Tomasz K. Stańczak - Bringing core staking innovations and L2s to institutions

Transcript

um we're going to go ahead and begin with the uh first Speaker here uh this is uh Thomas who I've learned today is a uh uh ethereum core developer and the founder of nethermind um as well as a twin stake and he's going to be talking about uh bringing cour taking Innovations to to L2 and to institutions um so with our first uh topic please go ahead thank you uh hi everyone okay so so um for the last five six years I've been working very closely with the core development of ethereum working on the implementation of NE mind node and they're building lots of Integrations and in the last few months

particularly uh looking a lot into the rollups the plans for decentralization for staking on rollups the fees me and so on so working with flash BLS also for the last two or three years um and twin s actually was created one and a half year ago as a collaboration between the financial institutions world and the core development team at nine so there a joint venture between uh webban uh from the like the brevan Howard family and snam steam and that's why we talk together about the eips and institutions so thinking about how exactly we bridging that thinking process from from

the internals of the core development all way to how it affects the big players on the market how it affects the markets actually and this was really thinking always for another mind uh thinking about creating the approach to developing ethereum in a way which um brings the ideas the the thingy of products for the largest of the institutions and slowly slowly bringing the all financial markets and governance uh and the world to ethereum it's it's happening now maybe it wasn't that that obvious few years ago when we were all starting and uh when you think about all

the l2s which is a big thing happening now for ethereum right so all the scalability comes with the layer twos and this is l2b fantastic dashboards that tracks tracks layer twos there is a huge expectations uh there there are huge expectations about l2s bringing new opportunities for uh for staking for additional yield and I think it's still not very clear how each of those major l2s think about orbit arbitrum optimism uh ZK sync scroll Stark net polygon and so on how exactly they will resolve the uh staking opportunities for their centralization of their protocols and uh some of the

conversations in the last few months like take a lot of uh take a lot of different paths uh showing that uh it's still probably one year ahead for many of those H2S to decide where exactly they'll be going with the centralization and uh some of the models that were appearing recently are the based rollups which are very strongly promoted or maybe like explained and and discussed uh under leadership from Justin Drake and the proof of governance uh which kind of got the name from John sharbono research and the first one says that L1 will actually be the place for

sequencing layer twos so if we have things like ethereum and Tao as a rollup or you can think of optimism as a rup it will be the blog builders that will be sending transactions to the smart contract on layer one the smart contract on L one will do the basic verification whether those blocks proposed by the proposers are valid are following the the most basic formatting parameters and content rules of what transactions can be included and then depending on the ordering of the of the incoming transactions within the smart contract we'll be receiving the information about sequencing on L2 like The Ordering of blocks on L2 canonical L2 will be constructed entirely within

the internals of the smart contract on L1 how it affects the staking and the yield well it actually brings all the me to the layer one validators so you what how does it really happen like normally when you have the me payment it goes to majority of it nowadays goes to the validators on uh on the actual chain that we are uh that we are sequencing so the payments from the me blog Builders uh are being shared with the validators and here the validator is actually the build builder of the layer one block so the the sequencer of the layer two is looking at this ler two transactions and

inputs them inside the layer one and if different layer two blocks are competing with each other uh then actually the ordering between them is being resolved by which one pays the most to the layer one uh layer one Builder so layer one Builder captures all the me so as we know that much of the ethereum staking nowadays is institutional all that me uh will be flowing to the institutions and well all the solo sers as well on L1 if the base rollups are being adopted and the additional proposal is that with the base rollups we actually have the uh cross chain Atomic sequencing with the ability to use the

layer one as this coordination layer of uh pushing the blocks that can be handling all the bridging automically uh between different L2 uh the second Proposal with the proof of governance also affects a lot our thinking about the the staking because it very likely suggest that some of the l2s if they follow the proof of governance model which is like an extension of the centralized sequencer U extension in a way that instead of having uh One controller like the foundation or the or the core builder of the network designating a single sequencer proof of governance says that that role is delegated to the

uh to the Token holders that represent the governance either token holders or other governance mechanis that defines L2 governance uh and they select a group a small group of sequencers and they can vote them in or vote them out so there are no protocol rules for uh for adding or removing permission LLY uh the sequencers it's just all voted in now it means that usually we have the staking for protocols like uh like tender me or Solutions similar to to polygon proof of stake staking uh that Define the need for the for the block rewards and the yields to the sequencers on Layer Two for the simple sequencing that is

delegated by the foundation like centralized sequencers or the proof of governance sequencers those payments are usually much much lower because you introduce more of the trusted sequencing so it's trusted or governed overseen sing quencing and you don't have to manage the security of the network through the stake that is being slashed really because the slashing appears by simply voting the the validator out um a few other things that a few other things that probably are already widely discussed in many other presentations here so I'll scheme over them a bit um more fast so raking bringing the additional opportunities

for those who are operating validator on layer one uh to get additional yield from using the same deposited Eve as taking again for securing other rollups and while we can expect that the existing major l2s will bring some of their own solutions for securing the chains they most likely will use their own native tokens um or as we mentioned the centralized or proof of governance sequencers with reaking we can expect that uh something like roll up as a service models will very often try to borrow the security from the main ethereum chain and now from the

institutional perspective um this is probably much more risky than what we see now in a very basic vanilla staking on ethereum institutions even nowadays are a bit timid to go with the liquid staking Solutions even Lio for many of the compliance teams is a bit too far so using smart contracts to go there um using something that starts to look like defi it's not accepted by many of the institutional teams for compliance or the any any regulations so with saking I think that uh much of the delivered added value from The Operators will be in ability to provide the very detailed risk

assessment and auditing of the uh of the behavior of the chains that are reusing this take from the layer one so we'll have um institutions picking like cherry picking the absolutely top well audited and tested and trusted um chains that will be borrowing from layer one borrowing security through the uh through the reaking like I can layer um DVT Solutions so things like obal SSV also a few other Solutions I think safe STI diva uh clay stack probably others so this is bringing the distributed validators to ethereum so

distributed validator Keys uh bringing potentially ex additional uh geographical diversity uh additional support for the uh limited downtime for mostly solo takers uh but also potentially Bringing Down the insurance costs for the large operators so we may expect the institutions will be uh slowly demanding the distributed validator implementations however there is some balancing expected as the distributed validator operations usually be bringing up the uh costs of operations for node operators so on one side we'll have increased cost on the other side we may

have the uh decreased cost of insurance and the pressure from the clients to uh introduce it for additional safety and geographical decentralization so when you think about the uh the inactivity leak uh problems those might be uh actually solved by the fact that we'll be operating distributed validators uh in ass sets where the uh different validators will be in totally different locations so uh if some of the regions go down uh then the other regions will be maintaining the key signing um now one more thing that I'm un that for l2s will be quite important is that uh we can expect the proving

markets to appear however for the proving markets I feel that um they will not bring the same opportunities as taking so we not be talking about yields but the sheer computation payment uh so more like for for those institutions they're asking is there business for us thinking about is is it something to add on top of the yield uh very likely not but we'll see maybe there'll be some Innovation here uh now quick overview of few eips that are coming to ethereum so 7,02 execution layer uh triggerable exits this I believe is something that for me was uh expected for the longest time the uh it brings the ability to

invoke the exit from the uh from the ethereum consensus layer exit of the deposit uh back to the um to the withdrawal address without interaction with the node operator so it brings this like fully non-custodial uh feel to the institutions nowadays institutions have to expect that they can communicate with the node operator that will pre-sign for them uh the exit the voluntary exit messages uh this makes it at the beginning a bit awkward because for regulatory purposes many of the node operators say that they are noncustodial but for a very short moment or at the time when the deposit is made and before we signing the

withdrawals uh this is not the case and with the with the previous EIP 7002 coming in in the hard work in the network upgrade probably the one after canun the one that comes now actually in fixes like it in a in a faster way in a simpler way so now when you're signing the voluntary exit the used to be um security mechanism that was saying that it's valid only for the two Network upgrades the with 744 this becomes perpetually valid which means that there is slightly less risk before we introduce 7,002 uh for those exits to become like custodial

again thep 4788 so access to the beon block route in the evm um it's very important it connects the execution layer with the consensus layer in a way that that execution layer can read all the data related to the um to the consensus layer Behavior which means that in a consensus layer you have all the information about the rewards about the exits about slashings and suddenly you can create set of the financial instruments for institutions to manage better the the risks related to slashing so you can build some automated onchain Insurance products uh you can start creating the yield related

derivatives where you may say that there is um like you convert floating to fixed by saying that if there is more validators joining the network than planned then we actually um pay out that difference on the so so we we know that when more validators come to the network then the yield drops so if I want to change it to the fixed payment then I would like to actually read the information about how many validators are joining the network and make some kind of deriva prod derivative product that pays the difference on the execution layer and the same for reaking both this one and um um sorry this one so when we think that forcing exits by

reaking on slashing from the restak validators uh and tracking the security levels actually knowing from the reaking position so if I'm if I'm reusing my deposit to secure some Layer Two and the deposit actually exits layer one or is becoming slashed I want to know about it as fast as possible and possibly react on the execution layer so 4788 I will have the access to that now EIP 7251 um it was a bit more famous so there were a few uh few block posts about it the max effective balance increase it says that no longer we

talking about staking think only 32 Eve per uh per validator or like per validator infrastructure said if uh if we have large node operator for institution very often they'll be uh accepting like uh deposits in the size of tens of thousands of e or more and for all of this now there's lots of validators and the Bon chain clients that have to be operated there's also a significant cost of sending deposits uh and creating the keys for withdrawals for all of those uh so if 7251 we can expect uh significant cost reduction for operating the infrastructure for the uh

for the large uh depositors so I have slightly mixed feelings about this one because it feels like um it brings some potential cost savings to the large operators which is usually seen as a a centralizing force course but probably this is negligible comparing to all the other uh centralization effects that we already have to deal with and the last thing that I want to mention so recently coinbase announced um the identity verification and kyc Solutions on chain based on ethereum attestation service and somehow I believe that the uh ethereum attestation service will be

one of the most important things that will be happening on the institutional side on ethereum in the next few years so from the very beginning of working on ethereum I was thinking that um creating a robust systems for reputation tracking and for claims they will be actually bringing the certifications and claims for the reputable institutions from the offchain world and bringing them all to the onchain will help us to start bringing the same like under collateralization for finance and the same level of checks and creating of the like tracking of the safe assets on chain as we have in the in the traditional Finance which means

that we don't really have uh to to get the connection between the offchain and onchain world we we don't need it we do it nowadays only for the reason that that that data does not exist on chain yet that we've built over many many years like tens or hundreds of years the sets of certifications and rules and attestations that exist in the offchain world so we can ask people about credentials we can ask universities to confirm whether they graduated University we can ask the professional bodies about certifications we can ask large financial institutions whether whether the assets that are deposited in a given account can be

tracked all the way to the source as soon as as we manage to move all those certifications and credentials on chain uh no longer we need to connect the Two Worlds so institutions that will try to kyc the assets flowing to their um to their let's say defi protocols will be able to verify every every single claim on chain now I think this is very much related to the many discussions about the censorship on the protocol level there is some expectations very often that um or maybe there is there is a risk that the protocol Builders the core developers uh facing the needs of the of

the governments and institutions uh have to bring the tools of following like the sanctions of particular countries uh restrictions censorship on the protocol level uh the truth is that if you don't introduce it on the protocol level U then there is absolutely no limitation to introduce ruce it on the level of the of the asset zones or like attestation zones I can still restrict the flow of funds uh towards the institutionalized defi uh towards the onramp and off-ramp zones uh by tracking properly the onchain kyc and data stations so if I'm an institution that doesn't want to deal

with the tainted assets with assets that have some kind of negative claims on them of the source that cannot be verified and so on then I may join the set of contracts that are always tracking the sorts all the way to minting or some clear uh certified onramp sources so what I expect is that entirely neutral protocols will be hosting the the zones of totally clean assets that are fully certified and those will be much more liquid and accepted by particular sets of institutions and governments and there might be different subsets of assets on the Chain so we'll slowly see a bit of

compartmentalization of assets on chain and we don't need to introduce that on the protocol level because this will happen nonetheless and this will introduce also a bit more of the acceptance that there must be some kind of coexistence of this compartmentalized asset zones on a single protocol because the rules the sanctions may change over time and there's no need for bridging and uh that separation can be introduced on the smart contracts level um maybe for many of us it might be feeling like as a disappointment but I think it's unavoidable and on one side uh it says it tells institutions that uh the chain will be SE will be seen soon as a fully

regulated space uh with all the certifications and kyc and KYB on chain uh but it also tells the uh whoever tries to fight for privacy brings that answer that on chain the space of the contracts that they will be able to interact with will be limited over time and it will be tightening and the liquidity will be always much much drier because um any privacy oriented transfers will have to go through this like tainted asset zones a bit like probably nowadays a gray black markets thank you so much for listening and if there are any questions if

there's time for questions yeah I think we have uh time for a few questions from the audience here um I'd like to take the first one here um which is uh you mentioned EIP 7002 and that one's very near and dear to my heart um and I noticed it did not meet uh it didn't get in I don't believe or at least currently under consideration unless I'm wrong the uh Cancun daab update but there's talk of it coming in I guess it's Electra that's going to be the next one can you comment on that or um maybe share some thoughts about what the community can do to start advocating for its inclusion um maybe improving that

communication between the needs of Institutions towards the the builders so any I think any um any teams that that connect that build products for institutions and also are responsible for maintaining change will be able to to push for updates like this however when we think about current C of teams they're very often already connected to institutions so as I show twin stake is kind of collaboration of nethermind with Enterprises uh Basu teu come with the space of consensus connecting lots of Enterprises to the needs of the core Builders um coinbase collaborates with with optimism and uh pris teams so

um I'm not sure I think this seems quite obvious that we need it uh maybe the ideation formalization required some time and and people to just feel a bit more comfortable with it and to actually start understanding the power so maybe through the talks like this and um and more conversations about what what changes for users it's easier to implement this perfect are there any other questions from the audience here hi um quick question on one of the last points that you raised I don't know whether I understood well but um vanders correctly were mentioning that certain let's say functions should be integrated at protocol level rather than

application Level the problem is that if they are integrated at protocol level that significantly increases the risk of regulatory capture because for instance under the markets and cryp assets regulation there is the infamous reciter which says that unless the service are provided in a fully decentralized manner whatever that might mean then potentially they might be within scope of of the regulation itself so wouldn't you say that there should be full and complete separation between protocol and application layer at all times so that the protocol is unass salable so to speak and then effectively at the application layer well then there there's the opportunity to either go down the unregulated route or the regulated route thank you um so the same

on the other side like I I want to try to make sure that I understand properly the suggestion so I'm not saying that this will happen on protocol level so I think that protocol should be seen more and more as a technological layer uh that is totally disconnected from the decisions on on where are the assets separated that uh hopefully Regulators will accept the fact that there will be total traceability and uh separ aration of assets according to their required rules based on the claims that the protocol supports and the it's just that the claims as um very technical system the claims will not be named or or

specified in the protocol the protocol just supports claims because of its uh Primitives that are supported like signatures and so on and the claim systems through the very neutral set of smart contracts um are landing on ethereum are available so I I think that that's what we should push for that we will not accept any regulatory capture on the protocol level that the core developers will not be following the any specific rules of sanctions not because they want to lead to avoidance of um of those mechanism but but because we know that those mechanism can be extremely efficiently

introduced on chain uh through the set of smart contracts and claims which means that uh any regulator that has control over some assets will know that they practically can fully control the flow of those assets and in the direction and track the source I think this is unavoidable but also it says that oh this gives us a bit of um ability to to make clear claim that well protocol is neutral but it doesn't really change anything whether you split it between two chains or you just split it between two asset zones on the same CH chain um the result is the same all right well thank you very much

please another round of applause for our speaker this [Applause] morning