Bankless - LiquidStake - Andrew Keys & James Slazas | Meet the Nation

Episode Date: November 11, 2020

🚀 SUBSCRIBE TO NEWSLETTER: http://bankless.substack.com/ ✊ STARTING GUIDE BANKLESS: https://bit.ly/37Q17uI ❤️ JOIN PRIVATE DISCORD: https://bit.ly/2UVI10O 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ 👕 BUY BANKLESS TEE: https://merch.banklesshq.com/ ----- 📢 DEFI BUILDER? APPLY TO FILECOIN ACCELERATOR FOR $20K GRANThttp://bankless.cc/filecoinapply ----- GO BANKLESS WITH THESE SPONSOR TOOLS:  ⭐️LEDGER - BEST HARDWARE WALLET TO SECURE YOUR CRYPTOhttps://bankless.cc/ledger-20 🚀ARGENT - GET THE MOST SIMPLE AND SECURE DEFI WALLEThttps://bankless.cc/argent 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDShttps://bankless.cc/monolith 🤖YEARN - YIELD-SEEKING MONEY ROBOT THAT FARMS DEFI FOR YOU http://bankless.cc/yearn ------ LiquidStake - Andrew Keys & James Slazas | Meet the Nation DARMA Capital is a fund that is perma-bullish on ETH, and the entire fund is focused on producing ETH-denominated returns for their investors.  DARMA has rolled out LiquidStake, a Staking-as-a-Service product that enables ETH 2.0 stakers to access liquidity during the unknown ETH lockup period.  Article: https://www.coindesk.com/ethereum-heavyweights-launch-liquidstake-loans-to-ease-eth-2-0-lockup Andrew on Twitter: https://twitter.com/AndrewDARMACAP?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor ------ Don't stop at the video! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Visit the official Bankless website for resources http://banklesshq.com/ Follow Bankless on Twitter https://twitter.com/BanklessHQ Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time we may add links in this channel to products we use. We may receive commission if you make a purchase through one of these links. We'll always disclose when this is the case.

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You can just go straight from your bank account right into your monolith checking account smart contract wallet. So check them out at monolith.xy-Z. Welcome Bankless Nation. We have Andrew Keyes and James Slazas, who is the, Andrew is the president and co-founder of Dharma Capital and LiquidStake. And James is the CEO and co-founder of... liquid steak. And we have them on to talk about exactly what liquid steak is, why this product is getting built, what it is useful for, and who should be using it. So James and Andrew, welcome to the Manclos Nation. Pleasure to be here. Thank you for having us. Thanks, David and

Ryan. So, yeah, as the deposit contract is here, the conversation has inevitably turned to staking ether. And you guys have just put out your guys' introduction, your announcement about liquid steak. So if you guys want to just kind of give us the quick elevator pitch of liquid steak so we could have some foundation about what this is, then we'll move forward and get into some more nitty-gritty details. Great. Yeah, I'd love to. And basically just there's two different two different offerings. We wanted to obviously support Ethereum's movement from proof of work to proof of stake. And so we saw that need of, well, if all these assets are going to be locked up, how do we get liquidity? And so we created liquid stake to help individuals to be able to

provide to do that. And Dharma Capital is helping institutions to do essentially the same thing. And I would say the form is a little bit different between the two, but it essentially gets you to the same spot. So for an individual, they can stake any amount of ether that they want. The, and it looks just like any other type of collateralized loan. They send in their ether. They get a loan against the collateral value of that ether. The big difference is that instead of, if they had already staked it somewhere else, well, then we can't access those private keys, right?

So they need to come through liquid stake. We then ask them of our, you know, three preferred, you know, valid. validating service providers, bison trails, codify, and figment, which do you like? And then we stake that through there, right? So we have those keys. And they can, like I said, they can put any amount that they want to, so it doesn't have to be a full 32 lot pool. Additionally, all of the stakers that choose the same validating service provider, they can, they basically have an aggregated pool. So they don't have one specific pool risk where one one pool might get slashed or not. Instead, it gets aggregated across, you know, everybody that's in each of those. And in addition to

that, a little bit more technical, but we, we basically commit our own capital to ensure that all of those pools are always topped up to 32. So if there were to be any type of slashing, we just want to maximize the amount of reward rate that each of the stakers are going to receive. All of this is done in a traditional collateralized loan format. And so our website will have a dashboard tracking all of your collateral and things like that. For the institutional side, institutions deal with our Dharma Capital, which is a CFTC registered investment fund. and in there we are a swap firm and so we enter into a swap with the with our institutional client

and the reason that we we do this is essentially non-security swaps have been around for several years and so there is a lot more regulatory and tax clarity on how to treat a swap and so there's a lot of different issues that are going around post-subes and so there's a lot of different issues that are going around post proof of stake association has done some phenomenal work on being able to, you know, do we don't actually know today that if we move from ETH one to ETH two, is there a step up in basis? Are the reward rates taxable in the current year or when you dispose of those rewards? By James, just to clarify, step up in the basis, you mean a taxable event of some kind, basically in the U.S. Yep.

And so for institutions where they can, they obviously know how to treat a swap, they're just receiving the swap, you know, returns. And so it really alleviates a lot of those kinds of questions. So, James, this seems to be a product that, you know, we in the defy universe, we can really resonate with because in defy, if you have an asset, you can generally put that into. to an application and then receive a loan based off of that asset. Like this is what Maker Dow does, this is what compound does, this is what Avey does. And so I guess in the grand scheme of finance, we're kind of spoiled here because any asset that we have, we can generally get a loan out of.

And this is what you guys seem to be doing with liquid stake, except it's for a very specific instance, which is staked ether, which is very much unlike any other asset in the defy and Ethereum ecosystem. And so the goal of the goal of this is just to be able to, you know, provide, I feel like a similar comparable level of service as all the other defy applications, but specifically with state ether. Is that right? Right. And the big difference, right, is that all of those assets are able to be moved. All right. So, so typically what

happens is somebody goes and takes their, their crypto asset, sends it in as collateral, receives their loan. On the other end of it, you know, that that group is then lending it out to someone else, right, so that they can borrow that asset and, you know, an additional, let's say, interest rate is earned. Here, the asset is locked up, right? So we can't, there isn't any type of re-hypothecation that goes on or anything like that. It's just, it's held in the deposit contract, and then there is this, this loan or, you know, leverage effect from the swap. The unique part of why we're able to offer this out is essentially because Dharma is such a large player within the Ethereum ecosystem. Even though that these assets are locked up in the deposit contract, Dharma itself can help when there's a liquidity event.

So let's say that someone has to be, you know, that they didn't meet their collateral calls. there's a liquidation event. Dharma has enough capital that it's willing to basically step up and say, we will buy that stake ether that's locked up. And it really just becomes almost a journal entry to our account. And so this is how we were able to solve the solution for being able to provide liquidity. It's a lot, you know, we, it's kind of funny. I laugh about saying it this way. We're using a centralized approach to really push decentralization.

And I would say that we really feel strongly that given that this is a short time frame, right, we only have a year and a half, three years until we reach phase 1.5. This solution basically helps bridge that gap so that we can continue to innovate because as people have more liquidity from their staked ether, now they're going to be able to do additional things with their assets. Super cool. All right, so a bunch of questions pop up in my mind about this. First is just a quick detailed question. So when somebody deposits their staked ether, right, you mentioned James collateral calls, right? So how are those calls made? People in Defi are used to collateral calls and maker, for instance, and that's all sort of, you know, bought arbitrage,

the Oracle feeds the price and you just get liquidated if you're in too long. People familiar with something like a Block 5, for instance, they will email you, they will call if they've lent on OTC desks. It's sort of similar. How do collateral calls work in the liquid stake system? It's literally the same thing. We're looking at this as different trigger levels. And so then we, you know, whatever forms that we can,

get a hold of the borrowers at. Obviously, it would be email notifications of saying you're X percent away from a margin call, and then each level getting closer and closer until a liquidation event. The part for us, obviously because this is an asset that is locked down, Once we do have a liquidation event, right, we do have to then liquidate the loan. So in our documentation, it's, you know, send us in stable coin, Bitcoin, ether, any of those to be able to obviously satisfy the margin call. Interesting. Okay. So that's how that side works. And if I'm understanding maybe breaking up kind of the retail piece and the more institutional piece, right? So the problem you're solving with liquid stake on the retail side is, I guess, a fewfold. One, with liquid steak, you can stake with less than 32-Eth.

Of course, folks that have been listening to Bankless know that if you're spinning up your invalidator, you must at least have 32-Eath, which is the equivalent of, I don't know, 15K in capital. So with liquid stake, one problem solved is you can stake with less ETH than 32. Is that correct? Right. Okay. And another problem that you're solving is in this first phase that we talked about all the way to phase 1.5, which could be a year, could be up to three years, maybe we'll be optimistic, maybe it's two years. There's no liquidity on the ETH that you deposit as collateral, which means it is essentially locked inside of ETH2 until the rest of the Ethereum network is bridged over. So you guys are providing liquidity there. And that will come in the

of a collateralized loan. I imagine it's got to be over collateralized. So what percentage over collateralization are you guys doing? It works out to be a little bit more than 50%. Okay, so 50% over collateralized loan. But in return, you get USDC, which is essentially a very liquid stable coin, almost as good as having FIA. Is you have the optionality of a collateralized loan.

You don't have to. And so you don't have to take it on day zero. You can take it in increments on, let's say, day 30, day 60, day 90, day 180. You can take it on day 180. So I think an important consideration to make is that if you do not stake with liquid steak at inception, your staked ether is ineligible for liquidity. Because we don't have a perfected interest in the collateral. If you do stake with liquid steak, you are able to have liquidity in the form of a loan at any point between phase zero and phase 1.5. Which, Andrew, is kind of nice because, look, all of us here, we're Heath Bulls, are we not?

I mean, not your head if you're an Heath Bull. Okay. So I may not want that liquidity when prices at 400 when I deposited it, right? But I may want that liquidity when he shoots up to 2000 because, wow, that's a lot of locked capital. And now I want to start taking out my loan. So it solves that. And I think the third problem it solves, again, I'm just sticking on the retail side because I know Dharma is solving some other things. But on the retail side, the third problem it solves is basically like, oh, boy, I have to run a validator, right?

Okay, like I have to buy some hardware, run it. It's easy, guys. We have a guide for it. You could do it. But if you don't want to get into that, you are essentially connecting them with a SaaS-based validator providers. So, and I want folks to know who are thinking about like staking on something like Cosmos or EOS or something. Those models are all a form of deliated proof of state, which is different than what these SaaS providers are providing.

You're not delegating your private keys to these SaaS providers. They're just providing you the infrastructure, essentially. They're providing you the hardware, only it's cloud-based, and they manage it in exchange for, I don't know, some sort of fee. But it solves that problem for retail as well. So it's kind of those three problems that LiquidStake is solving. Is that a roundabout, right? I think that's very accurate. I've actually looked to add another problem that I think, well, maybe it's not a lot.

a problem, but it's definitely a perk. And so you guys at LiquidStake are enabling non, non multiples of 32 as deposits, right? And so not only can you deposit less than 32, but you can deposit something in between 32 and 64 and still get the ROI on that, whatever is above 32, which, you know, if somebody is staking 32 eth on their own, they're going to be receiving ETH dividends. And so maybe by the end of one year, their 32-Eth grows into 36-Eth or something. But that extra for ether isn't compounding. It's just that first 32-Eth. And so from what I'm gathering, because you guys enable partial deposits of 32, you guys are actually enabling perhaps an increased ROI by enabling people to have just more capital efficiency by that extra deposit. Is that

correct? Yes. And in addition to that, your collateral grows. So in real time, your collateral will grow and you could in effect take more fiat out or USC out against that and we do journal that accordingly. Now, I want to zone in on this, right, to make sure I understand this because I said it, but I just want to make sure it's true. If I am retail staking in liquid state, am I giving my private to anybody here. So I've got ETH. Do I have to give custody to figment or codify or anybody else? So you're actually sending your ETH to us.

Oh, we are. Okay. Right. So it is that, you know, you're giving us your private keys or you're really just giving us that ether. You'd have to have that, I suppose, because you've got to be able to liquidate. Yeah, we have to have a protected agent. It's in the collateral.

Yeah, the perfect industry is the big partner there, right? Got it. It's obviously if you gave us your private keys and you held them, right, there would be a. Yeah, yeah, you can't come to my house and get them. Of course. That brings up an important difference because we were talking about how like a liquidation event might occur if somebody borrows a bunch of USDC, but then the price of ether drops. And so therefore the loan becomes underwater. You guys said that it's very similar to how MakerDAOV or AVE does this with their liquidation events.

But on something like on chain on Ethereum, there's a transaction that actually happens that occurs that liquidates the ether from those applications. Is that also true for liquid stake? Or is this something that you guys have your own internal ledger for that kind of operates not on Ethereum? Yeah. So this would be, so essentially what would happen is at a. liquidation event, right? There is this price trigger. And that's what I was referencing is that ether's already locked up. It's already under our, like we were saying, private keys. So it essentially becomes a journal entry of moving the assets under the borrower's account to Dharma Capital. And so

Dharma Capital becomes the then buyer of those of those assets. I'll just say in a later state depending on how much this grows, that's something that we absolutely want to reach out to the community and say if others want to be a part of this being a, you know, saying here, I'll be a buyer of those staked assets. But that's going to be a future state to those. Okay. So and I do want to get back to what you said, James, was centralization by decentralized, with like centralized to decentralized, because I think here's what you're saying here is, you know, you guys would custody the private keys, of course, because you have to in this model in order to provide the liquidity. But you are not doing the validating yourselves. You are essentially, I guess,

decentralizing that to some staking as a service provider companies. like Codify and Figment and Bison Trails, and I imagine you could add and maybe we'll add others to that list. Is that what you mean by decentralization that, like, you're not all staking it yourselves and validating. You're just distributing it to this network of SaaS staking providers. Well,

I meant more of helping push proof of stake in general. Ah, I see. In the community. And yes, you can, you know, absolutely are, you know, the way that we look at is, you know, we vetted those three validating service providers. And they're awesome. We know that. Yeah. And so we use them and, as you said, give over to them just that the tech stack to be able to manage the staking side of

things. You know, we, so there becomes this, you could say decentralization for, for all the different staking providers that we then connect to. But more so just this has been a project where, okay, Ethereum has an issue. We've come up with an innovative product to be able to solve this. And something else that I'd just love to be able to share about that is we've really worked with a lot of different partners in the ecosystem to bring this to market. You know, so, I mean, just our loan and swap documentation, that's all been codified through open law.

Yep. And then open law ends up, you know, encrypting a hash onto Filecoin. Oh, cool. Right. We're getting to use all the different parts of the system. You know, we have, you know, obviously the validators. And then we also use Luca for basically making sure that all of that regulatory data and compliance is all met. So it's basically saying here is blockchain in action delivering it, you know, in a, what I would say, a simple, you know, innovative financial product.

Very cool. All right. So those are the wins for retail on the liquid stake side. On the Dharma side, you are also providing staking through similar mechanism, but it has a different kind of regulatory interface, right? And here's the problem I think you're solving there is that institutions are leery of. staking this early because in the same way retail is the liquidity issue. That's one reason. But other reasons are the ambiguity, the possible ambiguity of the tax situation, right? Maybe retail's willing to accept that sort of risk, but large institutions with stockpiles of ETH may not be. So with Darmah, you guys are providing essentially a bridge, a way to unlock all of that institutional capital. like all of the eth that a maybe a poly chain owns or something, you can essentially unlock that to be available for staking. Is that correct?

Right. So all of these swaps, you know, they're driven off of an ISTA master, so international swaps dealers association agreement. So it's a standardized agreement. And there's 30 plus years of history of high, how do you treat a non-security swap? So it's very, I look at it as very cookie cutter. And so for an institution who says, you know, we don't even need to borrow against this,

but we want to know what is, we want to have that clarity. Yeah. Could we just do that, right? So it's, it really is much more just the institution just go, okay, great. I don't want to have to have this kind of. vagueness on how do I treat these things. There's already enough, you know, almost hair in how do I deal with these type of assets? And so having the swap is a very standardized format. We actually have a facility where we, it's called an SDR swap data repository. So we work

with the CME and we submit all of our swaps into them, which goes to the CFTC. And so the regulator is able to see all the different swaps that exist. Do you guys have a sense of the proportion of eth that's held by institutions versus say like quote unquote retail? You know, we have $50 million worth of interest today based on this, based on this news. That's on the institution side? Just in today's, you know, notwithstanding what we've committed, We've got institutions with that on, let's call it, day zero, hour three that have reached out. And I think that, you know, this may not be the coolest decentralized finance DAF today, but what we are doing by employing best practices and things like AMLKYC and using a,molk, YC,

and using a swap dealer repositories, we are bridging that gap for the institutions to be able to really enter this market confidently. Tax clarity, regulatory clarity, proper procedures, AMLKYC, and there's a time and a place for both the radical experimentation and the regulatory compliance, and we're really sitting on that regulatory compliance side to pave the way for institutions to participate.

Andrew, did you say $50 million, as in $50 million of potential ETH deposits into liquid steak? So it wouldn't be into a liquid stake. It would be into the Darmuswap facility. But just since this news, it's been over $50 million, you know, aside from the $50 million that's been committed already by us, that has reached out to have a conversation, basically institutions that have that amount of ether in the first three hours. Wow.

Well, that's a fantastic, fantastic news. Do you know how much demand are you guys expecting to have for ether deposits in liquid steak? Have you guys done any research or information on that? We haven't modeled per se, but just in, the first four hours since we've launched this news, the interest has been overwhelming. That's good to hear. Tell us about the sign-up process. What's that like? Say, say, I want to come and give you guys some of my eaves to you guys. If you want to live a bankless life, you need to get

a hardware wallet. There is no alternative for storing your crypto in a self-sovereign fashion. That's why I have four ledgers that I use to manage my different crypto assets using the Ledger Live account as well. Ledger Live is like your home base for managing your Ethereum, Defi, and crypto accounts. It does a really good job of aggregating all of your different Ethereum wallets if you are the type of person that uses more than one. But you can also add other cryptocurrencies like Bitcoin or Cosmos or whatever your preferred blockchain is. And then it will display an aggregate portfolio of all your accounts at the same. the main page. One thing that Ledger is doing a really good job of is enabling all the money verbs that me and Ryan talked about with the Bankless SkillCube enabled in the Ledger Live app. So right

now in the Ledger Live app, you can buy, sell, lend, swap, and stake your crypto assets, which is doing a really good job of fulfilling all of the money verbs in the Bankless Skill Cube. Something that's new to Ledger Live is Ledger Swap, where you can swap assets one for another directly inside the Ledger Live application, ensuring trustlessness in your financial activity on Ethereum and on Bitcoin. If you want to learn more about what you can do with the ledger, go to the blog post, The Power of Ledger Live on the Ledger website, or they share some of the more advanced things that you can do with your ledger that you might not have known about. There's a link in the show notes that will take you to the Ledger Shop where you can get your preferred Ledger hardware wallets. I personally

like the Ledger NanoX, but I also have both. They're both great options. When you own a ledger, you own your own assets in the way that they have been designed to be held by the user and the user alone. So go get your ledger today to make sure that you are as self-sovereign as possible. The bankless state and the nations are brought to by WIREN. Wynne is DFI's first self-building community-run project, which I just get really, really excited about. Wynne is a system that seeks out yield in DFI, and it does that in a number of different ways. A very aggressive way is with the vaults where you can deposit your preferred asset of choice and different defy experts will come in and generate a strategy for what to do with your deposited token right and so it'll go find ways

to get yield in that deposited token in defy for those who want to just earn yield on their stable coins the earn system is for you where you can deposit your preferred stable coin and lyern will go and figure out which money market on Defi in Defi is producing the best interest rate, whether it's DYDX, it's compound or AVE. It looks around Defi to see where the yield is coming from and it directs stable coins automatically so you don't have to. Check them out at yearn.finance to get started and also check out the stats page to see what other people are doing as well. It's good to hear. So tell us about the sign up process. What's that like? Like say I want to come and give you guys some of my ath so you guys can stake my eth for me so I can perhaps later pull out.

a USC loan. How do I sign up for this? So as of today, you can register and onboard through an AMLKYC service provider named Shufty Pro. It's almost completely keyless, meaning that you will have a picture taken of your face through your laptop and you can upload your driver's license and and passport. And once that happens, you're able to choose your preferred validating service provider. And when that is done, you have a seamless dashboard

that shows your collateralized ether. It will show your updated ether rewards that you're earning and basically the increase in your collateral as you continue to earn staking rewards. And then you'll be able to draw US dollars coin, against that. In the, because we know that this is the biggest use case of something like AVE or Maker Dow, at least historically, has been to deposit ether, pull out dollars by ether and deposit more ether. Is that something that is impossible with what's in here? Yeah, of course.

One is able to do what they want with those US dollar coins. So the answer is, yeah, sure, if that's, if that interests you. But the real... And really what I would say is that prior to this liquidity product suite for Ethereum 2.0, you really had... People had basically bifurcated their ether stack, if you will. And there was basically two hands. And one hand would say, I am comfortable with taking the risk of...

phase 1.5 coming in either 18 months or 12 months or 36 months. And I want to earn those rewards. And then I don't really want to sell my ether, but I need liquidity to pay my rent or to pay my phone bill. And basically it was a tale of two cities. Now we introduce the ability to earn staking rewards on all of it. And if you need that monthly payment for rent, in the phone bills, or if you want to withdraw U.S. dollars and buy more ether, or buy file coin, or buy Bitcoin, or buy a house, you're able to do so in this regard. So basically, what I believe that this is solving is that one-way street problem. And it's solving it both at a retail level and an institutional level. It's interesting that you guys are first out of

the gate with this. I don't think I've seen any exchanges offering this kind of thing, right? I guess that was pretty intentional to be first year. Well, we don't care about being first. We believe in the vision of proof of stake, and we believe that a strong Ethereum is foundational to a strong society, and we are here to encourage that evolution. So say someone has deposited ether pulled out a loan, bought more ether, deposited more ether, and maybe they got a little bit too excited and they did too much and then the ether price drops. Do they have an ability to unwind or is it kind of a one-way street with their ether deposits? So their ether is, it is deposited into the contract,

right? So it is locked up. It would really just be more of saying, do they have enough collateral to substantiated, reduce down, obviously the risk exposure? I was also going to say, though, on the part to alluding to of like, you know, being first out of gate, it really isn't, yeah, it isn't that. It's just that Dharma kind of sits in a very unique spot, right? That it's actually willing its investors want to be long ether. They, you know, so this time horizon of holding for a year and a half, three years. You guys don't care. You're long-term holders.

You don't care. You're bullish. Peribals. So we're permables to be able to journal over that staked ether, right? Really becomes, you know, becomes a much easier thing than if a an exchange were to say, here, we can we're going to go and do this. And then we're going to commit our own capital to being staked in ether. Yeah, exchange are a little more neutral, right? They are not necessarily permables any asset over another. They're about the transaction fee. Yeah. So, but by the way, we are dramatic. We are thematic. We are

investors in the Web 3 stack. Yes. And we believe Ethereum to be the connective tissue to that entirely. By the way, the thing that David was talking about hypothetically about like margining your eth guys, I just want to say, I know that was hypothetical, David, but like, don't do that. Yeah. Don't do that. Yeah, don't do that.

Too volatile. I've seen many get liquidated prematurely on assets they didn't want to sell by doing that. So be very careful. I do have a question about design choice that you guys seem to have made with liquid stake. Some staking as a service providers, or at least it's theorized that some staking as a service providers will, if you deposit your ether with them, they will return you a token that resembles a credit on that deposit, which would be like a staked east token, where the token itself has the interest baked into the token in the same way that compound has their seed dye or

their seed tokens. Have you guys thought about issue? a token like that? So at this stage, we looked at that in, and you think of the world in, here's how big the liquidity is of Ethereum, just freely traded ether, right? And then when you start to tokenize subsets, so now let's just take the bison trails pool. Okay, now that that world has gotten a little bit smaller. Then you've tokenized that. and now the people that want to participate in the credit worthiness or the volatility of just that token,

right, that becomes creating a token doesn't create liquidity. That can be just more of a, you know, you have this representation, but there is no then bid-ass market. So now if I'm a lender and I have to go and sell that token, well, what's the bid? The bid will be by appointment and there really won't be. enough there to substantiate lending against that asset. So that's why we avoided going through the tokenize these. Obviously what we could do is tokenize all the things that we bring in. Now that's a subset.

We then have that as a way that people in the marketplace could, you know, lend against it. What I would say is call it future state. It will be more of as ether opens up and is now, has reached 1.5, now we would be able to provide that, right? So that's where I kind of alluded to that today, it's almost like we have to sort of shepherd that part of the risk along. Once the development catches up, now we're in a great spot for everybody to participate in this. So I know you guys are permables on ether and on Ethereum. And I know that the decentralization

of Ethereum is very important to you. What would you say to you, somebody who looks at the solution and says, yeah, but guys, you're doing AML KYC, you're acquiring custody of our private keys. Wasn't the original design of ETH2 so that I can run my own validator in my own home and maximize decentralization. Is this a centralization vector? What do you say to that person? I would say they're still welcome to.

You're still welcome to absolutely do that. we want to solve the one-way street problem of liquidity. And we believe that that will further enhance Ethereum 2.0, and we think that we'll be a small part of the Ethereum 2.0 proof of stake evolution. James? Yeah, exactly that. I mean, this is really just supporting so that decentralization can occur. Right.

So let's do certain stepping stones for the next year and a half, three years. And we can really set up and position Ethereum to be this complete decentralization. But there's different parts where you can help, you know, basically be a pillar, holding this up here and now great, now we can build from there. And, you know, both Andrew and I did that, you know, at consensus. They've done a phenomenal job of really almost peppering the ecosystem with a ton of different types of products and projects that enabling just hold it up, right? And then it can take it to the next spot.

Yeah, I mean, I spent a tremendous amount of time with central banks, regulators, banks, and all we were doing is to say, I want to just move you from here, one step over. I don't want to get you all the way to centralized world. I just want you to understand this technology. Let your regulations catch up. Let your understanding of this technology catch up so that we can do a lot more.

Today we're working off of ancient type of regulations. Think about, oh, I have a tokenized asset. that's earning a reward that is on a new blockchain, but that doesn't really compute for a regulator. And so this is really, you know, we just look at it as here, we're taking these stepping stones. The way that I see this is that with adding liquid stake into the staking ecosystem, you're not pulling away people from staking at home. You're actually just adding more total options available for people who want to stake, right? And so there are people who are going to stake at home, stake their 32, 64, 128 ether. They're going to do that at home.

And just because liquid stake exists doesn't mean that they're going to stop doing that. Liquid stake existing means that it's going to be easier for a wider subset of people to stake their ether. And while it might be in a centralized fashion, there's going to, as a result of liquid stake, there's just going to be straight up more total ether staked to Ethereum 2.0, which at the end of the day is how we provide security to Ethereum. Agreed. And again, this is a temporary solution for a temporary moment of time from phase zero to 1.5. And this is our best attempt at financial engineering intersecting with blockchain bleeding edge technology to help solve what we believe to be a major issue in the Ethereum 2.0 ecosystem. liquidity. Yeah, I think that's the thing to zone in on. This is maybe sort of a solution for the next 18, 24 months or so because of that bridge problem, because depositing ETH2.0 is just

unidirectional at the moment. So it's good. And if I may, this is liquid stake 1.0. just like, you know, everything has to start from a centralized manner. I'd be remiss if I didn't say we've already been researching ways to decentralize multiple aspects of this concept. Very, very cool. That's exciting. So we actually haven't talked about this yet, and I would also be remissed if we skipped over it. How does liquid steak make money?

We're doing this for free. This is a charity. Exactly the same way as a collateralized lending facility. So our model is that we'll charge an interest rate. We'll charge a percent of the rewards rate. What we're doing with the rewards rate side of things is basically saying we're going to charge a 5% of the rewards rate. on top of whatever the validator service provider is charging. We're not, and we're not basically call it saying here.

We're going to change it a little bit for this validator versus that validator or anything like that. It's just to make it across the board that is an evil, even playing field for people to understand, here's here's the cost of let's say optionality of being able to get a loan right and then and then from the the lending side of things it'll just be an interest rate which we're going to we'll come out with just as as the market goes live are you guys absorbing any of the risks like the slashing risks for instance right so there is inactivity kind of risk when validators are down there's also of course, double-sign risk, which I'm hopeful all of these SaaS providers would never do that, but there's always the possibility. Who occurs that risk?

So we were saying before that we're aggregating all those pools, right? So for whatever you know, validator that you choose, but whatever those, that slashing or whatever those pools aggregate, right, that's going to be passed on to the individual. So, it's essentially you staked your ether, you had another thousand other people into that same, you know, validator service provider. And if some was slashed, you know, here or there, then, you know, part of your returns would be lower. We are, you know, adding to make sure that every pool has 32 ether, if any are slashed, so that it is maximized, at least for the reward rate that it would earn. But it is a pass-through of basically whatever happens there,

happens there. Very cool. All right. So guys, I want to ask you another question. This is sort of tangential, but also I think related and definitely within your wheelhouse, I would say. You guys talk to institutions a lot on the Dharma capital side, of course, you know, even with sort of staking. Do institutions with eth two data going live with ether as an asset turning into a productive yield-bearing instrument, consensus put out a white piece? We've talked about on a bank list. This is like a new internet bond, basically. That's what ether is.

And I love that analogy. It's kind of like, you know, it's like the D bill, right? So it is a bond that provides yields. Institution seemed to understand Bitcoin. Like, over the last three years, they've started to, miraculously enough. When I got in the space, originally, they thought it was for criminals and drug lords, right? Now they get it. Like, oh, Bitcoin is new gold.

Okay, I get that. Are they any closer to understanding ether as an asset, as an internet bond? And will this help? They're getting there. They're not there yet. You are light years ahead of them. Oh, good. It's still a good time to buy.

Okay. And the bottom line is that Bitcoin is now 11 years old. And I would say a much simpler concept and has potentially a tam of, gold and Ethereum has a tam of a multiple of the global economy right now as we digitize all assets. And that becomes a substrate and settlement layer for the clearing settlement and automation of assets and agreements. And that's a lot to process. And we will get them there. And that's what we're here to do. And that's how we hope to serve the ecosystem. It's hard to get it. It's hard not to sound crazy when you say like, yeah, everything is going to become digital and it's all going to be

on Ethereum. And then we have like this internet native bond market. And it was like, that was already like three bites to that. We're huge and too much. Yeah. Brains explode at that. Exactly. And to this day, like it's like you said, it's like we're 11 to 12 years into Bitcoin and people are now just dipping their toes in the possibility of Bitcoin as money. Like the average, average legacy world is still kind of like not really sure what the hell's going on in this Ethereum thing. We like to say that we like to live ahead of the curve and in the gray area. I would also add with Bitcoin, not just that it's been around for 11 years, but just think about what happened this summer. So the OCC has now said that U.S. banks could custody

the cryptocurrencies, right? That's an enormous step forward in the marketplace. Then they also then came out after that to say, you can hold the reserves for these stable coins to be issued. Those are huge statements for our marketplace, right? It's not just Ethereum, but to look at you've had over, you know, I keep always looking at the institutional infrastructure, what's being built.

I'm excited about what Fidelity is done. I love the investment that the CME and ICE have done. Those are really important for institutions to be able to access these assets, right? They don't have the systems in place to hold these kinds of assets. And then when you have the regulators backing them up, the New York DFS, you have the Confederate of state bank supervisors coming out with expediting different ways for money servicing. These are all huge steps that lay that infrastructure, right, so an institution can buy it.

So after their regulatory clarity occurs, then they start to look at liquidity. Obviously, it's the same thing as what we're doing with this kind of product, is that how liquid is this? And so ether, Bitcoin, those two have market caps and liquidity that enable an institution to be able to make that type of investment. Right. And they don't want to buy something where they're like, well, I'm 20% of the issuance. Yeah, right. It doesn't really help me.

So I would say that, you know, there are a lot of that infrastructure is now it's maturing. There's more parts being added on to it. You know, I think we'll probably be speaking to you guys in less than a month about something else that's going to be a really amazing institutional product. And again, it's basically pushing people to here is opening the doors and handholding those legacy institutions to understand it. Absolutely. Guys, these guys aren't saying it, but but I am. I mean, you want to buy ether bonds before Paul Tudor Jones buys them. Right.

And that might be in a three to five year time horizon. He's just now wrapped his head around Bitcoin. So give him some time. Give him some time. We're early. Guys, thanks so much. Andrew James. It's been a pleasure.

We appreciate what you guys are doing in this space. Always a pleasure to have Dharma Capital on. And this liquid steak thing is pretty cool. We will include notes in the show notes as usual. David, anything else? should say before we conclude this this meet the nation my friend yeah Ryan I can't remember what video it was but you we talked about the likelihood that enough eth gets deposited by December 1st in order for Ethereum to

phase zero to get launched I gave my my guess I think I think I said 85% chance that we meet it you said 95% chance I'd like to bump my numbers up now but if I can change mine yeah it's okay you could change it in wrong Ryan, the community thanks you for the high quality content and education you put on. We really, from the bottom of our hearts, appreciate all that you guys do day and day out every Tuesday. I love listening. I love watching. Thank you. Cheers. They appreciate it. We do it. We love it. It's fun. We work for the protocol in the Bankless Nation.

That's who we work for. Guys, risk and disclaimers. As usual, ETH is risky. Of course, so is DFI. and Bitcoin, but we are glad you are on the journey with us. This is the frontier. It's not for everyone, but thanks for joining us on the bankless journey.