Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Alluvial: Institutional Liquid Staking and Spot Ethereum ETF - Mara Schmiedt

Episode Date: May 17, 2024

The massive success of the recently approved spot Bitcoin ETF showed tremendous interest from large institutional players. Even despite negative takes in public appearances, behind the curtain, more and more ‘smart money’ accumulate $BTC, either directly or through ETF shares. The same is to be expected for Ethereum, yet uncertainty still looms due to its proof-of-stake consensus model and, ultimately, staking yield. While crypto natives quickly embraced both ETH staking as well as liquid staking, institutions could not justify the higher risk profile and lack of regulatory compliance. Alluvial and Liquid Collective seek to change this and provide ultrasound infrastructure for enterprise-grade security in liquid staking. Topics covered in this episode:Mara’s backgroundETH 2.0 and the current staking landscapeLiquid CollectiveETH ETF and staking concernsThe risks of adjusting staking emissionsRestaking and new opportunitiesInstitutional staking and risk optimizationEpisode links:Mara Schmiedt on TwitterAlluvial on TwitterLiquid Collective on TwitterSponsors:Gnosis: Gnosis builds decentralized infrastructure for the Ethereum ecosystem, since 2015. This year marks the launch of Gnosis Pay— the world's first Decentralized Payment Network. Get started today at - gnosis.ioChorus One: Chorus One is one of the largest node operators worldwide, supporting more than 100,000 delegators, across 45 networks. The recently launched OPUS allows staking up to 8,000 ETH in a single transaction. Enjoy the highest yields and institutional grade security at - chorus.oneThis episode is hosted by Felix Lutsch.

A lot of the asset managers that we talk to, I think to some degree may be underestimated the impact that the spot Bitcoin ETF would have on the market. How can you create some type of standardized architecture, infrastructure, policies on the compliance, on the performance on the security side? And how are you going to make these different platforms and partners, custodians, and exchanges and asset managers sort of interact, interoperate, and work together when they're in many ways competitive. I think there's a few, I guess, problems that people are pointing out with this concept of

excessive staking participation. We might end up in a position where these players could get too big or the protocols could take over, you know, decisions on Ethereum consensus that are not maybe maximally trustless. This episode is brought to you by Gnosis. Nosis builds decentralized infrastructure for the Ethereum ecosystem. With a rich history dating back to 2015 and products like Safe, Cow Swap, or Nosis chain, Nosis combines needs-driven development with deep technical expertise. This year marks the launch of NOSIS pay, the world's first decentralized payment network.

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Startsaking today at Chorus.1. Welcome to Epicenter, the show which talks about the technologies, projects, and people driving decentralization and the blockchain revolution. I'm Felix Lutch, and today I'm speaking with Mara Schmidt, who's the CEO and co-founder of Aluvial, the software development company behind Liquid Collective. Liquid Collective is offering staking products for institutions on Ethereum. Hi, Mara, welcome to Epicenter. Great to have you on. Thank you for having me. Yeah, so we go way back, I think.

And you especially also been part of the staking system like me since probably more than five years now. And yeah, a great place to start. As always, the NEPA center would be to like kind of go back to how you got into the space, like sort of like a little bit your path that brought you to where you are today. And then we can roll or we can like discuss how all that impacted what you were working on today. That sounds great. I've been working in the crypto space for about seven years now. I've been spending most of my time on staking and started working on Ethereum staking, particularly in 2019.

I think that's when you and I met when we were working on the liquid seeking working group, which was really early at the time. I was still at consensus working on product and strategy development. I started working pretty closely with the Ethereum Foundation to support the rollout of and the Serenity spec or East 2 as we know it today. And just got really enticed by focusing my time and energy on thinking about innovations at a staking level, how we could continue to improve security so that the protocols and applications building on top of it could really harness that sort of competitive advantage. that Ethereum in many ways has in providing that security budget.

I later decided to join Bison Trails after leaving consensus to really double down on staking not just across Ethereum but also other networks and supporting the role out of institutional grade and enterprise grade node infrastructure, which was a really exciting journey. We actually got acquired by Coinbase in February 2021. and then really formed the foundation of what became Coinbase Cloud. So Coinbase's developer and enterprise focused offering that covers a number of different product protocols where I ended up leading the sales team.

So those were several of the focuses that I had in the last couple of years before starting alluvial. And I think in many ways, alluvial and what we are building with liquid collective is a culmination of many years of work and research with great folks in the industry, you know, thinking about how we can continue to innovate and bring more participants into staking. Yeah, definitely. It seems like what you're working on now kind of combines your like sort of the close relation to Ethereum as a protocol and, you know, how staking works and your experience on the sales side or like working with enterprises. So really keen to dive into that. Maybe to start out,

I guess we can kind of go back and like roll out the time. You already mentioned ETH too, right? Maybe you can talk a little bit about how we got to where we are today in sort of the ETH timeline. And then we can talk a little bit about how the market has changed and how new players are coming in. I think one of the core focuses we were discussing earlier but also before the episode of this episode, I think is also to like sort of comment a bit on the market surrounding like the pure tech. So I think, yeah, we would really key to understand the tech first, but then also like see how you're seeing like people interact with the tech, of course.

I think that sounds great. So maybe we start with Ethereum's sort of life cycle as a proof of stake network. Obviously a ton of research went into that upgrade for many years before the beacon chain ended up launching in December 2020. What's been super interesting since that launch is, I think, the continuity of participation in staking on Ethereum, despite, of course, many interesting fluctuations in the market over that period of time. Staking actually ended up sort of growing consistently with certain influxes that we saw

after major upgrades, such as Chappella. that introduced withdrawals and also reduced some of the risk, I think, that participants and also institutions saw in participating in staking. Today, we have around $95 billion staked on the network. 26% of all Ethereum stake today, and that number continues to grow. I think there's probably a couple of trends that are contributing to that we can, like, dig into a little bit more. But on the technology side, I think the barrier to entry risk and capital efficiency of participating in staking has significantly improved over the last couple of years.

Today, you have access to innovations that ensure that staking setups are more robust. you have better correlation protection and anti-slashing technologies. There is better capital efficiency when you think about, you know, receipt tokens or liquid staking tokens that have, you know, penetrated through the market. And then there's a lot of other things that are like exciting and happening at the moment that I think are going to continue to drive up the participation and the appetite for staking in the market. So on one hand, you have restaking. which we can dive into a little bit more,

but that's obviously, I think, contributed to a lot of the more recent uptake in staking participation on Ethereum. When you look a little bit more out into the future, I think coming down from a fairly high interest rate environment, obviously can create more macro perspective and interest in participating in staking rewards that are around 3.8 to 4% today.

And then I think last but not least, of course, there's major developments on the institutional side, including the current, you know, pending approvals for U.S. Ethereum spot ETFs that could again, you know, continuously drive more and more appetite and participation in that market. Right. Yeah, makes sense. I think, yeah, it's very interesting to have like, we have this sort of two sides, one, the very frontier of innovation, let's say, and often kind of like where crypto Twitter is at or like sort of the more Dijan side and then on the other side kind of the more institutional,

slower adoption, the tech maturity side, let's say, that also like, you know, I guess more risk-averse participants kind of waiting to get involved until like there's certain things in place. And I think, yeah, you guys are like at an interesting crossroads there by one on one hand

being, you know, pre-crypto-native product, but also trying to kind of bridge the gap there to the newcomers and the ecosystem. So maybe you can talk a little bit about, you know, liquid collective, how you're like, yeah, trying to do that or how the whole project is structured to sort of achieve the goals. Yeah, for sure.

Let's stick into that. So I think in short, we designed this product around unmet needs that we saw in the market or in a matured market where, you know, new segments, enterprises and also regulated institutions are looking to start participating in the space. As I mentioned before, there's been a few innovations that have really improved security and capital efficiency in staking. On one hand, we've started to see a trend from single-operator architectures to multi-operator architectures that can inherently provide better security to participants and to companies. And on the other hand, we've seen receipt tokens, so liquid staking tokens,

really enable a very fundamental, quite primitive mechanism that allows people to prove an on-chain position. The problem with a lot of this innovation in the early days is that, you know, when Ethereum launched and the first multi-operator and liquid seeking token models became available, you know, you had incredibly early market leaders like Bido and Rocket Pool come to market with their products. But these products were really designed for the early part of the adoption curve, crypto-native power users that, you know, felt comfortable using, you know, direct interfaces and maybe didn't have a lot of questions around compliance and other considerations. But that's not necessarily a model that seemed compatible with the needs that we were hearing from

businesses as it related to the way that they view security and the diligence that underlies it, you know, the capabilities that they need in order to make integrations very seamless and accessible. And of course, also compliance. And so we saw this opportunity. to really think deeply about what kind of parameters, what kind of architecture would be needed in order to help bridge those participants into staking.

And through that, you know, continuously support adoption in the market. And so one of the things that's unique about what collective is doing is that our business model is actually quite similar to something like Visa, which is a business that we drew a lot of inspiration of. For the people that don't know the founding story of Visa, I really recommend you read a few books from DeHawk who ended up really being the brainchild behind visas

as an organization as we know it today. And so very similar to Visa, we thought, how can you create some type of standardized architecture, infrastructure, policies on the compliance, on the performance on the security side, and how are you going to make these different platforms and partners, custodians, and exchanges and asset managers, sort of interact, interoperate and work together when they're in many ways competitive? And I think for us, the answer was it needs to be a distributed, jointly owned and operated organization that can bring these different counterparties together in order to build.

something that is better, right? And I think that's sort of the approach that we took in the early days. We actually brought together Coinbase, Cracken and Figment as our early partners. I actually left Coinbase and my co-founder Matt left Figment to start the company. And we kind of brought more people around the table to do that. And so today, what we concretely offer is a product stack that provides orchestration, integration, and then standardize receipts on Ethereum. It's called LSEath. And so on the orchestration side, we support distribution across top operators, including Coinbase figment and staked.

We have embedded performance SLAs as one of the first protocols to offer this kind of thing, natively embedded slashing coverage, a risk auditing standard that was jointly developed by different participants. inside of the collective. We also have an integration suite, so a suite of enterprise-grade ABIs that really seamlessly integrated to the stacks of different businesses and institutions.

And last but not least, we obviously have our receipt design, so LSETH, which is a C-token, that is standardized. And so can be used across different venues and different platforms interchangeably, and very similar to USC, even though the entry points,

so minting and burning, has a natively embedded compliance model, the ERC20 is actually permissionlessly exchangeable and tradable on the secondary market. And so you could almost think of liquid collect as a standards-making body that works collectively to sort of define some of these standards in the market. And today, I think one of the exciting things that we've seen is that we've actually already been able to build support for LSEs

across nine different platforms and growing, including, you know, market leading businesses like Coinbase, Bitcoin Swiss, Figment, Bitco, Fireblocks, Anchorage and others. So. Yeah. Yeah. Super. I think we are very interesting how this model ports over. And I think actually also to contrast it or to see like, I guess these are even like goals

in the sense of the underlying blockchain itself, right, to like sort of be distributed. like platform that that has different stakeholders right like eth holders essentially but of course a building a model that's maybe more yeah inspired by like traditional corporation model like basically bridges that potentially better because i guess they are many of these are not so comfortable buying eth right away either um i think that's actually like a thing that only now is happening after, I guess, I don't know, when Ethereum launched for like almost 10 years now. Later, we have like some of the first, like, bigger institutions that are not like sort of crypto-stitutions, I'd say, kind of entering the game. So, yeah, interesting, interesting to see

that maybe they can be more comfortable with like this sort of hybrid approach there. How do you view like the current, yeah, ETFs and sort of like some of these products, that are poised to bring more in flow and more institutional capital into crypto and how that impacts, I guess, the layer below like Ethereum staking and kind of the participation at large. Yeah, it's a very timely topic. I think a lot of the asset managers that we talk to, I think to some degree may be underestimated the impact that the spot Bitcoin ETF would have on the market.

I was checking this morning, I think we're at almost $60 billion in assets under management. And trading volumes are just growing consistently. I think I was reading about $110 billion in March. That's almost 3x what they were trading at in February. So I think there is a signal that there is real. appetite between this intersection of, you know, traditional financial products and making accessible, you know, cryptocurrencies as a new solution to a more mainstream and institutional audience. I think when you look at the spot ETS on the Ethereum side, obviously there's been a ton of

applications go through submission that are obviously pending in the U.S. I think when you look at just the current numbers on the Bitcoin side, like it isn't indicative of like a pretty significant market opportunity that these products can capture if you estimate maybe 30% of the market size that we currently see on the Bitcoin ETS side. Now that's still $20 billion in assets under management or, you know, if those products were to be staked, that could almost be 20% of an increase in the current levels of staking participation. So these numbers do start getting pretty big. I think there's a few things that have been interesting. So I think on one hand, there's some, I think, consensus in the market that it's going to be interesting and different with Ethereum because these products will be able to offer some type of total return.

Because Ethereum is stakingable and there's a reward rate that's associated with that. And I think to be competitive, these funds are going to have to pass some of that back to their customers. And on the other hand, I think we're starting to see other. jurisdictions that I think are more you know sort of friendly to to to provide this types of approvals you know starting to roll out and enable these products right I think you have mostly Canada and Switzerland today where you have staked ETPs and ETS already you know the 21 shares of the three IQs of the world that are sort of you know being the first to market with these kinds of products and I

think that's probably indicative of a trend that we're gonna continue to see and hopefully unfold in the US and other markets as well. Yeah, yeah, it's super interesting to see. And I guess like then how these ETH actually will be staked. I think one of the core, yeah, things we wanted to discuss here is actually like probably more as we are at epicenter, right? We wanted to go more a bit on the technical side. And I think I wanted to talk about the institutional side as well because I think it has like a lot of impact also on like

the actual discussions that like Ethereum researchers or like the Ethereum community at large are having right now, like you just mentioned

right, like if all this eth would be staked, it would be like 20% more staking ratio. So at the same time, we have like sort of these conversations going on in the Ethereum community right now

of like potentially even capping the, how much should be staked and, you know, a few, like I guess concerns about centralization at large of Ethereum staking and I mean yeah curious to

hear how you think I guess would obviously like people might think that if an ETF comes and it's all staked probably with like some big provider that would probably lead to more centralization or yeah I guess how are you

seeing these discussions currently and maybe you can also provide a bit of more background of like what is actually being discussed and I guess, yeah, the market's impact on that and how you see that. I'm quite curious to hear your take. Yeah, I think probably like two questions in there. So I think the first one is like how do I view this like new entrance of markets or market participants?

I think we're trying to build a mainstream technology. And so getting mainstream participants to be able to access. and I think on the topic of staking actually contribute to a public good of internet infrastructure is really, really exciting. Ultimately, that's what I feel like we have been building towards for many years

and I'm not saying that, you know, the institutional market is the one and only holy grail, but I do think seeing progression in the uptake of this technology into sort of more mainstream and also potentially incumbent, you know, technologies and financial infrastructure, is exciting. I think the second question was, yes,

there's a lot of discourse right now in the Ethereum community on how much stake is too much sake and what does that mean for Ethereum and the way that the system is currently designed. So I think maybe just to look at where we're currently at. So the Staking issuance curve,

which is basically the amount of rewards that are issued by the system, is actually an inverse function. So it's sort of pretty high at the beginning, and then it slopes down, but it doesn't really ever go to zero. And there is definitely no mechanism in place that says, I will cap where there is a cap

to excessive staking participation. I think this concept of excessive staking participation is maybe a little bit more novel, because it takes an opinion on how much stake is too much stake. And I think that opinion was not previously expressed in the way that the staking issue on this curve was originally designed. So I think there's a few, I guess, problems that people are pointing out with this concept of excessive staking participation. We spoke a little bit at the beginning about how there's different market trends that

are all sort of continuing to indicate that staking participation will just. continue to grow and grow and grow. And we've seen the data over the last, you know, call it three or so years, that that has actually been consistent with what we've observed. So I think on one hand, there's this concept of, you know, what's the impact to real yields? So as staking approaches 100%,

the real yields actually end up going down to zero. Because once you adjust for inflation, you know, no one's effectively better off. participating in the staking market. That also does have some other consequences, including the fact that if there's a lot of participation and a lot of issuance in the system, then actually if holding eath and not staking eath becomes really expensive,

it's a little bit like holding your dollars in your back account when the inflation rate is really high, your nominal value might not go down, but your purchasing power does. And so that kind of counteracts the idea that ETH in and of itself without being state can really be useful as money because if inflation is really high,

then people are going to try to figure out how to protect that purchase power. And so as a result, I think there's this underlying question about, you know, what does that mean in terms of what will become sort of the de facto network currency and is there maybe substitute of currencies that can go in place of that?

And I think people often quote, state ETH or STEs, in particular, as a potential consideration or also concerned, that may eventually supersede the use of ease outside of the network for both consumable and transaction purposes. And of course, then, that can present other challenges. It's less competitive for solo stakeholders to participate in that environment. We might end up in a position where these players could get too big

or the protocols could take over, you know, decisions on Ethereum consensus that are not maybe maximally trustless. So I think there's a lot of different considerations and topics that, you know, are being unpacked at the moment. Maybe you want to talk a little bit about like what the proposal is and like what people are discussing at the moment. I'm happy for us to dig into that as well. Yeah.

I mean, I think, yeah, that was a really good breakdown of like sort of why this is happening. I guess also like ETHS money. and sort of eth being staked, not being able to be used as money anymore and that like sort of liquid staking tokens potentially taking that spot. I think we, as you mentioned, the liquid taking worker group,

we were, I guess, like pretty early to discuss things like this. And I think also in a way, this is down to Ethereum's design, right? I mean, especially in the beginning, it was even more predominant because, yeah, there weren't withdrawals. yet. So the iniquidity premium extremely high. So liquid staking tones actually got way more adoption than on other networks. As we can see, like, for example, on Solana or other networks that are now live five years plus, the liquid staking penetration is actually much lower. So I'm wondering how much it is also down to that. And another thing that we were like sort of wanting to talk about here in that discussion is also that.

that was like another side effect of like trying to control it in that way that you lower the issuance. I think, yeah, this is kind of the core argument right now that, okay, we lowered the issuance, we make it less attractive to participate in staking. I think you have like also other side effects there that especially probably impact solo stakers actually that want to participate, but also other trends or innovations that maybe try to bring the yield elsewhere. So I think, yeah, I would be curious to hear your like sort of impression of how this discussion, like, you know, what are these counterpoints that are maybe like under discussed actually in the public discourse to some degree from what I see.

I think maybe you are even more deeper in there than I am being like so Ethereum-focused. Could you like kind of elaborate on your side or your view of this? Yeah, for sure. So I think, I mean, in principle, like what's being proposed at the moment is something called stake ratio targeting. And so basically having an opinion about what stake participation is sufficient from a security standpoint. and adjusting the way that the reward curve or the issuance curve works. So we were talking about how today it's inverse. Well, I guess the proposed was to turn it more into an S curve

where with very little participation, the incentive and the staking issuance is really high. But then after a certain point, but again, as an opinionated point about what ratio of stake is enough or is sufficient or too much, that we yield or that reward rate eventually goes to zero, or it even goes negative, right? It's not too dissimilar, I think, from sort of policies that you would see in broader,

like economic structures today. I think the problem that people are raising with the concerns they have at the moment is, one, like, interventionism obviously is a question. And the question is also how does that impact credible neutrality of a system if you're adjusting the system to prevent a predicted outcome? because there is an opinion about whether it is or isn't desirable. There's also, I think, a confidence question. Like, what is the impact of changing these monetary policies on the developer community?

Like, even businesses like us, like in the midst of building, you know, it's already hard enough to build in such an incredibly fast-paced and volatile market. But if the rules keep changing while you're building, that's quite costly. And that can sort of erode confidence with also emerging market participants, like institutions who, you know, may require adjustment to that kind of swift shift and change of something that is as fundamental to the system as this. And then some people, of course, are also raising concerns around just the timing, you know, is this the right time to have this conversation while, you know, there is sort of outstanding reviews by major jurisdictional

and regulatory bodies on the classification of Ethereum and things like that. So, It's a really nuanced argument. There is different perspective, different sides. It's an incredibly dynamic system, so I tried to take a sort of more holistic perspective. I think observing the market the way that we do, practically speaking, it's going to be extremely difficult to create one liquid staking token

or one liquid restaking token that fits all customer cases. I think there is definitely network effects that underlie these systems. But at the same time, we're already seeing a universe develop where the market share and structure is changing, right? You're seeing very dominant liquid stake tokens like STE's come down significantly as new solutions like liquid restaking tokens emerge. And as new customers enter the market, new solutions emerge that are fitted to suit

their needs. And so I think there's a question of, you know, our, Are the assumptions correct about what the end game could potentially look like? And if those assumptions changed, would that change the way that we would view this potential proposal or change in the policy, right? So I think there's a lot of different opinions and perspectives, but that's sort of one that we currently observe and sort of anchor to. Right, yeah, thanks a lot for that. I think, yeah. Yeah, so we're interesting times. And like we mentioned it a few times already, right?

the emergence of restaking, also playing a big role. And I guess generally the market cycle right now, as we record this, being pretty bullish. And a lot of like sort of the trends that we saw in previous cycles kind of reemerging in like a new form. I guess nothing ever really changes too much. But I mean, now we have through like points and restaking like sort of the second. or like maybe it's already a third iteration of like kind of yield farming that we saw in defile summer and that obviously also changing the market.

In some ways actually I guess maybe like you were saying that like Lido lost some market share in ways that might make it more decentralized on the outside. But I think it also interestingly I guess is mostly driven by speculation and not really like people review the underlying tech too much, but more like trying to farm the new shiny thing. So, yeah, I think very dynamic system and, yeah, interesting. I guess you always need to look at it in

this holistic way like you already said, right? But how do you see it in that discussion? Or like what do you want to comment on that? I mean, you also being a founder, I think that was like something we wanted to discuss earlier. How do you navigate this space as a project yourself? Maybe that could be an interesting question. I think it's a great question. I mean, we've both been in the space for a while, and I think we've seen the wool markets and bear markets and all the things that sort of emerge in them.

I think like in the current market, there's like two, I think, interesting observations. I think the first one is with new technology and with new customers, a market's given the opportunity to mature and to centralize and diversify. And I think maybe we're starting to see a little bit of that with restaking and institutions entering the market, sort of changing a little bit, the configuration that almost felt like steady state for a while, where you know, you had projects like Lido sitting up at about 30% market share and sort of sort of thing seemed to be getting a little bit more static. But I think that's changed a lot. I mean, in the last like month or so, you've had, you know, projects like Lido boost like 3, 4%

market share. There's some liquid staking tokens that lost like 40%. I mean, we thankfully grew a lot this quarter. But on the flip side, you have liquid restaking tokens like booming like crazy. And so you see a lot of these like very crypto-native users move swiftly from one opportunity to the next. And I think when you think about restaking, in many ways, the underlying is the promise of maybe points or air drops and people farming that in the cycle. And so when you think about the fact that, you know, with Egon layer, you don't actually have Avesps enabled yet and ABSs haven't deployed. And, you know, we kind of really think through that. Then I think you start realizing that I think the very early adopter market is very swift to move on new innovations and

opportunities, there is definitely financial motivation underlying that. And, you know, not to say that's necessarily good or bad, but it's definitely something to consider. So I think one of the things that is interesting as a project in this space is sort of having to make that decision or the trade-off to decide how to counteract maybe some of the more short-term focus and incentive mechanisms that are active in the space today. And I think for us, the decision, I mean, we're kind of very long-term thinkers. You kind of have to be if you're going to go after a market that's, like, going to take years to mature and, you know, fully grow into its existence.

And so as a very long-term thinking team, I think for us it's very important not to take shortcuts or compromise on, you know, things that could potentially stand in our way of achieving the goals that we have. We're partnering with the types of businesses that we want to partner with. And so while that pragmatic approach maybe sounds like taking a high road, it is also a challenge, right? You're sort of confronted with that in many conversations, whether you're talking to investors or other founders or partners where, you know, I think there's sort of a more open, I think, conversation about how we as a space build and how we can build

with an incentive to build for things that can last. But I would love to hear your perspective on it. I mean, you've seen loads of this too, so not just in this cycle. Yeah, yeah, yeah. It's very interesting because I think

it's almost like table stakes to, you have to somewhat participate in it. to even be able to compete in some way. And sometimes, like, maybe something good comes out of it. I also think, in general, like, incentivizing the right stakeholders and some of the core ideas of what are sort of behind the distribution mechanisms or, like, these sort of programs are good.

Because it's pretty hard to, like, get the right stakeholders aligned, right? Like, I mean, maybe with proof of work, you had a little bit of, like, a moment where people could, like, mine on their computers and no one knew about it, but that's not really the reality anymore now, so you need to, like, find some other ways to find the right people. So I think, yes, it makes sense.

It should probably be there. But at the same time, it's a lot, it has a lot of noise. It doesn't really incentivize maybe building the right, the products that actually solve problems, but more like just create more problems potentially, or at least create. more in fraud, maybe isn't even

it, or like, it's very hard then also to tell if you're, if you even have product market fit or if you just have like mercenary capital that will like move on to the next thing or once they get the chance. So yeah, definitely like a thin line to balance and the more, it's almost like, yeah, I guess it's like kind of leverage almost like it's the more you go into the short term thinking and the more success maybe have then, like the harder it will almost be to

to like make that last, right? Like, because I guess you attract even more short term thinkers. So trying to find some balance and be somewhere in the middle or maybe even on the right side of the spectrum, which will be probably the hardest to say like, hey, okay, we're not doing it at all. Then I think you might find it pretty hard to compete at all. So I think, yeah, some balance in between there and that's a very, yeah, hard, hard space to navigate, like you said, right? You will have like different parties trying to talk you into stuff. And I guess also like the the market always, no one is like immune to it, I guess. So in a bull market, everyone gets like sort of into it. I mean there's like the good side to it and maybe also a not so good side to

it. I think on the good side, I think these incentives. systems, the bootstrapping and user ownership perspective that underlies, you know, protocols does create an environment where I think it's harder to like deeply and, you know, enshrine a product as the de facto sort of monopoly in a market. And I think we're seeing that happen right now. And I think that is good because it gives, it sort of erodes this like dominant, I think, like market tendency or centralization tendency, and it gives way and space to different innovations

with different differentiators, and I think maybe in part like a maturing tech market or technology landscape, I guess the flip side to that is that demand, those customers, those users, might just not be that sticky. And so that I think can create challenges for protocols that have to sort of play inside of that realm

because that demand can very quickly move on to the next thing and the next thing and the thing after that, right? But I think there's sort of a balanced perspective to it. I think we are continuing to do a lot of innovation in the space around what user ownership looks like, what distribution should entail, and I think, you know, what are sort of the functionalities, the governance participation and other things that we want to see.

And so I'm generally excited that we get to really continue, continue experimenting and sort of finding the right strategies to do that. But yeah, I think it's definitely an interesting conversation. Yeah, yeah, surely. I mean, maybe one thing that I also was interested in, yeah, we talked a lot about liquid-staking talks or like sort of that market structure, but I guess on the other hand, we have the sort of more centralized players also participating, I think, yeah, like we mentioned in the beginning, right,

like the ETFs also probably custodying. with, you know, like renown custodians and real businesses. How has that actually developed or is that like, how is the market share of those changing? Have you followed that?

And maybe do you have like sort of your take on why? Which directions these are moving? Is it going to be like more staking through like Coinbase and institutions like that in the future? Or do you see like, yeah, what's your take on how that will play out?

I think that was like the big concert. I guess initially how Lido was created is kind of like counter the trend of having the staking inside decentralized places now. Then Lido sort of becomes almost a problem itself. I guess it's like sort of the natural evolution. But how do you, yeah, how do you think about that? Or how have you observed that? Well, I think that's like exactly right.

Like if you think back to like 2021, I think like four players or even three players made up like 60 or 70% of all the staking market. Centralization was pretty high. And of course there was sort of an impetus to like, you know, bring more participants in. And I think more innovations like, you know, Lido and other staking protocols ended up sort of breaking that up, reconfiguring it. And now I think in themselves ended up becoming a little bit of a problem as a result of it. I do think all of these things are healthy for what it's worth.

Like you kind of, as technologies evolve and mature, it's good to see these types of shifts in the market. It keeps everyone competitive and innovative. And I think that's important. I think, as you said in the beginning, we kind of are operating on this adoption curve where the most crypto-native early adopters are going to and are moving away from traditional staking. They're moving into liquid staking and from liquid staking into liquid restaking, and they're going to really be on the, I think, forefront on the edge of all the innovation

that is taking place. And then as you move along the adoption curve, I think it follows a trend that sort of continues more conscious, more risk-averse, more security-aware, until you sort of end up with the institutional market where I think conversations about restaking are incredibly early. You know, I don't, I don't really see people like materially moving to approve or being able to integrate these in products at this point in time. But I think sophisticated operators, you know, continue playing a significant role in the market because at the end of the day, they're the lowest common denominator that guarantees a really robust, you know, security architecture and design. And so the way that we, for example, have thought about this,

we think multi-operator diversification is critical. Ethereum punishes correlation, so ideally don't want to have a single operator underlying your infrastructure. And so by partnering with some of the most sophisticated operators in the market, like a figment or coinbase or stake that have been running and building for a while, we can sort of create that risk-optimized allocation or design that can be distributed through a single API. So it's really incredibly user-friendly to support that kind of deployment. I think that consideration at this multi-operator design continues to be more and more important

when you think about some of the more recent conversations that are happening. I think just a week ago, Vitalik, put out a post that proposes increasing correlated penalties. Today, those are only applied to slashing. But I think there's a material discourse emerging now to potentially, extend these correlated penalties to other things, including liveliness failures. So that's a little bit of how we think about the market and leveraging great operators on the back end of our products and continuing to ensure that we sort of raise the bar on what it means to provide really great security and correlation protection.

Yeah, that's a really interesting point there, I think, because a lot of people also mostly look at the entities or like some kind of the wrong layer almost in in terms of like when they think about centralization like for example often you would see lido okay 30 percent but in many ways lido is actually like 40 operators and like pretty decentralized and like kind of very transparent structure like also forced maybe through like sort of the the market but yeah i guess the same as goes for big entities like Coinbase or even or you guys of course where often they might have operators underlying them that are actually not just Coinbase Cloud when they get big right. Although in some cases

that is like a little bit less transparent of course than because it's like these decisions are more or like the distribution is like more private given the nature of the enterprise. But yeah, I think that's a really interesting topic to really see what underlies is and there's also a lot of fluff about it or talk. Like many people say, hey, we have decentralization or we help decentralization. But then you look under the hood and then at some point maybe you find, okay, it's actually like the guy in the basement like one employee running everything or something. So I think also building up that like sort of capability to have multiple operators and

just that just takes time. I feel like there's also like a struggle for the new projects. coming along that have probably more focused on their initial go-to-market and have like sort of not build out that side as strongly as maybe like someone like you or Lido or even the centralized exchanges have. So yeah, kind of interesting to see, see that, how that impacts the the Ethereum like underlying like, so staking infrastructure at large and like these proposals are probably, yeah, I wonder, you know, like we haven't seen much, I guess, in slashing, right? We haven't seen that many slashings, but maybe would

correlate penalties on the rewards, maybe that would be a bigger thing, because I guess that's something that happens much more often, and then we could actually see changes emerging from like sort of direct impact on the rewards. Yeah, super, super interesting.

Yeah, I agree. And I think there's almost sort of this underlying consideration, which is not only does it encourage more operational, is to be more broadly distributed, like different servers, different locations, different physical machines. But there's also like another thing that becomes quite interesting in this conversation,

which is, you know, can we implement mechanisms that are maybe more effective at creating distribution and decentralization in certain parts of the technology stack? I think execution client distribution has been like a really much discussed topic in the market. and I think maybe as we see potential liveliness failures in executionally our clients, like this is actually maybe an interesting way to think about how, you know, that could be extended or a forcing function for client distribution more generally. Right, right, right. We kind of like didn't even look at that.

That's a big part. That was like a huge discussion. It already like feels like ages ago, but it was just really like three weeks ago. Yeah, so I guess. overall, yeah, lots of moving parts. Super interesting. It remains interesting. So, yeah, I think,

I mean, I sort of covered everything I want to talk about, so thank you so much for coming on. If you, yeah, I don't know if you have any last things you want to share about Liquid Collective or about you or to our listeners, please be free to do so. But yeah, thanks so much for coming on in your time.

Thank you so much, Felix. Yeah, for sure. I mean, if folks have any questions, feel free to check out our website Liquid Collective.io or head over to our Twitter, Liquid, Downward Dash, Cole, and give us a show. So thank you guys.

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