Lido V3: The Most Decentralized and Most Liquid Wayfor Institutions to Stake

Transcript

All [Music] [Music] [Applause] [Music] right. Hi, Fan Club. How's it going? Uh, hey everybody. Um, I'm Izzy. Uh, I am head of staking at Lido, contributing to the Lido DAO. And today we'll be talking about Lido's up upcoming upgrade Lido V3 uh and how in totality so the Lido that we have now what we call Lido core plus the new product that will be coming with Lido V3 is the most decentralized and most liquid way for institutions to stake on Ethereum. So yeah that's me. Um

all right what what is what is Lido? Uh Lido is a liquid staking protocol. So really really quickly for those of you that don't know when you stake on Ethereum you essentially need to take the capital that you would allocate to validators and it gets locked on the beacon chain. So there's a very high opportunity cost for doing this. What LITO does uh and Lido is a set of software that essentially lives on chain uh it's it's middleware. So it's not like me taking money and moving it between places. Uh is is that it allows people that stake with Lido to have the optionality of DeFi of using this capital at the same time that it's providing security and safety to the network. Um so it does this using robust infrastructure and in like a semi-permission spray which we'll go into a little bit more detail but it is

essentially the most accessible way for anybody to stake on Ethereum right now uh at any deposit size and at any withdrawal size. It is middleware in that it connects users. So users with ETH uh to hundreds of different node operators across the globe uh at this very moment. And it is governed by a Dow. So there's like very few real projects on Ethereum that are true Dows. And by that I mean there's no legal entity around or on top of the DAO. Uh it is essentially governed by the different LDO token holders. I think there's a few of them here like in the front of the audience. That's why they're so excited. Um and so like the code and the policies that drive this mechanism that powers like over $20 billion and secures the Ethereum network uh is purely driven by code and by the

people who are voting on these things. So this presentation is if you want institutional staking on Ethereum to be maximally decentralized and I think that we do. Uh the simplest path to this is using Lido. So why do we care about something like this? Why do we want stake to be maximally decentralized? If we think a little bit about like this this reinvigoration of the ethos around what is Ethereum trying to do in the blockchain space um Tomas's opening remarks around cryptounk values decentralization privacy uh accessibility for the people who usually don't have access to like highulutin financial systems we essentially in order for these systems to be resilient to global uh bulcanization if we can even say something like this at this

point of the internet um to wars to economics that are essentially creating some like forces for some countries to start turning inwards as opposed to outwards. What you want is a truly neutral um credibly resistant credibly neutral resistant place for all of this economic activity to settle. And in order for it to be robust and credibly neutral, it has to be decentralized. And so that means when large stake starts to be allocated to this layer uh so essentially we're talking about institutional staking it needs to be done in a way that protects these these core values and that that's what lido allows huge amounts of stake to do. So with v3 which is slated to come out sometime around September October um there will be two ways to do this

essentially like two main products to to the lighter protocol. There is there is right now lighter core. It's it's what we're calling the lighter that has been built up up until now. Um so this is the encapsulation of the protocol thus far through its large two largest um upgrades since uh it was first launched in December of 2020. Um ETH in light core is distributed according to programmatic rules that are essentially built into the smart contracts of LTO. Uh and it decides how ETH is allocated to these different node operators across the globe. And then we will have SD vaults and SD vaults are like essentially the the the big banner edition um in light of V3 which are new mechanisms that allow for tailor made non-custodial and even custodial technically um permissionless staking

setups. So users uh whether they be like plain users just normal retail users or whether they be issuers or whether they be custodians or banks that are looking to create um like more complicated products get to choose how their ETH is run who runs their ETH um and who is essentially allowed to to access those validators to potentially meant SDH against it. So let's look a little bit at what lighter core does right now in order to like maintain the safety and decentralization of Ethereum. If we look at validator client diversity um across Ethereum and across Lido, we actually see that the the balance of client makeup in Lido is better than it is on the network in average. If you look at specific node operators with the

exception of of a couple, they usually use maybe like one or two um configurations in order to to drive their stake. And the reason for this is that it's pretty like expensive to maintain multiple different configurations of running uh validator infrastructure. And the way that Lidto works is that it allows you to distribute the stake across a multitude of different node operators who make different choices about how they run the stake, where they run their stake, and what kinds of things they they prioritize. And let's look at the number of node operators that are running the stake. So there's 37 curated node operators that are running the vast majority of of light stake. And this is in part due to how the protocol built up over the last four years. But there's also 300 simple DVT node operators. So these are node operators running in distributed

validator clusters of seven participants each. The clusters may range from hobbyists that are running their nodes like in their desk or in their mom's basement and even running nodes together with highly uh performant professional node operators. 280 u approximately according to our analysis unique community staking module node operators. So the community staking module is currently the only way for permissionless node operators to join the lighter protocol and it's slated to go uh undergo its upgrade in September of this year. Uh after which it will go from like approximately 2% of lighter stake to hopefully around 5% and hopefully something like 10 to 15% within 12 months following that. In total this brings us to over 600 node

operators that are currently using the protocol right now. And if we compare that to what the state of uh state of stake let's say in light was one and a half years ago, we only had these 37 curated curated node operators working. So the last two years have all been about building uh infrastructure that will essentially allow the decentralized robustness of the lighter protocol to explode in order to meet the incoming anticipated capacity both from retail becoming more well-versed in uh crypto but of course uh institutional capital um being interested in in in playing in this market. So there's three modules with over 600 node operators currently essentially operating the stake. 95% of the stake uh is across these 36 professional node operators. But all new

stake goes to the smaller modules. It goes to the simple DVT module and it goes to the community staking module. And so essentially this means that through an organic process uh as withdrawals come into the protocol they're taken away from the largest module the curated module and and the very large professional node operators. and it and as new deposits come in, they get shifted into the simple DVT and the CSM modules where you have everything from homestakers um to professional node operators. So just as an example um if we were going to have like a 50,000 ETH deposit and we imagine that these uh modules had the following share limits. So a share limit is the maximum potential stake that a specific module um can operate of lighter core. Uh we might see validator

deposits look like this. So CSM has a current share of 9.7% and thus has like a 0.3% uh remaining capacity. Simple DVT has the same. Uh and then the curated module is kind of like the bull work module where all remaining stake can be allocated to. So if we had 500 thou 50,000 ETH get deposited into the protocol, we would see 500 validators first get deposited to CSM and then 500 validators deposited to simple DVT and the remainder uh deposited to the curated module. If these uh modules had more capacity, so the smaller modules, then all of the stake would be deposited to these modules. Uh and you see something like this in this example uh where you again we would look at 50,000 ETH being deposited, but SSVLM, which is a new module that is being worked on by

SSV and is purely DVT and permissionless based would accept the line share of these these deposits. And then you would have CSM accept more deposits and simple DVT accept more deposits. And this really builds into reinforcing the constant robustness of the protocol by seating ETH uh and validators to new node operators that are running like in more remote locations in more robust setups uh and with like different kinds of censorship resistance guarantees for the network. So the second part of this is that if we want institutional staking on Ethereum with maximal ability to service redemptions, we want the the best way for on and offchain liquidity.

And again, the simplest path for path for this is LTO. So what do we mean by this? If you are an institution and you want to stake like I don't know let's say a million uh worth of ETH, you want to do it with as high a stake rate as possible. In traditional financial instruments, this probably means that you would be staking somewhere between 50 to 60% of the capital and then retaining around 40% of it in order to service redemptions. With Lido, you don't need to do this. You can stake 100% or a little bit less if you want of the capital. And you can use the ST uh liquidity m minting option to essentially service these redemptions without needing to make a large portion of this capital unproductive at the same time. So let's look at liquidity for for SD and right now this is purely um

boosted by by lighter core. Over 5 billion US are used in collateral uh as DeFi and on some centralized exchanges. There's over hund00 million in trading volume on 30-day moving averages. There's 26 node operators with um type one and type two socks uh certification. So a lot of times institutions say well we need our node operators to be compliant. Lido is the largest concentration of compliant node operators in any staking solution on Ethereum. um we want liquidity and so you can service liquidity of around $75 million currently uh with the depth of STE on the markets and we already know that approximately 10% of minted SD right now so SD that that's circulating is held by publicly identifiable

identifiable institutional stakers um and there's curated note operators that are also working on other types of certifications such as ISO 27,0001 uh and lido also worked with um third parties in the past to create like open-source risk management systems for these operators and we're looking to standardize this uh sometimes this year. So what do vaults uh essentially allow? With vaults we take a model where laido was a one size fits most uh and turn it into a many uh sorry many sizes fit all. With vaults basically everybody can win.

Um it aligns the interests of stakers, node operators and asset managers or defi curators and and custodians if you want to think about it this way. It essentially allows you to wrap your validators or your stake and that stake to be run in any way that that the vault operator might want. And then it allows for the optionality of ST. So you don't actually technically even need to mint ST um if you're going to be running an SD vault, but it does give users that optionality. And so this optionality gets translated into a variety of different end user products. This might look like taking SDH and using it in reststaking. It might look like leverage staking where you can loop against DeFi markets. And it might look at something like creation of structured products which are especially appealing to

institutions where you can create like delta neutral strategies where some ether stakes some stable coins at the same time are are put into a strategy strategy together and then those products are sold to to end consumers. The these are like new mechanisms that allow for tailor made non-custodial permissionless staking setup. So as I mentioned earlier the whoever is creating the vault or whoever whoever is essentially sponsoring the capital can choose which node operators operate these vaults how they operate these vaults if they want to for example opt into additional infrastructure like running pre-confirmation sidecars that allow them um to leverage extra functionality to sell 122s whether they want to support based sequencing on layer 2s uh or those that support it at least and a lot of different things like that. some um players are like for

example like BTCS which is a listed company in the US is even interested in building their own blocks uh and the more validators that you run uh the easier it is for you to execute against something like this. Finally, the ability to stick into a vault and mint SD against it um and then control whether that's done in a permissionless or a permission manner essentially allows you to create products that you otherwise wouldn't be able to to be able to do. So if we have like a financial institution that says I want to stake everything but I don't want to pay a minting rate to have 50% of SDF minted at the same time. They can choose to only mint a small amount when they only need it for redemptions work with authorized participants or market makers like using a credit line. Um and then

they can optimize the the yield on the product that it would sell to to retail customers. So essentially Lido is expanding from a single staking product offering into a custom customizable and modular infrastructure primitive. Um this diagram is a little bit complicated but it kind of explains like the basic way that vaults work and I'll I'll talk you guys through it. So if you take stake like 100 STE um you can put it into a vault and you choose how that vault is run. You can choose the node operator you can choose the validator infrastructure you can choose whether they use this distributed validator technology or not and then you choose how much SD to mint against it. Um so it allows you to create strategies and financial uh products basically that you wouldn't have normally where any ETH

that goes into LTO core uh just comes out onetoone in the form of SD. So why are vaults better um for the ecosystem. Uh for example, let's consider uh a potential hypothetical future of an unnamed centralized exchange which you know happens to leak private information and currently we have very to little little to no information about how they actually run their validator infrastructure. So this centralized exchange might be running like 15% of the network but we don't know which node operators they use. We don't know why they choose the node operators they choose. We don't know what the reward structure is for those node operators.

Like are they actually making money? if they're not making money, how does that make business sense? Um, and we have your regular reporting of staked assets, questions over custody, uh, and other business lines. So, with a protocol like Lido, everything is fully transparent to the broader ecosystem. And that's the great thing about building on a fully transparent blockchain. We have insight into node operator selection, um, verifiable data into onchain rewards. So, how many rewards are generated on a daily basis, how those rewards break down between execution layer, consensus layer, rewards, or potentially even sidecars. um and how many of those rewards go to node operators and whether that's sufficient to uh basically make those businesses sustainable and on the vaults perspective we have like a risk analysis and reserve ratios which

control how much SD can be minted against vaults and these are all publicly set by the DAO so they would be set via votes and there will be full transparency for the potential users of these products um and nothing hidden behind like legal contracts that are that are opaque to the broader ecosystem. So let's look at at a potential stake of institutional uh staking like in 2028 if there was like no lito involved there might be a large centralized exchange with around 40% of stake there might be 20% of stake uh across a variety of smaller venues and then you will probably have a couple of node operators uh node operator 1 2 3 and four there that essentially stake is subcontracted to um in uh in aggregate with the stake that they will have like via direct

contracts. So it's like not a very robust and decentralized kind kind of like state of the system. Uh at the end of the day if you take the same amount amount of stake and you map it to how it might look like how it might be distributed on Lido you it might look like something like this. So you would have approximately 60 to 70% of that stake supported by light core which would be supported by the modules that we talked about the curated module that has a large amount of professional node operators. Right now it's 36 but it might be like 50 or 60 in the future. You have the community staking module which is set to increase from the current 2% to 10% by the end of the year and potentially even higher later with hundreds and potentially even thousands of permissionless node operators

including homestakers. Um you have DVT modules such as SSVLM and simple DVT where node operators are running the stake in concert essentially providing like the most robust validator staking infrastructure possible. And then you'll have an assortment of different vaults catering to different needs. um whether those are regulatory needs where somebody might want node operators from only a specific region or whether those might be needs that are catered towards getting the most uh bang for your buck in terms of like yield uh out of the validator setups. So with SD vaults users can choose uh whether to deploy their stake in a D5 via SD or not. So it allows you to run the gamut of risk appetite. You can se set set up delegated onetoone stake uh with operators of of your choice and you can

opt into riskier defi segregated from lighter core. Um essentially this means that whatever is happening with regards to like the APR of lighter core uh and their underlying validator set it won't directly affect vaults and vaults won't directly affect uh lighter core and this allows people to further use their own risk management systems or essentially you can opt into somebody else doing the risk management like a defi curator. So, who can use uh SD vaults? Somebody like an APR maximalist. Uh if you want to amass like a large amount of ETH like a couple hundred thousand, put it into a D5 vault and then you can loop it. So, ETH gets deposited into SD vaults and then you can mint STE against it. You can then take this SDH and go to a and borrow ETH against it and take it back

into a vault and deposit it into the vault again and then stake it and get SD out of it, etc., etc., etc. So this allows one to do looping that one would normally do um on their own or using like a smart contract that facilitates the automated looping strategy with with SDH. But it allows them to do this by at the same time picking the node operator. So a node operator can offer this as a service to their customers whereas previously they wouldn't because the stake would not be directed directly to them. And it also allows um other protocols to benefit from this. So if you're building a sidecar right now and you want to essentially guarantee that a certain percent of stake on Ethereum is using the sidecar in order to offer additional functionality and services to users, you can work together with a node

operator that would be running these vaults and say and incentivize stake that is working in these vaults and through the looping mechanism you would make you essentially make a multiplier on the potential rewards that would occur um from these incentives. Then you can look at strategies uh using D5 protocols like Melo um like uh instadap fluid etc where essentially you take the vault that is producing a steady amount of rewards over a steady amount of time wrap it in some sort of defy mechanism whether that's a lending protocol or a stable coin protocol or anything else like that um and then hook it into other uh subdefi strategy if you want to like pendle or anything that might be like delta neutral and lastly like we mentioned there's a very large

institutional use case as as well um where institutions might be looking for maximum effective uh rate on the capital but at the same time maximum and instant liquidity. So one of the big problems with liquidity is that if you need like very large amounts of redemptions you need to rent it. Uh and renting usually comes with like very high credit costs. In the case of SDH, the cost is much reduced because SD is essentially stake that is already uh gaining rewards and so the market maker that you might be making a deal with would not have to charge as much of an interest rate. So AV3 is right live on testnet right now. Actually the second version of it just came out a couple of days ago. Uh it's live on Ethereum hoodie. As a node operator you can already start building

vaults. As a curator or asset manager, you can start developing strategies and working with node operators to figure out how you can uh tie your strategies into them. And as an institution, you can start thinking about how you might want to tailor your setup. Um, which node operators you might want to work with, what kind of setup you might want from a validation perspective, whether you want to use distributed validator technology or not, and I think I've lost my Okay. Um, and like all the different parameters that you want to set up. And that's it. Thank you. [Applause] [Music] [Applause] [Music]