Bankless - 182 - In Defense of Lido, w/ Hasu

Episode Date: August 7, 2023

Lido has over 30% ETH staked. Should we be alarmed? Joining us is Hasu to shed some light on this question. In this wide ranging interview we discuss the State of Staking, the state of Lido, Idealist vs Pragmatics and asking the question - is Lido's reputation unfair? ------ ✨ DEBRIEF | Unpacking the episode: https://www.bankless.com/debrief-hasu ----- 🚀Join Ryan & David at Permissionless II in September. https://bankless.cc/GoToPermissionless  ------ 📣 STADER LABS | ETHX LIQUID STAKING https://bankless.cc/Stader  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE ⁠https://k.xyz/bankless-pod-q2  ⁠ 🦊METAMASK PORTFOLIO | MANAGE YOUR WEB3 EVERYTHING https://bankless.cc/MetaMask   ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum   ⁠ 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle  ⁠ 👾POLYGON | VALUE LAYER OF THE INTERNET https://polygon.technology/roadmap  🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku  ----- TIMESTAMPS 0:00 Intro 4:34 Is Lido's Perception Unfair? 9:08 Is Lido Too Big To Fail? 15:57 What Can An Entity Do With 33%? 21:27 TLDR Recap and Overview 24:11 When Does Lido Risk Become Systemic 32:54 Lido Is Not One Entity 36:40 Node Operators vs DAO 41:19 LDO Governance 49:39 Is Lido Forkable? 52:37 The Path To 5,000 Operators 58:46 Distributed Validator Technololgy 1:08:16 Addressing The Critics 1:17:31 The Staking Social Layer 1:24:40 Is Lido Treated Unfairly? 1:26:47 Can We Keep Ethereum Decentralized? 1:30:07 Risks and Disclaimers ----- Resources Hasu on Twitter: https://twitter.com/hasufl  Uncommon Core v2: https://www.ucc2.xyz/  Hasu last on Bankless: https://youtu.be/1qqkoGatPdE  ----- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠ 

There are some criticisms in the community about Lido right now. And I think there's the perception among critics that this would not be a good thing. Do you think this addresses the critics' critiques? Or do you think there's still something to them? Ryan, in order to answer that, I want to take kind of a step back. It's not a Lido problem, right? This is kind of a general problem that Ethereum is dealing with and has to deal with. Welcome to Bankless, where we explore the frontier of internet money and internet finance.

This is how to get started, how to get better, how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Lido has over 30% ETH-staked right now. All of the ETH staking, 30% is in Lido. Should we be alarmed by this? Is this a threat to Ethereum's decentralization? That's where we start this episode today. But we didn't end the episode there. We also got into the more meaty topic. Is it even possible to keep Ethereum decentralized over the long run? The guest today is protocol researcher Hasu, and this is a fantastic episode, a few takeaways for you. Number one, we talk about the state of staking as it is today.

What happens when an entity controls over one-third of Ethereum's stake? What about two-thirds? Number two, we talk about the state of Lido. How can it become more decentralized? Is it on that path? Number three, we talk about this cultural phenomenon in Ethereum. We've got idealists and we have pragmatists. There seems to be a cultural clash between these two ideals of Ethereum and the reality of network effects and Moloktrops. What's the right balance? And number four, we end the episode actually where we start, which is this question. Does Lido have a bad rep? Is that fair or is it unfair? David, this was a really interesting episode to me. I love having Hossiwan. It's not his first time coming on bankless. Why is this episode significant to you? The need for this episode has been crescendoing, I would say. There has been a growing conflict between Lido and other staking as a service organizations out there.

And some of it is real and concerning. And these concerns have been elevated by some in the Ethereum leadership, some strong Ethereum community members, and other critiques of Lido, I think, might be narratives and might be opportunistic by other Staking As a Service orgs. And so I want to really unpack this question in this episode, does Lido deserve the bad rap that it gets? So this is the in defense of Lido episode where a Lido representative can come and speak on behalf of the vision for Lido, which is not something that I don't think you and I have yet been able to articulate here on the podcast.

And so what is real about the critiques of Lido and what is fake is something that we try to unpack here in this episode. Yeah. And as always, of course, we have a debrief episode where David, I can't wait to talk to you about this. There's so many ideas in my brain about this. I want to get your raw thoughts. That's available to bankless premium subscribers. On a premium RSS feed, you can click a link in the show notes to access that. And as a reminder, guys, this is just one episode on bankless about Lido. And I think we'll have future episodes to continue the conversation, maybe from some alternate perspectives. But first, we disclose bankless holds investments in Lido, and Rockapool and David and I have angel investments in some smaller staking startups. We're long-term investors, not journalists. We don't do paid content. And there's a link to all bankless disclosures in the show notes. We were really excited to host this conversation with Hazu. Like Ryan said, he's been on the show a number of times before. I have a ton of respect for the man in the way that he thinks.

So I think this is going to be a very enjoyable conversation for the broader Ethereum ecosystem and hopefully can start many further conversations as well. So let's go ahead and get right into that conversation. But first, a moment to talk about some of these fantastic sponsors that make this show possible, especially Cracken, our preferred exchange for crypto in 2023. If you do not have an account with Cracken, consider clicking the link in the show notes to sign up with Cracken today. Cracken has been a leader in the crypto industry for the last 12 years. Dedicated to accelerating the global adoption of crypto, Cracken puts an emphasis on security, transparency, and client support, which is why over 9 million clients have come to love Cracken's products.

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He's been affiliated with a number of different organizations pushing the frontier of this industry, previously research at Paradigm, governance inside of Maker Dow, and more recently strategy lead at FlashBots. And also, the reason why he's here on the show today is he is also a strategic advisor to the Lido organization. Lido, of course, is a staking as a service Dow that holds over 31% of all ETH staked, making it the largest staking entity in Ethereum and has

been the focus of a lot of support from certain parts of crypto and also a ton of controversy from others. So today on the show, we're going to unpack some of the nuances about the Lido organization, the perceived risks, the reality of risks, all about Lido and what it means to be the largest staking as a service organization in Ethereum. Hazu, welcome back to Bankless. I'm excited to be back, David, Ryan. It's a pleasure. Yeah, I think this is a conversation that I think all of the crypto space,

I think generally Lido gets a bad rap, and maybe some of it's justified. Maybe some of it's not justified. But I'd like to actually explore the contours of that conversation and try to figure out what's reality and what's narrative and what's truth. So you ready for that? Yeah, let's dive in. So maybe we can start with this. Hasu, do you think Lido has an unfair rap in crypto?

Do you think perhaps it doesn't deserve the perception that it receives? I think it's a nuanced question. So just to already kind of lay out what I guess the controversy is, the argument against Lido is that it's the biggest staking protocol. And because of its size, it can have a small, but nonetheless possible impact on the validators of Ethereum to behave in certain ways. And there's, I would say, a secondary argument that says,

state E is kind of the asset that is, issued by the Lido Protocol that represents stake on the beacon chain in a validator. And that asset is also becoming increasingly used and increasingly attractive to users. Because if you compare it to Ethereum, you know, Ethereum is the best asset in the world. But if you have Staked Eve, then it's Ethereum, but it's staked. So it's also earning 4 to 5% in, you know, Yves denominated network rewards from the beacon chain and the consensus layer. So it's like if, but it's also generated.

some return for you. And so because this asset is becoming increasingly used compared to Ethereum, I think there's also increasingly systemic concerns in the sense that if Eve is kind of the unencumbered asset, it's, you know, it's very unlikely that there's ever any problem with it at the smart contract level. And if there is, then it's very clear that, you know, what Ethereum should do about it. But it's not so clear about Staked Eve, right? Because StakeDiv is a smart contract on Ethereum. And it's a protocol. it's not part of the Ethereum stack. It's something that is built on top that was developed by the free market, right? And I think if there's a problem ever with Staked Eve, then it's much harder decision that could potentially cause a rift in the Ethereum community for what to do about this. Maybe to explain some of the reasons why this debate is so big is I think if you re-rolled the dice of Ethereum, you would have this debate no matter what. Just like how you said, Ether, I totally agree with you. It's the world's greatest asset. But the only thing that's better than ether is, of course, staked ether. And I think in this

conversation, it takes the assumption that eventually staked ether will be the dominant currency inside of Ethereum, the dominant form of collateral, simply just because it is ether plus more, plus more of itself. And so this is why this conversation naturally concludes is like, which free market service provider is going to provide that version of staked ether into defy into the Ethereum economy. Would you say that that's an accurate interpret of the future? 100%. And I really like how you said that if we roll the dice of Ethereum and you play through

the history a million times, then I think in virtually every case, you would have the same debate because you had ether and then you go to proof of stake, you create the ability to have staked ether. And this always, always creates the situation where people will, of course, want to delegate their stake to node operators. And while having it on the beacon chain, I still want to use it at their own. execution there. They want to trade it. They want to collateralize it. And in general, they want the optionality to do with this asset to do whatever they want and not have to wait

a month in the withdrawal queue. And so you basically created the situation and there's no way to get out of it. So you have to deal with the consequences. So any chain that has proof of stake, A, and has kind of espious for the native token to be money, has the situation. And this will play out in every single blockchain ecosystem that has these properties. And so it is a very hard, fundamental question and challenge that we need to address. And there are no easy answers. I think presenting it as a market challenge is the right way to frame this. Too often I feel like in crypto, clearly sometimes there are bad guys and there are good guys in crypto.

But sometimes crypto becomes overly tribal. And we attack people and individuals and entities. At times we should be attacking. what we call Molok problems, game theoretic type problems. What you're illustrating here, Hasew is a sort of a game theory type problem of, well, who wants this? The market wants it. Why? Because the market wants to stake their ETH, if they are ETH holders, in order to receive the yield. And they want that ETH to be as fungible and as usable as possible. So we have these liquid staking tokens that are staked in ETH that we want to use across other things. And so the problem with that is it creates

centralization. It creates some sort of network effect for, let's say, the pool or the apparatus or the entity that can service that market need most effectively. And this almost resembles when we're starting to illustrate the problem or the criticism of Lido. It kind of sounds like a too big to fail type of argument. It sounds a little bit like the problem that Ethereum faced in the early days of a lot of ether being concentrated in the Dow. I'm so good that you said this. I was ready to make the same in my head. I wanted to bring up the same thing because you already had this once in the sense

that there was the Dow and I think it had between 15 and 20% of oil Eve deposited, right? It was this insanely popular project and then it had a security incident and yes, it got resolved and there

was a rift of course and I think that left a lot of scar tissue in the Ethereum community and the soul of Ethereum not to go through a situation like that again. But what then happened afterwards was actually Vitalik said, you know, please, guys, if you make another Dow or another ICO, please cap it at $10 million. You know, don't raise any more money because we don't want to create any

systemic risk. Ten million dollars or ten million ETH? I think it was, I don't know, I think it was 10 million dollars. I can't remember. It was some... It might have been one in this, close to one in the same. Some relatively small amount. Like, maybe it was 1% of EVE. maybe it was $10 million, I'm not sure anymore. But the point was then, when the ICO boom happened,

the first projects were basically following this guidance, and they sold out some within, you know, one or two blocks and like within minutes, basically. And, you know, yes, they ended up respecting this wish and prevent kind of the systemic risk to Ethereum initially in the sale, but it had all kinds of negative effects. So first of all, it was extremely unfair who could contribute, you know, because only the most sophisticated whales were able to participate

because they had to stay in a contribute in the first block and they had to be in a very particular time zone. They had to be at their computer at the right times and so on. And then once the shares started trading in secondary market, of course they went to there and where the market would have cleared anyway because the supply was not matching the demand at all. And so I think it showed that it's very hard to kind of make these rules and that the market will always find a way.

Yeah, I think that's a great point, Haseau, and I want to tap into kind of two points you made. So one is it seems like you can't enforce this on the social layer, right? Vitalik or the community saying, hey, out of the goodness of your hearts, right, we'd request that you wouldn't pool more than 1% of ETH in one smart contract location, right? Well, that's not enforceable at the protocol layer. Molok doesn't listen to that. Wrecks all of the plans. And, of course, you know, the market forces take hold.

So that's one of the points you're making. The other point I think that is important to make here is that this pattern of too much eth being pooled in one place plays out and has played out in other cases. So let's say a centralized exchange or a group of centralized exchanges start to pool a lot more eth. Let's say maybe just for trading purposes. So ignore staking for a second. Let's say a Coinbase and Cracken and Binance held 60% of the eth, right? And we found out that one of those actors was like an SBF type character, right? Well, then the Ethereum community has this dilemma of like, wow, a large portion of the ETH supply is now controlled by a single entity and how do we get that

back? I mean, there have been other cases of this too. I remember in the early days of MakerDAO when MakerDAO is just like a wrecking ball and everyone was like depositing ETH inside of MakerDAO smart contracts. There was this question, what happens if MakerDAO gets hacked? There's a lot of commentary on Twitter saying, well, now Maker Dow is so big, it's the Kingmaker, right? And so if Maker Dow smart contracts get hacked, well, then that would cause like a fork of Ethereum kind of Dow style. So this pattern, and now we're talking about this with eigenlayer as well. So this pattern, you know, tends to play up. And I just want to illustrate like what the problem actually is. So let's say LIDA right now has 30% of all staked ETH, right? And so what portion of total supply is

that? That's 30% times 20% because 20% is the number of or if that's currently being staked on the beaten chain. Okay. So it's 30% of Ethan. Six point something percent. About five or six percent. It's eight million ether. Okay. Seven point nine.

Okay. So eight million ether, right? And so if something bad were to happen to that set of smart contracts, like what's the outcome of that? Let's say an exploiter, like a curse. Say there's a EVM style issue. We've seen that this week. There's some kind of exploit or drainage of the smart contract, like worst

case scenario here, than some. exploit or some black hat has all of this ether potentially. I mean, that's like worst case scenario, what could happen. And then the question is, okay, where does the community go from there? Is that one of the core problems of kind of accruing so much ETH in one place? Yes, absolutely. So I think this particular list that you outlined could not really happen because the EVE cannot be withdrawn from Lido because it is staked on the beacon chain. And the beacon chain has a very long withdrawal delay. So at least there's time to deliberate what to do. So you could not have a kind of curved situation. It would be more like the Dow situation, I believe. I think the real

crux of the issue here isn't that there's a honeypot of ether, but it is what happens when a staking organization has a certain amount of ether staked. Specifically, there are a couple thresholds in the mechanics of the way that proof of stake works, that gives an operator who has control of enough ether over those thresholds, gives them some influence over the protocol. And I believe those numbers are 33% and 66%. Hasu, can you walk us through what can someone do, some entity do, if they have 33 or 66% of all ether staked? I don't have all the numbers in my head anymore.

It has to do with basically preventing the chain from finalizing. something about the attestation committee. I'd have to look it up. But I mean, the overall rule is very clear. All consensus protocols rely on honest behavior to a certain threshold. And how do they encourage that by creating the right incentives for this honest behavior to occur? In the case of Ethereum, you do it basically by forcing the stakers to hold what is almost

a form of equity or stake in the system itself. So if the system itself gets attacked, there is this implicit assumption that, you know, your EVE would also become worth a lot less. The slashing is almost, you know, like an additional thing on top, you know, so proof of stick would work also without slashing. And there are some staking protocols that don't have slashing. But of course, if you can also add slashing, then you don't just have the carrot. You also have the stick. So it is kind of this extra layer of security. So that's said, you're totally right.

So someone who has stake above a certain threshold, they can perform various kinds of attack in theory. That doesn't mean they have the incentive to do that, of course. And the second thing that I would point out is actually, so in the case of Lido, I think this doesn't, like you have to really stretch kind of the argument for this to apply in the first place because Lido is a protocol for distributing stake

from stakers to node operators. But under the hood, there's 29 different node operators right now, and many more that are being onboarded right now and staking modules that are being developed. So this number is going to go up. But already today, these 29 node operators are not near the same party, nor do they hear, like, not do they listen to in many cases, you know, what the Lido protocol says, nor could Lido even unstake them today. So this is something that we can talk about.

So this is not a feature that's yet enabled, this ability for the DAO to say, you know, this node operator didn't do what we want. So we are going to exit them, you know, programmatically. Today, LIDO can only say, you know, you bad node operator. I will not give you any more stake that is coming in. So we have seen in the past in many instances. So MEV boost is a great, like the MEV policy in general was a great example.

Then there are other examples around what to do about OFEC, when that happened, where we saw a lot of controversy between node operators that had very different views. They actively contributed to what the policy in given situations should be. And so it's basically not possible for LIDA to say, we are making a policy for what not or what us should do and for not or whether to just accept that policy. So they are very opinionated. They are extremely aligned with the health of the network. as is the Dow itself.

Because, I mean, when you look at the economic model of the Dow, you know, it makes money in perpetuity if Ethereum is healthy and Ethereum thrives. And if that's not the case, then that's basically suicide for the Dow. So I think some of these, what is kind of really the risk that I am most focused on, and we can talk about that. I think we have some ideas here about the Tao, how the Tao can mitigate that. But the risk that I see primarily is actually someone coming into governance from the outside, some attacker who maybe buys up a large amount of LDO or who finds some other way to sneak a proposal through. So like code injection, like we have seen all kinds of attacks and Dow governance, right? And they actually, you know, do something to the smart contract of Staked Eve.

And maybe, for example, they print Staked Eve from thin air. So there's more Staked Eve now than EVE on the Beacon Shane. And there are many safeguards. So, for example, there's a hard limit on how much the EF can be generated per day to really limit, you know, that this can happen. But nonetheless, I would say this is really the biggest list that I see on a kind of short-term basis. And I think that is perhaps the crux of this conversation and why we're having this conversation. It's about the relationship between Lido governance and the staked ether and its node operators.

I want to really just quickly tie off the conversation about the thresholds in proof of stake, because these two things are coupled, of course. If one staking entity passes certain thresholds of protocol control, then all of a sudden the governance of that entity becomes very important. And so that 33 and 66% that I was talking about, these are the two thresholds for proof of stake. 33%, like you said, is how you get finality. So you need 66% of all ether staked

to be in consensus with each other in order to have finality. And so if one entity controls 33%, they influence and control finality. Not too long ago, we had this Ethereum non-finality event, which was a couple of client bugs, which was an accidental non-finality event. And if one staking, operating entity had 33%, they would be able to induce this if they so chose. They would have that power. And that just means stop the blocks from finalizing. Right. The blocks still propagate, but they are not beholden by the weight of Ethereum proof of stake. They can be reverted without ether being slashed. That's what you can do

if you have over 33%. If one entity has over 33%, that is what they can do. And then if you have 66%, you basically are Ethereum. That is like a 51% attack for proof of work, but in proof of stake is 66%. So if one entity had 66% of all Ether's stake, they get to basically choose the outcome. You mean like reverse blocks or that sort of thing?

It's like a bit more, are we getting over a series? Yeah, if I stop talking anymore in this direction, I'm going to start to trigger some of the Ethereum devs. But this is definitely correct. They can probably do some kind of reorganization, I would agree. What you cannot do still is make any kind of invalid state transition because that's correct. Yeah, you cannot sign transactions on other people's behalf.

You can just do a lot else, though. And so these are the risks, right? And so this is the protocol risk. And so importantly, it's worth noting the philosophy that Ethereum has about governance, which is to not have it on chain at least. And so there is no governance attack for Ethereum. on-chain specifically, you would have to process through all the all-core devs calls. But if one staking as a service entity, perhaps Lido, has more than 33% all of a sudden, that off-chain

governance philosophy actually becomes routed around by an on-chain entity called Lido. And like you said, Hauser, there's this LDO token, which is the governance token of Lido. And so perhaps if Lido had over 33%, and it currently has 31%, the off-chain governance philosophy of Ethereum become, ignored and routed around by an entity that has on-chain governance with this LDO token. And so this is where this becomes systemic towards Ethereum at large, where if one entity had on-chain governance like Lido does, had over 33%, then all of a sudden Lido gets to govern some of the rules of the protocol. I think this is the contours of the conversation as it relates to Lido critiquers. What would you say to this? I think if we want to be precise, then the concrete risk is that the

Lido Dao makes some kind of governance decision, introduces some kind of policy that mandates that all of these independent not operators who have their own completely independent motivations and stories and utility functions, that they all collude in some way, they behave in unison to destroy their own livelihood, basically, and attack Ethereum. I couldn't imagine how that would happen. just from like knowing them and like how, like, none of them individually would do something like that, let alone all of them together. I would also find it incredibly difficult operationally how you would coordinate something like that. Right. So inside of Lido, there are 29 node operators and what

you're saying that even if Lido governance voted to like Nuk Ethereum, you would still need to coordinate the 29 or maybe 27, 28, almost the complete majority of all Lido operators, and you would need to coordinate them to even follow through on that. Yes, because it is really, really important to understand that all of these not operators, they run their own local infrastructure. They run all of the hardware. They run the validators. They decide what block to build.

They decide what block to attest. They make all of these decisions. Lido has some policies. So I'd like to encourage people to think about the Lido protocol as this like thin middleware layer that gets EF from Stakers. and then it has some key for how to distribute that across different node operators. And then the node operators basically pay the reward back into the protocol,

and then 5% goes to the node operator, and 5% goes to the DAO, and 90% of it goes to the user. And so what's kind of really going on here is that the LidoDAO is the organization that develops and improves the protocol and makes sure that it's secure and that it's hardened and so on. And all they can do is they can make policies for how they think the node operators should behave.

But the node operators are not compelled to listen. For one, they can exit. They can just not do it, you know, and Lido doesn't have right now any strong way to punish that. And neither today nor at any future point will they have the ability for a node operator basically to take over their hardware and say, you know, this is the block that you should build.

This is, you know, whether you should attest to another, block or not. And this is a, I think it's an interesting case study to understand. The most hands-on that that Lido has been about this is the MEV policy. And so what the M-E-V policy says is there was a period basically where Lido said, oh, proof of stake is coming. So the beacon chain had already been live, right? And then there was the merge, right? And so maybe six months before the merge, Lido said, okay, so we know the merge is going to happen. What does that mean? So the beacon chain validators are now going to be responsible, not just for the beacon chain, but also for the execution there. What does that mean? That means there will border actual Ethereum transactions, and there will be

MEP. And so we need to have some policy for what to do with this MEP. And, you know, should we extract MEP? Should we not extract MEP? If yes, what is the mechanism? Because there are a lot of questions around this. For example, if you say, well, every validator can do what they want, then you get into the problem of MEV hiding where the VETA can just extract the NOTA just extracts the MEPV and says to LIDO, you know, they extract, you know, the block is three EVE and they say,

oh yeah, look at this one EVE block that I mind. Here you go, Lido. Here's the one EVE block, you know? And then they pocket two either. That would be stealing from users, right? So Lido has the responsibility to make sure that there's no way for the node operators to kind of break this like

955 split of rewards. And they also wanted to basically look at what Ethereum wants. And so, you know, the Ethereum Foundation in FlashBots and the community, there was a general kind of acceptance. So we want, you know, MEV is something that exists on Ethereum. You know, there's no way to just make it go away. But what is really important is that we keep the barriers to entry into the valid data set as low as possible to encourage solo staking. And so we want to, want to make it very easy to join a permissionless and competitive market where you can outsource the building of your blocks too, right? And so that was the idea behind Proposer Builder

Builder Separation and MEV Boost. And so LIDO was actually the first of any exchanges, of any second protocols of everyone who publicly said, we will support the idea of Proposer Builder Separation, and we will onboard MEV Boost. We're mandating the use of MEV Boost for our node operators and here's like five MEV boost relays that you have to include. And here's five more that you can include if you want. So the first list, the must include list that it guaranteed that it set a baseline for the minimum value of the block that the note operator was seeing. So MEV hiding is not a problem.

But then there was also the ability for them to include additional ones. So for example, once there was the office for foreign asset control in the US, had put tornado cash on their list of sanctioned transactions, then some relays were saying, I'm fine mining these transactions and others were not. And many node operators were saying, we do absolutely not agree with the idea of kind of using only relays or primarily relays that do not mine these transactions.

We want to mine all of the transactions, right? And so they were also given the opportunity to do that. And so what the LidoDAO was trying to do in that case was really, you know, make a policy that would balance, the interests of all the parties, you know, the Stakers, the Ethereum community, and the note operators, and the research community as well, which was kind of trying to plan kind of what the roadmap of Ethereum with regards to MED was looking like. And this is a great example in two ways. One, I think it shows the thoughtfulness that went into this, like trying to

really, you know, having a long discussion period, anyone you can make a proposal for a policy, and then it got voted on. And it was like a couple of months process. And the second thing, it shows how the Lido-Dao makes decisions. It doesn't make any ad hoc decisions. It tries to create policies that have a lot of deliberation. And then these policies, they kind of exist in perpetuity, right? And maybe once per year they can be revisited and amended. And if something doesn't work, then they get updated, right?

But this is, I think, a good example for how Lido-Dao makes decisions and how it thinks about these decisions. So I think that's an important point, if, like, for listeners to understand, if really is Lido, is not one kind of entity, right? So you can't look at Lido the same way you might look at all of Coinbase's stake or Binance's stake. If Lido gets this right, and what you're illustrating in this example,

is it is a loose confederation of a whole bunch of node operators, 30, you said. And if it gets this right, then what you essentially provide is kind of this very lightweight, credibly neutral middleware, where, for example, all node operators inside of the Confederation, again, 29 of these, they have the ability to do the OFAC censoring relayer or the non-OFAC censoring relayer, right? They can choose, and they have full autonomy. They can also withdraw

from the Confederacy at any point in time if they feel like Lido governance is going in a particular direction. So if they get it right, that is what they become. And the reason I want to contrast this is, again, I want to go back to kind of the macro point here of like, we're trying to slate Molok, right, is a hard thing across crypto. I think all of the good actors in the space want more decentralization. I think sometimes we get in this more lazy habit of painting things as bad or good. It's either bad or it's good, right? When reality is much more nuanced. Reality is there's bad, there's good, there's better, and there's best. And I want to draw the contrast between, so Lido having 31% of stake, that's not ideal, I would say. The ideal is that

100% of steak to eat is all solo-staked. Like, that is the perfect ideal to maximize decentralization. We don't live in a perfect world and perfect ideal. So I will say for myself, it is better to have a Lido with 31% of stake than to have, let's say, a not throwing one exchange under the bus, but a Binance with 31% of the stake. I like that better. And the reason I like that better is not best, but the reason I like that better is because it's a confederacy.

It's kind of looser middleware versus a binance, which feels a lot more kind of like a single entity, that's CZ, a single person control. It's CZ, right? So just making that point, I think, is important at this juncture.

And, I mean, all of the decisions and the policies that are being made and the way that the protocol functions in LIDO is completely transformed. transparent. And if as a staker, you don't like it, then you can leave. If as a note operator, you don't like it, you can leave, right? But in Binance, as a user, you have no idea what they're actually doing, how much money they are making. You only know what they give you, right? And they don't even have any node operators, right? It's just like all of their own infrastructure.

I think the relationship between a Lido node operator and the Lido Dow is really the crux of this issue, because we talk about, like, sure, it's an independent node operator. It's not, is a part of the Dow, but it's also independent. And I think the question of how much voice as a node operator have independently versus the Dow is like the big issue here. So if the Dow makes some vote, that is harmful to Ethereum, can a node operator actually achieve independence from that vote? And so you said, like, yeah, they could just leave and they could not be beholden by that vote. But then they stop getting paid. They stop getting the reward. And so there is some sort of enforcement, coercion, coordination that the Dow holds. So like Lido, it's not decentralized.

It is an organization. It's called Lido. It has a name. It does coordinated things. And so yes, it's a collection of parts, but we can call it a name. It's got a name. That means there is an entity here. And so like how do we think about the independence between a node operator and the influence of the Dow. Yeah, so you're completely right. So if a node operator decides to leave, then they don't get to take the stake with them, right? So the stake is with the Lido Protocol, and the Lido Protocol distributes stake to different node operators.

And it also aggregates the kind of the bargaining power and so on of all of these different stakers and really gives them the best terms, right? So there is a reason why Lido and node operators get 5% of the staking reward, and on Coinbase, they get 25%. This is kind of the difference, right? Because Lido bundles the demand and thereby it has a strong bargaining power against the note operators. But you're completely right.

Bargaining power can also be abused. And this is why it is extremely important that the stakeholders also get a voice in the decisions that would affect them. So, for example, if the LidoDAO wanted to say, node operators, you know, only mine empty blocks from now on. Okay, this is something very stupid, but it's just an example that would clearly be bad for Ethereum because everybody, you know, now 31% of blocks would be censored. Like the capacity of Ethereum would go down, right?

So this is, I mean, it's clearly not in the best interest of node operators to now make way less money. So they would resist. but maybe they don't have a way to resist. But for stakers, it's also clearly bad because they make less money and also they are afraid that their eiff will become worthless. And so the Dido Dow has developed this new concept that's called dual governance. And it basically means that the governance responsibilities would be split

between the LDO token holders and the stakers, i.e. the stake e.e. the stake e. holders. And it's not too dissimilar from other kind of bicameral governance systems that have come, I mean, around the same time or after that. So, for example, there's, you know, the dual house system and optimism where you have token holders, but then you also have nominated kind of groups of community participants, right, who are kind of trusted, right? So these are kind of meant to balance each other out, you know? So maybe the token holders decide something bad, but then the elected officials, they can still do something, right? And, and, these are kind of meant to balance each other out, you know, and you have something similar.

You have it in arbitrium. For example, there's a so-called security council. The upholders, they still have to upgrade, for example, the bridge contract. But what the security council can do, it's a group of, I think, 11 people. And if I think six of them vote together, then they can also kind of turbo upgrade also everything. And they can also pause the system. Why? Because sometimes it's necessary to override kind of what the majority is saying, right?

Or the majority can't act fast. enough and then it's also important to override them for security reasons. So you do have kind of systems like that. And I think what makes them so powerful is that you really introduce new checks and balances that make the system much more robust. So the LDO token holders could no longer make any policy change that would go against, you know, the wish of, let's say, you know, more than 2% or more than 5% of the state eFoders.

And for something that is transparently bad or stupid or anything like that, it basically gives the stakers a chance to just veto the proposal and even get whoever made the proposal and voted for it slashed. So there's now a big disincentive to even making kind of a malicious proposal in Lido in general. So just to clarify, does this mean effectively that I think there's like over $14 billion worth of STEath as the Lido staked ETH token that's out there? Does this effectively mean that that pool of capital all has a vote here? Is that what that means? It cannot change the protocol. It can only prevent changes to the protocol.

They get a veto. Yes, exactly. And what's really cool here, I will say this is one cool feature of crypto. This is why crypto organizations can operate different than corporations that we're used to seeing in the real world, right? So this is akin to like Apple iPhone users, all of them having a vote, like veto power. at least, right, over some corporate kind of decision-making. So it's not just the Apple shareholders that get to dictate all of the rules. If you have an iPhone, you have some contribution of governance. And I do think, like, you can't do that with iPhone users. Like, our system is not set up to do that, but we can design these types of governance systems in crypto-economic protocols. And that, to me, is actually very exciting. This feature, Hasew, by the way, it hasn't been

introduced yet. So we're talking about something in the future. Is that correct? Yeah, so it's something that has been in the works for, I think, nine months now. It's now in its fifth iteration. So it's progressing through the research stages. I would expect that it might go live before the years over. So it's pretty mature already in its kind of research stage, but it's not life yet. So earlier when we were defining the problem statement, one of the problem statements that people give towards Lido is that Ethereum is this no on-chain governance protocol. And then if Lido has over 33%, or any staking as a service, system that has governance has over 33% of each stake, then all of a sudden the non-on-chain governance philosophy of Ethereum becomes invalidated. And what this mechanism is doing is it is giving the staked eth holders a veto mechanism to suppress the on-chain governance nature of Lido in the instance that that needs to be expressed by staked ether holders. And so it is going closer back towards the no on-chain governance philosophy of Ethereum, but I will say it doesn't

get all the way there. It is still, I'll call it a Band-Aid, not a fix. And so maybe, as you said, 2% or 5% of the Staked Eth holders need to vote in order to veto a Dow vote. My critique here is that, well, the product of Staked Ether is meant to be a hold and ignore type of product. And so while it is a feature that staked ether holders have the veto. It is also a bug because now they are responsible for checking the Lido governance when they might just want to put staked ether inside of MakerDAO and then go have a vacation for five years. And so I'll say that this is a step in the right direction, but I won't say the problem of the fact that Lido now has on-chain governance is fixed. How would you respond to this? Yeah, I mean, if you compare it to the status quo,

which is, I mean, they also have to monitor LIDO governance, but they have no way to stop it. It's a clear improvement because they still have to monitor, but they can stop it, right? And only a very small, very small quorum of them would have to watch. Do we know what those numbers are, 2%, 5%, so off the top of my head, so the reason I give two numbers is,

I believe, so you want a number that is so low, that it's relatively easy to trigger, but not so easy that it becomes possible to grieve the protocol and the other sticks. So I believe the way that the fifth and latest, iteration is designed is you need 2% to trigger kind of negotiation phase. And then this gives time for other state efforters to both vote up or vote down the veto. So you can also say the veto was unjustified.

And then your vote would decrease the voting power. So let's walk through an example. So let's say, you know, 2% voted. This is bad. And so that's why we entered kind of the negotiation phase. then after that someone else comes in you know two more percent comes in and says i agree this is bad so it goes to four percent yeah and at five percent the final veto would be triggered but if someone now in the meantime comes in and says no i i think you guys are just trolling you know this is actually good and they voted against

and it might go from four million you know back to one billion or whatever right so it's possible to vote both up and down and it's possible so i'm might have the number slightly wrong. It's also possible that the mechanism might still change because it is under active development. And it's being kind of research and audited by multiple different parties. But I believe this is roughly the idea. And this conversation is all in vain of discussing about what happens if Lido governance is oppressive and a individual node operator disagrees and would like to exit. This conversation happens first. It is a line of defense that allows for the node operators to not have to take that responsibility on themselves,

we can stop any sort of oppressive governance vote from going through through the veto power of the staked ether token. But let's take this further and take the example of that shield, that protective barrier of the staked ether veto gets broken. And all of a sudden, we do need to discuss about the coercion defection incentives between the Lido governance and a node operator. You said that if a node operator wants to leave, they can't take their staked eth with them, and so they lose their golden goose, right? They lose their income. Can we just talk about like kind of the parameters of that? Say I'm a node operator and there's a Lido governance vote that gets passed and I disagree with it and I think it's bad for Ethereum. I want to leave. Do I stop only getting

new ether distributed to me by the Dow? Do I have to give up my entire supply of ether that's staked in my node? What are the parameters here? Yeah, so in the future, if you wanted to leave, then you would basically have to exit, or the Dow, the protocol would programmatically exit these validators. The LiDo Dow would programmatically exit a single Lido node operator. So the Dow can exit a node operator's stake. Not today, not today, but it's on the future roadmap that the Dow can programmatically exit the node operators. And why is this important? Because otherwise, you know, the flip side of this happens where a node operator can misbehave.

and just say, you know, what are you going to do? So in order to hold the node operators accountable, it is important that the lot of protocol can also withdraw the stake. And this, you know, creates an incentives for them to be performed, which I believe that would be especially important once kind of the number of different node operators in the protocol goes way up, right? Because while today we are at 29, the vision in three years, at least my vision, is for there to be overrunerner.

5,000 node operators. So the Lido of the future will look a lot different. So just to really define the incentives here, the power that the Lido Dow has over a node operator is the income stream, the 5% of staking revenue that the node operator gets from all staked ether inside of its node. And so if someone is worried about the centralization effect of the Lido governance, really the power that governance has over node operators is the incentive of the income. Is there any other variable or is that it? No, that's pretty much it. So it's getting access to more stake that is coming in and losing access to the stake that is already allocated to you. Are you a Metamask user? Well, you're listening to Bankless, so of course you are. The wallet you know and love just got a whole lot better. Metamask

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token grant award templates to managing postcliff taxable events with payroll. For legal, finance, and HR teams, it's a huge complex task to have to comply with labor laws, payroll, and tax obligations, tax reporting, and crypto regulations in every country that you employ someone. It's difficult, time-consuming, manual, and costly, and it's drawing more attention from global regulators and governments. Toku makes it simple for leading companies in the space, Protocol Labs, Hedera, Gitcoin, and many more. So if you want some help navigating the complex world of token compliance, go to Toku.com, class bankless, or click the link in the description below. A quick question before we talk about entrance, because I'm curious how we get to the

5,000 number that you're just talking about and when that's practical. But before we get there, okay, I guess a quick question on this. Is Lido forcable today? By whom? Like, is it open source? Could people fork it? So I'm wondering about a scenario. Let's say a section of, you know, Lido governance and then a section of the node operators sort of turn evil and they start, you know, wanting to censor transactions to all of these things. And there's a group of defectors who are like, we are the good node operators. And so we will exit.

We will defect. And these are, you know, 10 defectors. And so they defect. Can they defect fork Lido? Go play the social game on crypto Twitter and start saying, hey, these guys are censoring. This is evil Lido. We are creating Lido classic.

Good Lido. And Lido, you know, good Lido. And Lido Classic, which is, of course, good Lido with, you know, all of the, you know, the more saintly and how of node operators, they do good Lido and it's a completely forked version and they encourage the community to exit from Lido and to stick with them. Is this a scenario that could play out? And that's why I was asking, what is Lido for? Lido Classic Barry Silber's vision. So let me turn the

question around. So if you forked the USDC smart contract today, would it be forcable? No. Why not? Well, because you have dollars in a bank account Yes. So Lido is the same, yeah. So it has the EVE. The on-chain stake-dive. It only represents the stake-dive that is also off-chain from the perspective of the Ethereum execution there because it's on the beaten chain. And it's in these, you know, hardware machines, right, that are validating. Yeah, but you could. Could you fork the code and then just two-step? Fork the code, have Lido Classic over here, and then encourage all of the stakers inside of Lido to exit, withdraw, and then, actually, I guess there's a penalty. There's a cost because everyone has to withdraw. So there's some capital

cost in doing that and then redeposit into Lido Classic. Yes. Yeah, but then aren't you just competing with every other staking as a service, Dow startup that is starting from square one? Yes. Yeah, but that's right. So, yes, technically that would be possible. Yeah, so it would be possible to kind of write over validators, but it would have to happen voluntarily, right, from kind of the site that remains, quote, in power. They'd have same as they could, you know, you could fork USC and you could say, you know, please here's my bank account. And then, you know, Cirque sends you half of the money, right? So if they do that, then that works. And maybe you could even a program something like that into the smart contract. I think it could be possible. I'm not

that technically, but it, you know, it sounds like it might be possible. Yeah. Well, I am not ready to launch Lido Classic today, but maybe at some point, who knows? But let's ask about that question of we have 29 right now. And the concern about 29 node operators, right, even if it is not one entity, there's 29. So this is this confederation is that it becomes kind of an OPEC, like kind of a cabal. There's some kind of monopoly behavior. We can count to 29.

Yeah, we can count to 29. It's, you know, 29 is better than one. But you know what's better than 29? 5,000. And you mentioned the number 5,000. Yeah. How can... I can't count to 5,000. Can Lido make it permissionless to be a node operator inside of the

Lido network and or how do we get to 5,000? Yeah. So, I mean, first of all, I think instead of creating an OPEC-like situation or a cartel, so far I would say the Lido-Dao has, you know, the policies that it makes is about breaking this kind of behavior, you know, and preventing it because that would extract money that otherwise would go to stakers, right? So, for example, you know, these ideas around preventing MEP hiding, making a really robust policy.

This all serves, in fact, like the opposite is kind of anti-competitive, like stop anti-competitive behavior to make the market better for the stakeholders. But yes, thank you for the stakeholders. question. So today, Lido has 29 node operators. In the future, I said in maybe three to four years it will have 5,000. So where is it coming from?

Lido introduced a new version. It's called Lido v2 a couple months ago. It had two main features. So the first was it enabled withdrawals from the beacon chain. So someone who holds Staked Eve today, they can actually send the Staked Eve back to the

protocol and they can trigger an exit and then they, you know, actually the EVE from the beacon chain is being unstaked and, you know, it gets to them, right? And the second part was called the staking router. So in the past there was basically, you know, this like one smart contract and anything that went into and was distributed automatically to these 29 node operators. And what happened with the staking router is a fundamentally new architecture, where you have kind of a new centerpiece and you can imagine it a little bit similar to like

a maker dow where there is kind of money coming in but then you have the different modules and they can all represent different staking strategies or different node operators and so the 29 node operators we call that now

that's the permission set and this permission set is curated by a committee that works for the LidoDAO it's called the node operator management committee so NOM and maybe you have seen you know IzzyDoros Izzy so he is the leader of that committee.

And this permission set would become one module in the staking router. But you can have many modules, all coexisting with a permission module, and anyone can add new modules in a permissionless way. And then you have money coming in from Stakers, and there has to be now some new distribution. So basically, modules would become added to the distribution function of the protocol. So if you zoom out three years, maybe there's 100 different modules, and they have to be approved by the DAO. But once they are approved, they have basically a risk limit for how much EVE can go in.

And then any EVE that goes in is distributed across the different modules. So what modules are possible? So we already said, okay, there's permission to module. This is very good for basically professional node operators who have an off-chain reputation, who have really good performance numbers, and so the risk reward is kind of worth it. You know, you say, like, we can, if you do something bad, then we know where you live, we can sue you. We're going to get that, you know, it's non-custodial, but you get the idea.

It's like you have some recourse. Reputational state. Exactly. But you can have many other modules. So there's two modules that I would highlight that will most likely be added in the next year. One is a permissionless staking module. So it's basically rocket pool, but in Lytle. Yeah.

So you can stake, anybody can basically be an order operator. but they have to put up a bond, you know, and then they basically get the other half of the stake, and they can stake that. What is that bond denominated in? I don't know. It would depend. So I don't know that the module has been developed yet,

so I have no insight into that, but I would assume that you do it in Eve. So when I look at Rocket Pool, I always thought it's, you know, huge kudos to them, basically. I'm a huge fan. I think it's an incredible project and really good that it exists.

I don't agree with all of the design decisions. I think the use of RPL, As a collateral, to me, it feels like, you know, it's just like shoehorning in kind of the token in order to, you know, pump the value a little bit and make the community happy. I think it's not actually the best choice if you just want the node operating to be as efficient as possible. Because you really do increase kind of the collateral that is needed. And so, yeah, I think that this is something that Lido could do better, to be honest, you know. So you only require EFest a collateral. That's what I would do.

And yeah, so other than that, I think it could work quite similar. So that would be the permissionless pool. So we get the permission pool, the permissionless pool. Was there another type of module? Yeah, so the third thing would be a blended version between the two. And there would be a module that has both professional node operators and, for example, solo stakers in a permissionless way, but secured by distributed validator technology or DVT. So what DVT is, you know, one validator is usually operated by one party,

but DVT allows one validator to be operated by a committee of many parties. So for example, you could have a validator that's secured by a committee of five different parties. And maybe two of them are permissionless and three of them are professional. And so you could kind of have a module that really blends the best of both words. Anybody can join it. But it has kind of the uptime and the performance of a professional note operator. Yeah, the thing I like about DVT, we've called it squad staking on this show before because it's a fun name and it's in alliteration.

the simple way to put it, I'd say, is like, say you have one single central operator who is just extremely good at their job. And then you have like four hobbyists. Well, you give all the ether to the professional, but then the professional node operator in order to actually propose a block needs to have transactions signed by the hobbyists. And so it's a nice way for the little guy to check the power of the big guy. And you're saying that these can be blended into a single module, a single committee. And I think this V2 version of Lido, the pattern of how it's designed fits other patterns that I've seen across the crypto landscape. Most recently, Uniswap V4, but then also Ethereum's roll-up-centric roadmap, where you have this main hub, and then you have

things that are free to express themselves hooked into the hub, and the hub just coordinates this layer two, for example, or the uniswap hooks, or the Lido modules. And And so rather than having a monolithic Lido, which with 29 node operators and node operators have voted in or out, instead you just have these modules that can express themselves as they see fit. Either it's a DVT system, it is a single operator, it's any sort of expression of a staking system. And it's just up to Lido governance to vote in and out these modules. So this is the pattern that I'm seeing, again, like expressed across different designs that I'm also now seeing in Lido V2. Yeah, I mean, it is a design principle in general, but in particular in LIDO that we are trying to push complexity to the edges.

So you want basically the core, which is the DAO and the protocol, you want this to be extremely simple and easy to understand, easy to audit, easy to secure. And if you have any operation that is more complex, maybe because it needs to be, because it's maybe more economically efficient, you basically want these to happen on top, right? And that's why I think you see this design pattern now emerge as a very dominant form of kind of design pattern in all across DFI. So with Ethereum's like roll up centric roadmap, a lot of the ethmaxis are like, hey, all those layer ones are going to just become a layer two on Ethereum. Would you say that all of these, like there's a bunch of startups staking as a service systems that are out there? There's like the long tail. Would you say that like if you're a Lido maximalist, and since Lido does believe in like being a monopoly over a staked Eth in. inside of Defi as a token.

Would you say that the Lido Maximilist take would be, hey, all these staking as a service orgs are just going to become modules inside of Lido? Yes. I think that Lido is moving now to a platform model. The staking router is basically perfect for that, you know, because Lido has the most liquid staking token and it has all of these integrations. It is the most battle-hardened trusted staking protocol. And what it has with this is basically the power of distribution, right?

because Lido has this EVE coming in, and this basically solves exactly the problem that if you want to design a staking protocol or like a staking provider, what you need, right, you need basically to get EVE, you know, what you have is, you know, maybe the skill to use it, but what you don't have is the power to get it. And so I think this creates a huge opportunity for Lido to become a platform where other people who may today choose to, you know, launch a new staking provider to launch on their own. instead, you know, they will build it on top of Lido and they can set, you know, and this is something we haven't touched on, but something that the modules also allow is you can set your own economics, you know. So for example, something we see in the bonded model of Rocket Pool is you need to pay a higher fee to the node operator in order for them to participate. Why?

For one reason, because they need to put up a bond, yes, so they have a cost of capital. But second, because they might overall be, you know, less professional. and smaller in size. And so any fixed costs they have are harder to amortize. And so overall, they have basically, you know, for every block they make, they have a higher cost of production. So you need to pay them more, yes. And this is something that, for example, can be represented in a module.

So the module can say, this is a permissionless module, but instead of 5%, it pays, you know, 15%. And somebody else can say, well, this is a permission model and it pays 12%, you know, and then maybe the Dow has to choose between the two modules. So I think there will be free competition for how to set the fee. And this allows someone to come in and build on Lido as a platform and say, you know, this is what I do. This is the fee I charge. Please consider me for the stake distribution.

And it allows new models of staking that basically haven't been possible before also to happen on top of Lido. So one of their main incentives as to why somebody would start a staking as a service, Dow or organization, a new LSD, because you get to issue the token. You get the LDL equivalent for that particular protocol, right? The RPL equivalent for that particular protocol. Are you saying that these orgs would be able to retain their token as well as also being a part of the DAO? Oh, so it depends.

So you said RPL, but do you mean I, if? No, I mean the actual, so going back to the comparison between like the Ethereum layer two, is like why don't all just layer ones become a layer two? It's because it kind of neuters the power of the layer one token if they just become a layer two, or at least the perception of it. And so one of the incentives for why one might start a new staking as a service system is because they get to issue their own governance token or their own version of RPL or their

version of LDO. But if they just become a module inside of Lido, is there room for an alternative token? Because that's one of the coordination defection incentives between many different LSC systems and just one LSC system. Yeah, you can absolutely have your own token. So imagine you have a model. module where you say, you know, I'm a note operator, but I use eigenlayer. And I, for example, I am a sequencer for this new layer two that's about to launch.

So I have another income stream. So give me some if, you know, I will do a good job. And I will also generate, you know, not just the revenue from Ethereum, but also the revenue from this new layer two that's about to launch. So that's a possibility. Yes. And I charge 10% for that. And so there's 10% going to the node operator and 5% going to.

to Lido, and in this case, then it's 85% going to the user, right? And of course, if you're the creator of that module, you can, for example, decide to distribute your 10% to your token. So in terms of how the modules are designed, you have really complete freedom. You can even have governance on top of your own module if you want that. I think, you know, if a module is, yeah, it would kind of, you know, increase the trust surface of the module, is a consideration in whether to include the module or not.

But in theory, all of these things are entirely possible and something like having a token that, for example, has a cash flow from your module that introduces no additional security concerns for Lido. So I think this is something that we will absolutely see in the future. So I want to go back to something you were saying, you know, just now in this vision of Lido becoming a platform. Like this is definitely the perception in the Ethereum community.

like Lido's going for it, right? They're not throttling themselves. They're not stopping at, you know, 10% staked or 20% staked or a 30% staked or 40% staked. They're not self-capping. They are not stopping. They are going for a platform play. They are also saying, at least the case you're making is, hey, this is not as centralized as you think, even if we become a dominant, the dominant staking platform within Ethereum.

Let me ask you, though, you know, we kind of set this up as a, um, there are some criticisms in the community about Lido right now. And I think there's the perception among critics that this would not be a good thing. These changes that you mentioned with the different modules and permissionless pools, the ability of Lido stakers to veto and have some vote in themselves, do you think this addresses the critics' critiques, or do you think there's still something to them? Yeah. So, Ryan, in order to answer that, I want to take kind of a step back.

we've already kind of said it a few different ways. So, for example, you know, really the Ethereum community would like for there to be, you know, maybe 10 different sticking protocols and they all share the stake equally. And we would also like for there to be no way, for example, for any on-chain action to influence the governance of the protocol or anything that happens at, you know, the M.EV layer or the staking layer. So in my other role in flashboards, I hear the same things, right? Just like in a different color as well all the time.

And this shows it's not a light. problem, right? This is kind of a general problem that Ethereum is dealing with and has to deal with because increasingly, you know, there are things outside the protocol that are affecting how Ethereum works and or that are growing really big to the point where they can become a systemic risk for Ethereum, right? So there are other protocols that also have kind of, you know, large amounts of stake, not stake, but kind of tokens in their smart contracts on top of Ethereum or that are like majority gas users and so on, right? And so overall, I think the first part of my answer is the Ethereum community has to find

a way of kind of dealing with applications that are built on top of Ethereum and that are growing really big because I completely get it. Like it's really scary and there are no simple answers, right? So you cannot just like kick them out or somehow throttle them in some way because that would erode the credible neutrality of your platform, which, I mean, if Ethereum loses credible neutrality, then that would be really bad. But at the same time, you also feel like you cannot just do nothing, you know, because you see kind of, you know, the threat creeping up and really, you know, the situation is not good. And there are real things that can happen, right,

some of which we touched on. And so I think it's basically really complicated. So when I started thinking about liquid staking, then I kind of had a three-part thesis, and I want to briefly go through it. Why? Because I think it's still really relevant today. Like nothing pretty much has changed about this for the last two years. The first part is that there's a kind of a natural desire to divide capital and labor. So if I have stake, then I want to delegate it. You know, I just, I don't want to do it myself. Some people do, but they kind of, you know, they are in the minority, you know and what that means is that at the limit all stake will end up being delegated today so we saw excellent report from rated dot network and they were saying you know based on their estimates there's

six percent solo stakers today in the network you know that's it just six percent yes yeah yeah and i mean it was a high guess so the number might be way lower than this you know and and so 94 percent professional node operators. So what happens as more users hold ether through like their brokerage accounts, through exchanges, ether goes up in value. So people already like get more freaked out about self custody as well and so on. I think this number actually goes down more, right? It doesn't go up.

I think it goes down. At the limit, maybe there's one percent solo stakers. So this is definitely, I mean, a trend we have to fight. But it's not a trend that you can reverse. Like you have to deal with the fact that the number of solo operators would be very small. And there will be delegation, which means you have this principal agent conflict, which is just basically a name of describing this whole conversation that we had. The second is that of all of the forms of staking that exist,

liquid staking is by far the most dominant, the superior form of staking and will over time crowd out all other forms. Why? Because it is effectively, it is like staking, but you get all of the liquidity and it's non-custodial, and you can basically turn it into any other form of staking. So if you have a liquid staking token and you can still give it someone else to custody and then you have it like non-custodial, right?

But you get all of the capital efficiency and the optionality of using it however you want. And the third one is that these liquid staking tokens actually compete as money. Why? Because ether itself competes as money. Ether is the best asset in the world. People want to transfer it.

They want to use it as money. collateral, they want to use it as Defi, they love using it, they love holding it. And so the same applies to LSTs. So any LST that competes in the market competes on the same terms as EF, and that creates extreme network effects. And when you have an industry with network effects, you know, what that means is the more people use it, the more valuable it becomes for other users also to join. So when I want to stake my EVE today, then why should I, you know, stake with staking protocol number 100 or even number 10, when I can join the biggest one that has the most liquid asset

where I can use in the most places. It is the most liquid. If I ever want to exit, it's instant. I can sell it. I can collateralize it everywhere, getting the best rates. And industries that have these network effects, they usually have very strong kind of winner-take most, if not win-a-take-all dynamics.

And there has virtually no counter-examples to this, you know. And you can say, well, but not in Ethereum. And I'll say, you know, I just don't believe you, you know, because the other two trends are just like they are too strong, you know. And Ethereum itself, if it was a country, then I would say, okay, well, you have like the rule of law and, you know, you have decision making. And if some company gets so big that it's like 50% of your economy, you know, maybe you can exert some pressure over it, you know, you can keep it in check. But like the value proposition of a country is not credible neutrality, but in Ethereum it is.

And so Ethereum is in this really hard place about dealing with projects that get too big. And this doesn't just apply to Lido. I mean, you mentioned it applies to eigenlayer. It used to, you know, OpenC was really big before Blurke came along. Like Unisop, Metamask. I think these are like all projects in some way, they dominate basically kind of their respective niche and they are really powerful. And if you are like part of Ethereum, the Ethereum community, then you basically wonder, well, what should I do about them? So I remember very distinctly

in my role at FlashBots, you know, MetaMask had 70% of all of the transactions of Ethereum. And these were not mostly sophisticated users. These were users who, you know, they are kind of, you know, they don't really know what they're doing, many of them. They don't. really care. They wouldn't even know if, for example, Metamask did a block builder and wins every block in Ethereum, you know, and extracts all of the value and then sets the price wherever they want. So they would never do that, right? So we know the team like well and they're incredibly Ethereum aligned. But I'm just saying, you know, this exists everywhere, like this kind of rationale that you have power somewhere and there are network effects in like every layer of Ethereum.

And so I think if you look at these assumptions, then for Lido to keep growing to a place where they are kind of dominant, you know, is not just an option that is viable that has to be thought about. If you believe in network effects, then it's the only option. Because, you know, between being big and being nothing, there's nothing in between, you know, there's no place where you can be like 10% or 20%. And you chill. It doesn't exist, you know, because if you're 20% or 30%, if you don't keep growing, at some point, someone else will grow bigger, and then everybody will go to that player, and then you will die. And this has been my view for a long time, and this is still my view today. So in some ways, Haseu, that's kind of a dim view. But you might also call that a pragmatic view and a realistic view.

And this seems like to be the case why Lido has not self-limited. it's, you know, itself. It hasn't said, we're not going past 30. It's just going to continue to go up and continue to grow. And if this kind of Moloch trap is true, if your thesis is true, then really the best outcome, the highest utility outcome, is for Lido to do everything that it can, and for the community to apply as much pressure as possible to Lido, to decentralize the elements that are still decentralized in its stack, to be as quick as possible to safely. of course, not speed and safety, both of those are related, to safety, roll out some of the permissionless modules you're talking about and some of the governance you're talking about.

And yet, I want to contrast that to another point, because, yes, competitive forces and market forces are a force at work here, but there's also a social force here, right? And primarily among stakers, I think. And I remember we had a conversation a very long time ago, Haseo, the first time I think I met you and we had a conversation was actually on the topic of Bitcoin. And it was Bitcoin and Ether and how these communities would evolve. And I remember you saying something that has stuck with me and continues to stick with me. It's like, I'm paraphrasing here. But the most bullish thing about the Bitcoin community is how ferocious they are, how zealous they are, how single-minded they are, how much they actually care.

Bitcoiners have articulated this like, you know, you could go to the protocol devs and put a gun to their head and say, you know, change this code in Bitcoin and push out a fork and they wouldn't do it, do you know? And so it's this zealousness, this hardcoreness. And in order for a layer zero, this is kind of the social layer behind all blockchains, I think, in order for them to actually stay decentralized and fight all of the Moloch forms and the traps and the bosses that come and fight and try to centralize, then you need to maintain this zealous core who says, I don't care where the most profitable pool actually is. Like I care a little bit about that, but I'm willing to take, you know, 1% lower yield and do the right thing and solo stake or stake with this more decentralized pool.

And that force, I think, has to exist inside of an entity, almost like a spiritual type force, a cultural type force, has to exist at the root level of a blockchain in order for it to succeed, moving forward. And this is actually a force that I see in some of these fights on crypto about centralization and decentralization. And it's almost like a moral call to like do the right thing, solo state, you know, buy those bonds and win this war. It's that kind of thing. Ethereum needs you. Yeah. And I don't, I don't hate it. I actually think we 100% need that. So how do you contrast that kind of public goodness with what you just said? And sort of almost like the evil, it's not even evil. It's just like the factory type nature of the Molok trap that you just

described. Oh, I love this question really. So I have actually many points that I want to answer. I will try to connect them in some way that makes sense. So in the Bitcoin community, even kind of the ferocious core could not do anything about the fact that at some point, 80% of the blocks were built in China. And now, like 55% of the blocks

are built by public U.S. companies. So there are things that are within the scope of what kind of is like a ferocious minority can affect. And then there are things that are basically out of scope. And I think if we look at like mining, for example, I think it's autoscope. Second, I remember this conversation. This was on the Block Crunch podcast. It was a famous bear market debate.

Oh, yeah. I remember this. It was great. And I think that the Bitcoin community was really ferocious. I mean, maybe a bit overly so to the point when now it's moving in the other direction because, you know, their ferociousness ended up, you know, removing so much nuanced debate and so many smart people that kind of the, you know, the snake ate its own tail. but I think Ethereum is not and shouldn't be like that.

Ethereum should not try to compete with Bitcoin on ferociousness. I think the values of Ethereum were always, you know, optimism and science and, you know, creativity and community and stuff like that. You know, what in community, not in the Bitcoin sense. And so I think the Ethereum community should try to solve the problem in a way that stays true to its core values, which I actually think that the right way of thinking about this is like Ethereum is extremely like accelerationist in many ways, right? Like the idea that like on Ethereum, it's it's kind of, you know,

we are maximizing MEP extraction but democratizing it. You have defyp protocols that are like working on bribe models where like, you know, they have a market for bribing them like curve as an example, but like many others as well. This idea that like everything that can go wrong will go wrong and we are building systems that work around that. Another example, Italics Vitalik's Endgame Post.

He says, well, there are two, three different ways where we basically cannot change the fact that, you know, block production will centralize. But what we can do is we can make sure that block validation stays decentralized and that there are censorship resistance mechanisms for users. And this is exactly the kind of pragmatism. that really defines the Ethereum community for me and that got me, you know, so addicted

to being part of this group and part of this community. And this is basically the type of thinking that I apply, you know, in flashboards, that I apply in Lido. It is this, well, how can we do both, you know, how can we keep Ethereum decentralized in spite of, you know, being pragmatic about these market forces? And that is exactly, you know, it's making all. of these hard choices that hopefully make both of this possible, where in the end state, you have a staking protocol, and it's a very, very thin middleware layer, and it is decentralized.

It has a lot of checks and balances for users where basically no bad governance decision can happen. It is formally verified. It has basically, you know, all of the security guarantees that you can want, but it's still in line. Like, there's no way if you want to attack Ethereum, if you're a big player who doesn't care about any of these things to be better than that. So, Hazu, with that, I want to actually return to the question that we started this podcast episode with, which is, do you think Lido has been unfairly vilified by parts of the Ethereum in crypto communities? I think if you asked the opinions of the general Ethereum OG leader person, whatever archetype that that fits into your mind, you would get the answer that

Lido is centralized, Lido isn't Ethereum aligned, they're not decentralized, et cetera, et cetera. So do you think, would you say that Lido has been unfairly vilified? I don't think that any Ethereum leaders think that Lido is not Ethereum aligned. I think they think that we have a different view about how things will play out. I think they see us as ultra pragmatists, which is fine, because I think we are. And, you know, they are maybe ultra-optimists.

I don't know. I think so. So I wouldn't say, you know, Lido has been vilified. I think that or villainized, maybe that's the better word. I think that a lot of the criticism is extremely important, you know. You're completely right. Staking router was only shipped a couple months ago. It doesn't have a permissionless staking module yet. It doesn't have a DVT module yet.

Dual governance is not yet live. The I think of a smart contract is not yet. is not yet formally verified. There's no programmable exits yet. These are all true facts, you know, and this is, you know, like everybody who contributes to Lido reminds themselves of these things every day

and kind of uses it to get better and really work on the roadmap and, you know, try to ship it as fast as possible. And like, we use that as motivation, you know? And so I would say, you know, really keep pushing us. So we ship this stuff as fast as possible. and also contribute because this is, you know, instead of fighting, like let's work together to, you know, make this happen as soon as possible.

So, yeah, I mean, I love the discourse. I think it's making us all better. I think that is a core value of the Ethereum communities to have this discourse and to not to shut down conversation. So I'm glad we had it today, Haseu, and before we let you go, just one final question, because I think this is really the meta question of the episode. and maybe the meta question for all of crypto in this 12-year project we've been working on, Ethereum just hit its eighth birthday too, so it's an eight-year-old now. The meta question really is this.

Can we keep Ethereum decentralized? Do you think we have a hope of that? Do you think we can achieve that? Yeah, so if we stick to the values that make Ethereum unique, then I think we can. And there's not just staking, you know. There's not just MEP, there's not just re-staking. Like, these are all things.

that are really, really similar in nature. They are all pushing in the same direction. And if we kind of lose these values and we start thinking that we can fight market forces, you know, just kind of through social action, then like we will either fail or, I cannot be prepared when it happens, or we will succeed, but destroy ATMs credible neutrality

in the process. So I think this is actually the only way of, you know, just building systems, that can win in the free market against players who don't give a shit about Ethereum's values, and that kind of achieve both, you know, that achieve success and that also protect Ethereum's decentralization. And yeah, this is the way that we win. We'll have to leave it there. That is the way that we win. Certainly, Hasu, it's been a pleasure to have you on bankless. Thank you so much. Thank you. Bankless Nation, some action items for you today.

This isn't the first time Hossu's been on bankless. Okay, we're going to include some links in the archive of his previous visitations, which have been ultra-fantasmatial. as well in explaining these concepts. Also, another action item for you, I have heard, and I believe this is true, that UncommonCore is restarting. That is Hasu's podcast. Maybe it already has restarted. I need to get myself caught up on some episodes. Hasu, can you tell us quickly about that and how to tap into your podcast? Thank you so much, Ryan. Yes, you're right. So I do host a podcast. It's called Uncommon Core. It used to be very popular. Then we took a one-year break. And now it's back with a new co-host, John Chabano. So if you're in the Ethereum community, then I don't know how you don't know, John, if you don't.

He's written some of the most fantastic reports on Ethereum, even got a shout out from Battallic for them. So together we are diving basically into some of the things that we are very passionate about, which is infrastructure. So it's stuff like what we talked about today. It's MEV, roll-ups, staking, restaking, all of the good stuff. So if you're interested in kind of very technical-minded and kind of at the frontier discussions about these topics, then check it out. It's Uncommon Core in your podcast player or go on our website. It's called UCC2.xYZ. Thank you. And there will also be a link in the show notes as well.

Big plus one on that, guys, Hasu and John are going to bring it. So make sure you check that out. Got to end with this. Of course, none of this has been financial advice. We're trying to keep Ethereum decentralized as much as possible. Watch out for staking. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.