challenges. Um um Some players like Coinbase have a leg up on this because they have the muscle to uh to do it, and they uh uh, have like a huge follow decks of people uh, who they can explain the product to and stuff like that. Um, but uh, there is always something you can do to differentiate. Like for example, Coinbase has charged huge fees.

Uh, so uh, um, that's basically it. Like three pillars of institutional grade product is safety, liquidity, and like regulatory compliance. That's three things that have to happen. Perfect. Um, maybe this one is a bit more directed to Hassu, but how how do you feel um, if ETFs will or if they come, how do you think they'll change uh, the dynamics of ETH staking or just in general like how Ethereum is, let's say over the next couple years?

Mhm. Yeah, I've been under the uh, impression that um, yeah, in general if ETFs will have a pretty big impact on on staking. Uh, I think ETF buyers in general are like very indiscriminate buyers. Uh, they don't really care like how much yield there is. I think they just want, you know, the yield to be staked and so doesn't matter really how how high the yield is. I think they they would stake it. Um, I think also like in the past people used to think there would be ETH ETFs and staked ETH ETFs. I don't believe that to be the case at all. I I think there would only be ETH ETFs and they would stake, period. Why? Because um,

ETFs compete amongst themselves, uh, you know, on the total expense ratio. Um, and uh, I mean even for physically backed ETFs you can see that I mean they're effectively lending out uh, also as much of their uh, assets as possible um, to kind of generate some extra yield on them. So this this type of rehypothecation on inside ETFs is is kind of very normal, right? And so I think you will see this you know, a lot of stake coming in from from ETFs.

And I think what's very important to ask is like what kind of provider will these ETFs use, right? So in many ways ETF is kind of the most regulated entity you can have next to maybe an endowment. And then it is basically you know, definitely not this kind of digital institution that Vasily was talking about, but it's more the kind of ultra conservative one. Where they they do want the yield, but they also have to take like extreme precautions to make it safe and and liquid and kind of especially like very regulatory compliant.

And that's why I I think that the you know, ETFs are very big threat to Ethereum in that sense because it's basically the promise of a lot of stake coming in and that stake selecting almost the most conservative provider. And yeah, it can I think basically shake up what the staking landscape looks like and this is a big motivation why last year we created this the the kind of goals for Lido DAO strategy proposal that was ratified and a big part of that was to focus on this institutional opportunity.

Because we we thought that there's a significant amount of money lined up to come to ETFs and also if if if no decentralized staking pool gets into the position to serve this market and kind of also fights you know, for first place here, then you know, it's basically guaranteed to go to one of the centralized highly regulated providers. Got it. Yeah, I think that makes sense and definitely want to bring this sort of back to the issuance conversation because it definitely plays in where having an ETF like assuming that these providers are all going to stake their ETH, that's

going to be a huge driver for the percentage of staked ETH on the network. And we already talked about sort of the the pros and cons of having a high stake rate or low stake rate, etc. And we did see a big proposal from Ansgar and Casper regarding changing the issuance curve to address potential concerns with the high stake rate. So, I'm wondering if you guys could give an an overview and share some high-level thoughts on their proposal to change the issuance curve. Yeah, I think I'm happy to take a first step. So, at this point there have been multiple proposals.

I think it started actually with one uh uh from Anders that was called a minimum viable issuance MVI. And I think that was more about how how can you have a mechanism that basically says, you know, we want this amount of ETH staked minimum, but also not really go beyond that and have more than that. And it also had some good discussion of, okay, so what is too low? Like at what point do you get really like very destructive effects on the network? But it was more around like attestation games, etc. It was not focused on what is the quality of the node operator set.

Which is more what we are interested in, I would say. So, then the proposal from Casper and and Ansgar, this one I think is explicitly proposed um designing the curve in such a way that it would effectively uh kept the stake rate at 25%. And um I believe they brought three arguments for that. One is kind of the more technical one saying that like more ETH staked means more validators means higher network overhead. Um, then there's one that's around okay, so we are overspending on security, right? So, is the network at % stake really more secure than at 25? And if

no then you may save uh be able to save that amount of issuance. Uh, and basically return it to the token holders. And the third one was that um if you let a lot of ETH be staked, then you create the environment where uh um a liquid staking token like staked ETH can basically unfold a lot of network effect and get a high share, and that would crowd out ETH as the trustless base token. So, I think this is kind of the rough summary of what they proposed and um uh yeah, and the motivation for it.

Yeah. Um I like um the it's been like a long series of like thought posts and proposals and analysis from uh multiple people. They have different proposals, they have different opinions on like why why they need to happen, why they don't need to happen, but like the um I thought like most of them like it's uh spending less, it's limiting the amount of validators in stake, uh and uh limiting the amount of validators in the network. I think that like the uh technical side, the amount of validators in the network is kind kind like it's mostly going to be uh alleviated by Maxi D for portal that's

going to be in Spectra. Um uh so it's like a uh secondary uh argument here. The most important ones are like uh limiting the impact of uh stakers uh like making stakers a small part of uh uh in the run state of like a majority of other holders. Uh and uh paying less for security. Um I think that like it's going to explode. Uh it's uh like I'm not uh convinced that like small amount of having stakers a better end game than uh high amount of having stake. I think there are a lot of

uh um benefits from having stakers and block producers and uh attestors to be the same people as uh token holders mostly. Uh it's the ultimate alignment basically here. Um and uh I think that uh like we should explore on what what would happen with validator set. So like imagine there is uh at 25% the it's like 10 times more centralized. Is it good or not? This is like big question here.

Uh and this is uh can happen because uh with the economic mechanism of limiting the uh amount of stake uh like you're using issuance to limit the amount of stake basically. Um the actors that can uh afford the cheapest kind of uh node operation or have additional sources of revenue. That means that they have additional business on top of staking. Like for example, an exchange has additional they uh get money from fees and they also get from staking fees and they also get money from trading. They can uh even have like staking fees to go into negative if people who are not change trade a lot because like they can um have a vertical integration here. Um uh

similar things with like ETF. They have uh they fees on top of like as a deposit and so like they can uh stake cheaper, right? Um uh take less fee on staking just staking or such vertical integration as risk taking. So, like if you can put on more uh revenue streams on your stake data, uh you're in a better position to to be successful on extremely limited market. It's basically changing the current market that is like growing market and everyone wants like to be the best product in the growing market to the limited market where competition is the uh the harshest and easiest

And uh if the competition is mostly on price, it's going to end up in centralization. Um There is one like kind of great example that is for me probably uh the emotionally hardest part of this, right? Uh in why in the latest latest proposal, they say that uh uh like we'll we will not get more solo stakers than we have now. That there are solo stakers, they will not go away because they are super committed and they will not like there will be not uh not no more than because like they uh they are not coming because

they don't have like enough stake or like they stopped coming mostly. And this is uh a tear for me because like we spent uh the team and Lido working for for for uh on um uh on Lido's balls for almost a year now building a great product for people who want to solo stake. It's going to be the like pretty low bond, lower than 32 ETH, which is like the main thing that's stopping people from uh, participating in consensus right now. Uh, it's going to get them like um

uh great ability to solo stake. We have um strategy to reach out community to attract people to stake. And if it's all getting like striked out because like the staking rewards are going to be reduced to fourfold, for example, this product is non-viable. The thing that uh, the Lido community wants is going to be like the product that makes uh uh, solo staking more um uh, approachable and usable and uh, like a better uh, allows more people to do it and provides

better incentive to them. Uh, is going to become less viable. So, this is a big gradient. We are working on making people uh uh, able to more people to able to to solo stake and like they are are going to be more of them if uh uh, you don't make life worse for them, basically. Perfect. Um, on the topic of solo stakers, I kind of want to hear you guys and what you think about how valuable uh, solo staking is. Like, is this something that I mean, you guys are working on it to optimize it, but is this something that is very important to

optimize for? In my opinion, uh, it's very important to optimize for. I think one of Ethereum's biggest or most important properties is censorship resistance. And censorship resistance is basically a result of kind of the heterogeneity of the validators that today kind of the layers that that sit on top of it. Uh, so you can argue, okay, maybe the the the the kind of diversity of the validators is not so important anymore now that we have PBS, you know, you have relays in the mix and you have block builders and you have maybe other intermediaries.

Um, but I think the opposite is is true, right? So, I think you see um solo stakers are less profit-driven, more ideology-driven at the limit. And so, they, you know, may make uh validation decisions that that don't uh just follow, okay, so what is what is the the most profitable thing to do, uh, which is, you know, subscribe to the top three relays and the top three block builders, let's say, and maybe 80% of those, uh, you know, are are censoring transactions right now.

Um, they can also use different configurations in in MEV-Boost like min-bid, uh, where they build more blocks locally. And I think, uh, what many people forget is that we will also I think increasingly get a a paradigm in Ethereum where uh, we start reintroducing uh the preferences of validators into the higher layers. So, I'm talking about um things like partial block bidding, uh, and inclusion lists, where for example, a proposer can forward, uh, a list of transactions that they want included in, let's say, the next block. Uh, and then that is basically sent to the relay and the block builder as a almost like a

blueprint, right? So, you know, I have to include those transactions, otherwise I can't even participate in the auction. And so, there are ways like that how the kind of very useful heterogeneous preferences of validators can positively influence all of the the layers around them. And I think if we want to keep Ethereum censorship resistance even in even in kind of the face of more institutional capital coming in, um then it's very important that there's kind of this uh this core of solo stakers to keep the protocol safe. Uh perfect. And I kind of wanted to also ask um what is the Lido's building a solution or let's say it's optimizing for solo

stakers. Could you kind of talk a bit more about that? Um Yeah okay. Again, I'm like not the best man on point for this. Uh it's led by the three from community staking module team. Um I'll start by high level. Lido has staking module thing going on, which is basically when stake comes into Lido, it can get distributed into multiple buckets for staking. We used to have one bucket, the curated module, um which had a pretty low number of uh

uh professional operators like uh right now it's uh a bit over 30, I think. Um we recently launched um a second module, simple DVT module, where a lot of more operators are collaborating on DVT infrastructure, uh like make many node operators running the same validator together, which in uh, increase liveness and reduce the chance of malicious takeover of of validator.

Um, and CSM is supposed to be the third bucket here. So, third module. So, when stake comes into Lido, it can get into a creative model or um, simple DVT or when CSM is live into CSM module. Um, the um, module itself is pretty simple. The it's permissionless. Anyone can post a bond into this module and get stake distributed to them.

Um, the bond number is pretty small and Lido has a lot of stake. They it it can pour into this module. Uh, it will probably start slow at first because like that's how we approach the stake distribution. We don't make sudden movements here. We slowly redistribute it and that's like with the simple DVT which started as a test mode and like slowly getting more stake right now. Same will probably happen to CSM. Um, um, and that probably like basically the gist of it.

We are reaching out to many people who are making the interfaces for stakers like Dapp Radar and uh, nice note and other folks and um, two communities to bring more people into into this module. So, um, that's the gist of it. I think it's mostly like the code is mostly done. It's going into audits now.

Uh, then testnet then and then deployment. Awesome. One more thing I wanted to get your guys' thoughts on regarding the the issuance proposal was with respect to like ETH's money-ness. So, one of the things they brought up was this idea that if you have a high stake rate, there's less liquidity for basically natural ETH as opposed to liquid staking derivatives. I'm curious one, is that a concern like the liquidity of like native ETH? And two, is like stETH and Lido trying to compete on the money-ness with ETH itself?

I basically think it's not a concern. Why? Because the the kind of unencumbered ETH will disappear anyway. I mean, you can see it. I mean, what is ETH in a roll-up? I mean, that is also effectively sitting in a bridge, you know, in many cases secured by a governance that can be upgraded as a smart contract that can be upgraded by governance, right? So, and in in in almost all, if not all cases, I think they have like even less, you know, safeguards than the Lido smart contracts have today, you know?

And um uh you know, we are working towards dual governance, um which is a a way to give stakers the ability to veto any changes that are being made to the smart contract. Um we also have a security council that that can basically shut down um you know, staking. And maybe the city can say more about that. Uh but so, we have different kind of safeguards either already live or in in the works that kind of make, you know, the negative upgrading of the smart contract uh very, very difficult, right? And so, we all know Ethereum has uh this full up centric road map. Uh you know

on the one end more and more ETH is going on roll ups because more and more of the activities moving that. Uh but also you have effects like the ETF ETFs coming online and so you will get more uh also funds sitting in these centralized um custodians. So the end result is one way or another the unencumbered ETH will disappear and it will be replaced by different forms of uh of encumbered ETH. And what really matters is kind of the security properties that these that this ETH has. And so you I think you need to like look a bit more close and kind of evaluate the different ways um where the ETH is actually sitting.

And I think there's a you can do a lot worse than than ETH sitting in Lido. I honestly don't see the argument of reducing the money-ness of ether because like it's staked. Uh it's uh you could sort of make this argument. Like I don't think it's also hold but like does DAI for example reduce the money-ness of dollar? Um I don't think so but even that like I I think this is frankly like the other way around.

Uh dollar denomination does increase the acceptance of dollar as like as a money, right? Uh but even like if you assume that it does uh it's also a pretty different thing because like uh staked ether and uh is an aggregate state of ether. It's not uh like a synthetic thing. It's just ether that it is staked. Uh if it's used as money then it means that ether is used as money, right? Um so I like don't really understand it. It kind of uh in some cases like in some part dependence and so on and so forth, it can lead to maybe liquidity

fragmentation of some sorts. But it probably looks uh uh like makes ether like ether plain ether is still better off here because it can be instantly converted to any of the uh aggregate forms basically and but not necessarily vice versa, right? I agree. I mean, for me staked ETH increases the money-ness of ETH because it makes it a yield-bearing asset. Uh I mean, I like way more people, for example, are holding treasury bills than would hold, you know, basically dollar cash, right? So, um I think uh I think just uh the ability of opt into the uh the yield that you can get on um

on ETH just makes it a more attractive and like more scalable and just better asset overall, I think. Uh if a lot fewer people would be interested in holding ETH if staking was limited to a very small number of people. Speaking of earning yield on your ETH, I um kind of want to ask a few questions about re-staking. Um first of all, like how do you think re-staking is going to impact the validator set in the long run? And also like how would it impact ETH's issuance policy?

Yeah, I can maybe take a first stab at this. So, how will it impact the staking in the validator asset in in general? So, I mean, for one, there's um many forms of re-staking, right? I think like some limited number of things actually requires you to have a validator. And so, those things, you know, actually need to be done by the Ethereum validator set or by subsets of it. And then others, it's just some type of economic commitment um on the activity of some actor that doesn't have to be a validator at all. And you also don't need to use if for that at all, right?

So for example, you know, you can you can restate dollars. You can you know, you saw the launch of the Eigen token which I assume they would try to position as the superior form of collateral for restating. Because it's intersubjective. It can fork based on disputes. So Um They see that that there's only like a if you look at like the pie of all restating then only a small fraction of that is is basically relevant for a particular I think for Um for the Ethereum validators. And for that subset Um there I think you you do see if if if use cases like that become attractive. And let's let's talk about

for example data availability. So is that actually do you actually need the facility do you know if if you need the Ethereum validator for that? I'm not really. You don't, right? Yeah, I think even like anyone can do this, right? Um Um but there there are like select few where you actually need it. So pre-confirmations. So this is a commitment to include a like a transaction in a future block. Um that only a validator can give, right? No nobody else can give this type of commitment not even a block builder or relay because they ultimately also only bid in the block option with the validator.

Um And so yeah, if use cases like this become prevalent then it's like MEV. It's like MEV boost that also started at 0% adoption and then you know, it added more yield basically to staking and it was seen as very Ethereum aligned and very useful and good for the network to do it. And so eventually it became the new standard. And now when we talk about staking we also talk about running MEV boost. Like you know, it was never any different. Yeah. So I think pre-confirmation can be the same thing. Um and in that case, what happens is just the definition of staking changes and I think everybody else has to has to play along in order to kind of the the base yield of staking may go up and

then you know, they are the amount of stake will also go up until a new equilibrium is found where it's basically like not more profitable for the marginal staker to join. So, um I think you could argue well, I mean some people are basically painting the scenario where re-staking will create this massive kind of extra yield coming in for validators. When I really see it at all, I think it's actually very hard to come up with useful things that validator can do that would be like widely accepted and like create so much value that they have an impact on on the yield of such a big network.

And so, in my view, the I mean re-staking obviously is is kind of very hot right now as a topic, but it's also driven by purely kind of unsustainable and subsidies, right? And so, I think as far kind of how how it affects staking, I I think it for the next few years, I I don't really see that there will be like financially speaking kind of a a very big impact.

Yeah. So, I have a bit of a different perspective on this, not in that like I disagree, but I'm like have a different mind map of this, more like this. Um So, let's start by assuming that re-staking actually is as successful or like nearly as successful as people believe it will be. So, like it's not going like let's assume it's not going to be a vaporware, basically. I think it like it has chances for this because like people want the Aether to be to to have more use cases for the

Aether. And when like a lot of capital wants something to happen and that's it's technically feasible, it's probably going to happen. So, it makes some sense. And that means that for if and this is like there there there there there is a difference like how how it's going to play out depends on how the AVSs and the validated services and the staking providers like LRTs or not operators or like

exchanges etc. to absorb this. But in general, if they force every node operator to run everything, basically, so if there are 10 successful AVSs and to be a like a best node operator that is provides best APR, you have to run 10 of them, it means that like this space is going to be super centralized. If you have to run a lot of software that is different and you have to excel at all of these, it's not it's impossible to do this as a small operation. You have to be a company. You have to be like 15-30 people, something that that works on shift and have like maintain relationships and attract stake and like

do BD etc. etc. Just how it is with like node operators on different networks these days. When when who operates on like a lot of networks. It takes uh you you you can't run operate like multi-network operations uh on your laptop. Uh what is possible uh even it's hard to at home uh when you just like run Ethereum nodes. Uh hard I mean for most people, not for uh for majority of people, not for like doesn't take say it and uh rich in other um So yeah.

um The gist is uh if you if to be a successful node operator that like has a best chances of um tracking stake or just like working in um in the black instead of in the red if the uh if you are in the Ethereum is going to get close to negative rate. Um the it means that uh only professionals can can do complex operations. The harder staking is, the more complex staking is, the more centralized it is.

Um this is a rule of thumb that like never failed in in proof-of-stake networks. The simpler it is, the the easier it is to make it decentralized. The harder, the more complex the uh more competitory it is, the harder it is. um So, if you don't have to be uh uh to like run complex things to be in the Ethereum validator, like you can delegate it or something or something, then it might mostly remain the same. um There is also a question of uh implementation. Like for example, uh right now uh it's not really easy or

cheap to be a small uh operator in EigenLayer because your costs are most like almost flat from the number of not the like quality data you have. And not insignificant. So, when you run only one or two in EigenLayer um you have to pay a lot for for each. And then you have like thousands, you have your costs are flat, but your uh um like your points are not, right? Yeah, you have fixed costs large fixed costs in the beginning. Yeah. Yeah, uh the gas costs and uh operational costs, yeah.

Uh so, it's very dependent on how the things play out. Uh the more complex it's going to be for uh to to be a good operator, the uh um the worse it's going to be in terms of centralization. Perfect. Um that makes sense. How is um Lido getting involved in restaking or is it planning on getting involved in restaking? Or how do you guys view that um sector in general is a better question, I say.

Yeah, so um when this episode airs, uh we will have uh I will have put out um a proposal on the Lido forum to update uh the the last goals uh set of goals uh giving it kind of, you know, a bit of a fresh touch in the light of you know, both of these topics of today actually, you know, minimum viable issuance and uh and what to do about restaking. And I think there's three takeaways um or what I'm proposing um at least for the DAO.

And one is that the um that staked ETH should should stay a liquid stake staking token and not become an LRT kind of in spite of the big hype that you're seeing right now and kind of the points that you know maybe able to be farmed etc. And I think it's it's for two reasons. One is that the big opportunity over the next years is institutional capital coming in that has very strict rules as kind of a silly laid out in the beginning of the episode and I think the kind of actively managed nature of like selecting AVSs and kind of additional re-hypothecation steps

makes it not very suitable if you're kind of pursuing this this this group of users right now. Um and and the second one is that really kind of LST is is really kind of a commoditized software service. And an LRT is really more of a kind of actively managed mutual fund or like a tokenized share in like an Ethereum lending market or something where somebody has to constantly kind of make these like risk assessment and capital allocation decisions. And and so while like one share of an LST is like every other share of an LST and it kind of satisfies this big

I think like preference of many people for LRT it's very different. Like you can make you can have very different baskets of risk. And you can have many different ones and it's less likely that many people actually share you know the same preference. And so I think LRTs will have a very different potential to reach a network effect from from LSTs. And so I think an LST can and should be used actually to create LRTs. I think stake ETH is the best collateral uh Ethereum. You know it's it's it's if but with yield.

Uh and like very little additional uh trust assumptions, and so you can actually use it very well to to kind of create uh LRTs that that don't rely on having uh Ethereum validator, which is most things you can do, basically. We can do it like your own consensus set or your own set of operators, basically, and use the stake for that. Um and the the second uh thing that I would add is that types of validator services uh that do require a validator and that explicitly align with Ethereum's uh roadmap.

Um and that don't expose um stakers to additional risk, I think Lido should be uh very active in exploring those. So, in particular here, I mean, one example of this used to be MEV. And Lido was the first uh staking protocol to commit to using uh MEV boost uh at the time of the merge. And then we ended up developing this uh MEV policy, and it basically used it it ended up becoming kind of the standard across the industry, and I think we really like accelerated uh the way that um that became like an established part of staking.

And when I look now, uh kind of what validator services are possible, I see a lot of interest and I think excitement around preconfirmations. Um I think preconfirmations are great. Like, you can create the ability for ETH validators to to sequence rollups that want to be based uh that want to uh unlock the, you know, security from layer one, but also the interoperability uh with all of the liquidity that is already on layer one. I think people talk a lot about like rollups they don't want to give up uh you know, maybe MEV, etc., but um I think um the effect of this uh, you know, uh,

atomic interoperability between your layer two accessing all of the liquidity and all of the things that already exist on layer one is is massive. I think actually the it's like a very underrated opportunity. Uh, plus uh, preconfirmations can also be used by apps that are on layer one. So, if you think Uniswap, like Uniswap swap could offer like one-second confirmation, for example, to uh, to someone who wants to make a trade instead of 12 seconds. I think you can like do a lot with that. So, I think that Lido should actually explore like become a leader in preconfirmations and like and look for partners to uh, to kind of start exploring that with because I think it has a real chance uh, of becoming

uh, kind of the next very popular validator service uh, after MEV-Boost. And the final the final prong uh, of that that strategy that I'm proposing is to to make stETH the number one collateral uh, in the restaking market. Um, so this really like involves, I think, um, educating like working with ABSs about the benefits of using stETH for for opportunities that that don't require uh, an Ethereum validator. And from the perspective of uh, of stakers, I think this is great because it keeps stETH uh, kind of the unencumbered asset, uh, but it allows them to basically opt into any point on the risk-reward spectrum

that they want. So, we are all about choice. Um, and I think uh, this is kind of the um, the approach that that I think like uh, would best fit uh, Lido's strategy. Well, yeah, I definitely want to want to talk about um, where Lido's headed specifically with relation to the rollups and how a lot of activity is moving to rollups. You sort of mentioned a little uh, in there, how super curious As we start to see more users migrate through rollups, more activity, etc. How does Lido's strategy specifically um look to like evolve with that changing landscape? Um, so you mentioned

like base sequencing, getting involved in MEV, etc. Um, there's a cool experiment on Blast where Steve sort of like native yield bearing on on the rollups. I'm curious if Lido has any strategy with respect to L2s. Yeah. Um, uh, so this is also a part of what has been outlined in Goose's proposal for goals for Lido. Uh, these days uh like the ones that staked are to be represented on L2s used uh in in financial uh protocols and products uh transacted upon used as fees, etc. There are etc.

Like there is uh there has been recent news of the case things for example using staked ether as a gas uh fee option. Um uh these days uh the L2 ecosystem is growing and like where it grows uh staked ether also uh uh should should grow as well. That is like the approach that I was taking to that. Um um L2 stuff and uh you you you you uh can see it's working like there are a lot of protocols using staked ether on L2s. Uh there is uh uh like for example uh like not not maybe not example of that but an interesting

uh fact when Blast uh started to uh to make an L2 with the uh productive assets, right? Uh it used staked ether uh as an asset to use uh uh for like to the way to stake out there, right? Um so um you know, this is a uh lifting tide. Like this is a tide and like it should lift all the votes including staked data.

Yeah, I think uh what one thing to add is um we've been very focused on um getting kind of as trustless as possible deployments of staked ETH on the different layer twos. Uh we have now full coverage across all the layer twos. Uh very secure um canonical bridge deployments there. Um so it makes it very easy for users kind of to pass back back and forth between um the different layers. Um and then the I think the pre-confirmations is also a very interesting way of kind of getting engaged kind of using um you know, not you're not explicitly like staked uh ETH as a product but using kind of uh the the Lido node operator set uh as a product to create a lot of value

um for these rollups uh as well as to the idea of kind of sequencing them uh from the layer one. Perfect. Um Vasily, Hassu, thank you guys very much for coming on. I think um this is definitely the most exciting episode that I've done. Um so I really appreciate you guys joining and talking about everything from issuance to restaking to L2s to how Lido's going to be involved. So thank you. Yeah, thank you. Great questions. We have teamed up with the Wormhole Foundation, stewards of the Wormhole protocol, the leading interoperability platform powering cross-chain transfers for over 200 plus multi-chain dApps.

Wormhole isn't just a bridge, it's a leading interoperability platform for multi-chain applications. So go and claim your unique Wormhole NFTs just for Zero X Research listeners today. Hit the link in the description to fill out a form and to prove that you've listened to today's episode and receive a POAP. You get an email over the coming weeks to claim your limited edition NFT.