Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Isidoros Passadis: Lido DAO – Staking Decentralisation for Ethereum and LSTs in DeFi

Episode Date: December 30, 2023

As Ethereum ‘merged’ to its current proof-of-stake consensus model, the steep (for retail) minimum stake of 32 ETH created a serious risk of centralisation through staking delegation to centralised entities. Lido DAO was envisioned to preserve staking decentralisation, while also providing additional value for staked ETH in the form of liquid staking tokens (LST). However, as its market share reached the first threshold of 33%, concerns have started to be voiced regarding Lido’s own risk of centralisation. Through its dual governance model where stakers can veto $LDO voters, and the upcoming implementation of distributed validator technology (DVT) and community staking module (CSM), the Lido DAO aims to preserve staking decentralisation.We were joined by Isidoros Passadis, contributor and Master of Validators at Lido DAO, to discuss Ethereum’s current liquid staking landscape, Lido’s governance model and what steps it takes to ensure staking decentralisation.Topics covered in this episode:Isidoros’ background and how he started working at Lido DAOLido’s core architecture and how it ensures decentralisationTransitioning from a curated node operator set to a permisionless modelDistributed Validator Technology (DVT)Lido’s dual governance modelstETH bridging and use cases in DeFiHow Lido adapts to Ethereum forks & EIPsMaximum validator effective balance and minimal staking issuanceEthereum vs. Lido governanceLido’s approach to MEVRestaking & EigenlayerExpanding Lido to other chainsLido’s market share and other liquid staking competitorsEpisode links:Isidoros Passadis on TwitterLido 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 Brian Fabian Crain & Felix Lutsch. Show notes and listening options: epicenter.tv/528

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only gets you the highest years, but also the most robust security practices and infrastructure that are usually exclusive for institutions. You can stake directly to Quarice 1's public note from your wallet, set up a white table node or use the recently launched product, Opus, to stake up to 8,000 eth in a single transaction. You can even offer high-year staking to your own customers using their API. Your assets always remain in your custody, so you can have complete peace of mind. Star Saking today at chorus.1. Welcome to episode at the show which talks about the technologies,

projects and people driving decentralization and the blockchain revolution. I'm Brian Crane and I'm here with my co-host Felix Luch. And today we're going to speak with Izzy Pazardis. He is the Master of Validators, great title. At Lido, Lido, of course Lido, project, Probably pretty much everyone listening here is familiar with. The most successful liquid staking protocol in total and most successful liquid staking protocol on Ethereum,

definitely one of the biggest things in staking. And you do a lot of interesting stuff. And yeah, I'm really excited to talk with Izzy about that. Okay, cool. Well, thanks so much for coming on, Easy. It's really great. Really excited to speak with you. Of course, Lido, something.

both Felix and I have been deeply involved in since the very beginning and it's been a very impactful project for crypto so I'm really excited to talk with you and talk about Lido but maybe just to start off tell us a little bit about your background like how did you get into crypto

and how did that end up with you working on Lido? Yeah, definitely so first of all thanks for having me a pleasure to be on here I know that Constantine and Vassili have also previously done episodes and they spoke really highly of their experience here.

So I'm glad to be included. So how did I, like, what's my origin story? So my background is very, very non-crypto, very kind of like traditional corporate. So I studied econ and international relations. And then I ended up at a big four firm for approximately six, six and a half years. And then, as we say in that industry, I rotated into the industry. So I was working at some large retail companies doing like finance and risk management. And most recently, approximately five years ago, I was working at Nike at the European headquarters doing financial controls and risk management.

Kind of like building up the European processes there. And at that time, like COVID hit and I had a lot of free time. And I was trying to find something that interested me a little bit more in terms of like where I'd be allocated. my time. I'd been involved in crypto since around 2016, and by that I mean, like, losing money, trying to trade. And I started reading more about crypto, like all of the basic mechanisms. And it was like a couple months earlier, I think, had just been the genesis of the beacon chain. So I was reading a lot about staking, a lot about, like, game theory and M.V. So I was like writing some, I don't know if you want to call them, like, articles, like posts around

the time, around the possible centralizing effects of. MEV on validator sets and what staking solutions and staking protocols in general can do to stave off like the centralization effects there. And especially worded about how centralized exchanges primarily, but centralized staking solutions in general would use things like user lifetime value to be able to offset costs of staking to capture users and centralized markets have been further. And somehow one of these articles ended up in the hands, of Vasili, I think. And around the time, even, like, Felix was involved in this process.

I think they gave me a Lego grant and be like, hey, this article is pretty cool. Do you want to come write another one for Lido, looking at these problems specifically through the prism of Lido and what Lido as a Dow and as a protocol can do to kind of alleviate some of these pernicious effects of like staking in general and economies of scale and M.V. and like a month after I started writing the second iteration of the article, I just get a DM. Actually, at the recent Lido Connect, I found this DM, I put it on the screen because it looks like a scam. It basically says like, in half broken English, hey, do you still want a job in crypto?

And that's how I ended up at Lido. So I started the job part-time, I think in August of 21, working at both Nike and as a contributor to the Lido Dow. and then I realized that that wasn't viable or sustainable. And so I decided to try it full time and see how it would work. And it's been two and a half years since then. It's really, really awesome ride, really, really crazy. What was it about Lido that you found so exciting? I think it was like three kind of intercepting concepts,

which also have a lot to do with the principles behind Lido and the value. So the one was the very matter-of-fact. and pragmatic approach, which the founders and the first people working on on the protocol kind of took into designing mechanisms. And they're really apt, I guess at that point, maybe you could call it a guess or an inkling that they had about what the market would look like in one to two years, right? And positioning themselves in such a way, based on these assumptions to stave off the centralized players, which, like, if you, If you look at, I think, staking distribution in early 2021, it was something like over 50 or 60% was with centralized staking providers in aggregate.

And how to basically move the stakeshare away from centralized staking providers and move it towards decentralized protocols. Now, obviously, there's like a huge debate with regards to what constitutes decentralized. And, you know, you have this whole spectrum between permissionlessness at the staker level and at the notar operator level. and we can get to that in more details later. But at least starting with a solution, which is practical and usable at a mass scale in the beginning in order to stave off decentralizing effects and then really, really do the work

in terms of being leaders and researchers in decentralizing the protocol, like Lido itself, but also the effects that it has on the network as much as possible throughout the further growth of the protocol. And I found that really appealing because I believe that in general, as we see more adoption of crypto and blockchain, you're going to have to find this meeting point between ideology

and kind of like the virtues and the values of the chain and around the people that started the chain and where it meets kind of like the practical reality of market forces and trying to find the right balance between those two things. And I think Lido does a really, really great job of that. Right. So you mentioned right, like the main kind of danger of Lido not being there is the centralized exchanges now

in recent months especially since Lido sort of broke this 33% threshold of like market share and staking Ethereum actually like Lido has been getting much more of the sort of hate let's say or like sort of backlash from the Ethereum

community around like the centralizing effects of Lido now. I think what we sort of wanted to talk about since that's like kind of also your role in in Lido is, you know, what Lido is doing to actually be decentralized. So sort of highlighting, you know, where are the centralizing vectors and what's actually like sort of the things Lido does to decentralize.

So maybe, yeah, can you go into some of these points? I think the first one would be probably like your actual job in terms of like node operator. So maybe we can kind of start there. Can you tell us a little bit how that works just so guests have a, but overview. Yeah, definitely. And I'll take maybe just like one really quick step back to set the context a little bit around. Like, what do we mean when we say Lido?

Because Lido means a lot of different things. So I'll try to be a little bit more specific as I use or as I mentioned these different aspects of Lido in the rest of the cast. So Lido is at its core a set of smart contracts. So basically like software scripts, want to think about it, right, that reside on the Ethereum blockchain. And this software is essentially a middleware that helps to aggregate and allocate stake across a variety of different node operators. And the kind of counterbalance to this action is this creation of a liquid staking

token, which represents this staked ether and the rewards that it accrues. The other facet of Lido is the DAO. So the DAO is an organization and Lido is probably one of like the fewer, the few like what I call pure play DAO is like there's no legal entity that wraps the Lido DAO. And the DAO essentially is a guardian of the protocol, let's say for now and there's a lot of work being done in order to determine and understand how can we reduce this guardianship over the protocol and eventually at some point minimize it and maybe even remove it completely. And so, like, why does a protocol need a guardian? A protocol needs a guardian because, at least currently, Ethereum is still changing.

So in order for the protocol to change to meet the base layer as it's improving and upgrading and evolving, like adding new functionality, for example, withdrawals were only added to Ethereum in the last hard fork, you know, in May of this year. And if the protocol was onerless and non-upgradable at the beginning, it wouldn't have been able to have withdrawal. outside it. You can make an argument that you can perhaps migrate the protocol from one version to another, but from a usability perspective, that's really, really terrible. And to be honest, it's unsustainable given the amount of evolution that Ethereum is still going to make from a staking baselier perspective. And the other reason that you need

a kind of guardian is to for the moment control like a couple of the levers that protocols need while they're in this nascent stage. And these levers can be a bunch of different things. There might be things like curating a node operator set in the beginning, right? So how do you create a robust allocation protocol? You need to find node operators. One way to find node operators is by having a permissionless mechanism

for anybody to become a node operator, which Rocket Pool did very, very well from its inception. But it took Rocket Pool like a little bit over a year, I would say from when it intended to launch until when it actually launched, in order to be able to deliver on this promise. And so LIDA wanted to launch as early as possible. So the concession that you needed to make there

is that you needed a curated operator set. So you needed some sort of mechanism, and this mechanism is Dow controlled, which means it's controlled by the LDO holders to select these node operators to review them and to figure out if they're any good at their job. So my role within the Dow, as master of validers,

I basically lead a team of contributors in a team or a woodshur, that we call node operator mechanisms. And the point of this workstream is to kind of act as a liaison in between the Dow and the node operators. It takes how the protocol works and translates it into like mechanisms and processes and incentive alignment mechanisms to A, identify node operators that would work well with the protocol, to be determined and make suggestions to the Dow as to how to allocate

stake between these node operators, and then C to figure out. out strategies about how to improve this node operator set in the future. So Lighto started with one module, which we call the curated operator module, which you guys also know because you were one of the founding node operators, right, within the set from the chorus one perspective. And so like the remit for the first couple of years was grow the node operator set. So it grew from five initial node operators to currently 37. And the next remit was to evolve the LIDO protocol so that it's not only limited to one set of node operators. So in the V2 upgrade that came out in May right after the Chapella upgrade, our core architecture of the protocol was changed.

And from like a single module, it turned into kind of like a hub and spoke model where each new module that the Dow adds essentially avails the protocol of a new set of node operators and validators that could be permissioned or permissionless using DVT or not using DVT or using some other technology. And it essentially turns Lido, well, not yet, but it will eventually turn Lido into not only like a staking aggregator and allocator, but also a marketplace between all of these different node operator sets. Right. So yeah, I think there's like a lot to talk about there with the staking router and the modules. I think also like more recently you already like announced two of the newer or like two of the newer modules were kind of presented. So can you maybe like explain them a bit and why like these were the first two to come out? Yeah, absolutely. So as I mentioned earlier, the current module is the curated operator registry.

It has 100% of the current stake allocated to Lido. So all of the stake that's currently in Lido, which is like around 32% of all of Ethereum stake right now is allocated across these 37 node operators. the idea behind the two modules that were first developed was the following. It was, A, how do we grow the node operator set as fast as possible by introducing as many new independent node operators as possible? And two, how do we deliver on an intent that was always there from the beginning, which was introduce a permissionless element to becoming a node operator on the LIDO protocol? So both of the first modules that have been kind of discussed about and proposed to the DAO,

so one of them, simple DVT, which I'll go into a little bit of detail on, was approved by the DAO already, and the second one, which is called the Community Staking module, which is basically a permissionless module geared towards, primarily geared towards solo stakers, but really anybody can use it. It's currently being voter on right now. So if you're curious about that, you can go to the Lido forums or the Lido Snapshot and check out the proposal around the LIDO community's thinking module, the CSM. So the CSM and SimpleDDVT work quite differently. Simple DVT leverages the existing technical shell, let's say of the curator operator registry. So from a technical perspective, it works exactly the same. The great thing about that is that you can just reuse the code. How it works very differently is the actual operationalization of

the atomic level in the node operator registry, which is like in the curated module, it's a node operator, but in SimpleDD, it's actually a cluster. So clusters are sets of node operators or groups that work together to run validators in tandem. So whereas before validator duties are all basically operated by one node operator with technologies like distributed validator technology, of which OBLE network and SSB network are the two that are currently being utilized in the SimpleDVT test net, you can have validators run by multiple operators at the same time. This gives you increased operational robustness, reduced technical risk, and also reduced kind of like geographic and jurisdictional risk all at the same time. What it does add is a little bit of

overhead off-chain from a coordination perspective. So like you need to get all of these operators together. You need to basically battle-harden the DVT technologies, which are still quite you and nascent. But the idea is that by utilizing the LIDO protocol, we can actually run hundreds of these validators on Mainet, hopefully within the end of Q224, and that'll really give us the opportunity to push these technologies and see how well they work from a practical perspective. Maybe it's worth if you just give like a two-minute summary of like what DBT is, because I don't think this is like something that everyone is going to be familiar of. Definitely.

So DVT stands for distributed validator technology. and so normally like a validator is somebody running the server and the software by themselves. But in this case, you, Felix and I, and ideally one more person, you kind of want like a threshold configuration. And so they tend to be like three out of four or five out of seven or seven out of ten where we can co-run a validator. So the private key itself is actually split amongst the three of us. and you need some sort of consensus between that M of N that we were talking about, like three or four or five of seven, to put enough of those key shares together to make a full key. Likewise, in terms of operating a validator, you need that consensus threshold when performing

validator activities like attesting or proposing blocks or participating on sync committees in order to actually send like a valid message to the network. So when you split the share, the one thing that you really, really drastic, reduces like the risk of this key somehow being compromised. Instead of it only being compromised in one place and now needs to be compromised in multiple places. So the risk of key theft or key loss is drastically reduced. Because of the threshold mechanism, it also means that some portion of this group of operators that's co-running a validator can actually be offline and the validator itself keeps running. So you really offset also operational and a technical risk that is associated

with running validators. And the other thing that you can do is also, like even one operator, for example, might choose to use DVT if they want to distribute the technical risk of running a validator, right? So they might want to split one key across multiple nodes

that they might be running in different geographies or different jurisdictions or even using different clients. Because in Ethereum, like client diversity is also really, really important. So if you're splitting your key across multiple nodes that run different clients, you reduce the risk of, client bugs affecting your validator activities.

Maybe, can you talk a little bit about the governance aspect as well? I know there's like dual governance, which has been a big, a big thing that's been explored by Lido. Can you explain like what dual governance is and like what you're trying to address with dual governance? Yeah, absolutely. So dual governance at its core is an attempt to solve what is well known as the principal agent problem. And it's basically the conundrum of what happens when the people who get

to decide about something do not have aligned expectations, preferences, or ideal outcomes with the people whose decisions they affect. In DeFi protocols, that's basically when governance token holders, so in Leido's case, LDO holders, may not necessarily have the same desired outcome as Stakers, STE folders. In LITO's case, there's actually quite a large overlap between these two segments of users or audiences, let's say, but there is a big discrepancy in terms of the power equality, let's say, between them, right? So you might have a lot of stakers. That might also have a lot of, a little bit of LDO, but obviously they're largely affected to the extent that STE is a portion of their portfolio by larger token holders.

So what dual governance allows you to do is have the second set of, or the second subset of users, let's say, so SDE folders, have a say in the governance proceedings around Lido doubt controlling the protocol and then therefore stakers. Its purpose within Lido is kind of like twofold. One is to more closely align the incentives between these two groups. So like the mechanism existing in the first place is kind of like, a deterrent for one group doing something that the other group doesn't want, just by itself. And the other thing is to make sure that if, for example, there's something that goes wrong with the governance mechanism, like somebody ends up holding a lot of LDO and their desires are

not in line with what's good for Stakers or other LDO holders, then STEath holders can basically veto votes that they think are not good for them or might be bad for the network. So this allows stakers to more directly represent their interests by not having to have exposure to the LDO token. And the other kind of benefit here is that if they disagree with votes that LDO holders might be having, to give them time to exit the protocol, right? So at its core, doer governance is like a foot voting mechanism, which means that like you take your money and you move it elsewhere. So you have to give these stakers enough time to be able to take that money and move elsewhere if they disagree with the direction, of a vote or the effect of a vote.

And this basically does that by putting the protocol in kind of like a limbo state. So if LDO holders like get captured or by somebody that has like malicious and tense for the protocols, right, like wants to upgrade it to do something that's bad for stakers, stakers, can basically put the protocol into this limbo state. And then it allows for more stakers to come in to decide if things. are actually against this vote or not. And if they are, they can put the protocol into a mode that's called like local settlement, which is basically all stakers who are voting, vetoing the current proposals will be allowed to withdraw their stake. And so that also reduces the actual

power that the lighter protocol would have on the network. So this is one way for stakers not only to protect themselves, but also to protect the underlying network. Would this also allow people who have state if that's locked up in some kind of defy protocol to participate or you will need to have the stake if kind of, you know, just like liquid in a wallet?

So that's kind of like an implementation detail that's not hired out. Actually, if I don't know if we can attach links later, but there's like an ongoing discussion on the forums about stuff exactly like that. I think in its current iteration, it would be very, very difficult

to have SDE that is used in DFI protocols to actually be used to veto. Because basically you would need to create like a wrapped version of it for every defy protocol that supports STEath and then you also have to deal with like what if it's bridged to other like L2s or even other L1s. But what in lieu of that, the current mechanism is the following. There's kind of like multiple veto thresholds. The first veto threshold is quite low. So if you get some small amount of STE stakers and like I don't recall what the threshold is right now, but I think it's like below like 5%, they can extend the window

during which more SDE stakers have time to come in and veto the proposal. So basically, like, if all three of us agree that pay this proposal is a bad idea, but you two guys are a defy and you need 20 days to exit, but my STEth is in my wallet, I can go and veto the proposal, and that gives you guys enough time to pull your STEth out of Defi

and then come and also put it into, into the veto aggregation mechanism. Yeah, so we're talking a lot about like SD-Eth in Defi. I think, yeah, one thing that we wanted to also, you know, hear more about is, yeah, how, like, ETH is pretty huge rights, like, 20 billion market cap. And, like, obviously one of the core promises of liquid staking is sort of you can utilize your collateral in defy now. Yeah, we wanted to ask sort of around, you know, how is it being, how is ETH currently used

and how do you see the usage evolve in the future? So there's kind of like an interesting dynamic that we've observed together with like the timings of the actual market, right? Like if we're in a bull or a bear market. In general, in bull markets, you tend to see people are more, let me say, adventurous, I guess, with their steve and in bear markets less so. However, actually, we see more STEF plane holders than we were initially expected. That said, though, STEth is basically like one of the biggest drivers of most Defi protocols right now. So if you look at like AVE or Maker and you look at like the vault utilization rates or the amount of capital that has been provided in terms of like lending, STEth is up there with ETH and in some cases, surpassing it. And that also kind of makes sense from an economic perspective because at some point,

the rates between these two tokens, like the lending rates, especially because some people will lend STEath to borrow ETH to restake it, kind of find an equilibrium, right? So at some point, it doesn't make sense to necessarily go and lend out all of your STEth because the rates that you get on it are either not worth the additional risk that you might be taking on it from a smart contract or from a protocol perspective or just because you prefer the immediate liquidity as opposed to having to unwind all of those positions. So, you know, what's the percentage right now that is being used in Defi? And, like, what are kind of the top usage pattern that you're seeing?

So I think that the current usage is somewhere between 35 to 45% of SD Ethan in Defi. But actually, that's probably, like, a couple of months old, so that's the last time I saw it. However, the other real difficulty here is like tracking this across L2s and then also tracking it across L1s. So a lot of the times what we see is that there's like STE and it's on a bridging contract. And it's difficult then to like kind of like pierce the veil and go into like Solana right and see exactly how it's used on Solana or even on osmosis and neutron now since the recent bridging

kind of capabilities there. So the most common usage is actually from a lending perspective. Leverage staking, it's kind of like restaking, if you think about it. Like you're taking out EF and then restaking it, but restaking me something different now. But leverage staking wasn't and still is like the largest use case of it. But we actually also see a lot of people that are lending their STEth and borrowing stables against it. And this is beneficial because you kind of have the built-in rewards rate of STE while you're lending it, as well as a quite beneficial lending rate that's offsetting the borrow rate that you have to pay on

on the stables. So in bare markets, when there's like a lot of volatility, it's a little bit more dangerous. It means you just have to be much more careful about the health factors of their vaults. But in the last couple of months, when the markets have been like relatively more stable, you see a lot more of this kind of usage. And it makes sense because stables are generally like the easiest way to get exposure to other secondary or tertiary tokens, especially if you want to easily hop across different networks because there's a lot of liquidity there. But also in terms of being able to take these stables and then go to centralized exchanges where you might want more like exotic options like perps and stuff like that. While we're talking about bridging

and bringing STE to different networks, I think that's also like been a huge talk. in recent weeks and months, right? So you mentioned already U-Tron and some other ones that S-Eath is available. Now, can you talk a little bit about how it works? And I guess most importantly, probably like, explain to us a little bit the scenario that happened with like layer zero and like how rapt STEs was supposed to be brought to B&B from them,

but it wasn't like going through the governance process. So I think there has been like a bunch of discussion how, you know, STEath can be bridged across to other ecosystems and yeah maybe you can just kind of shine some light on this whole like story and you know how how SDEth will be

bridged going forward and the role of the light or Dow in it. I'll do my best here because this isn't really my area but I can give you guys kind of like my understanding and also from a general process perspective. So the tricky thing about bridging and like in general with DeFi

is that they're permissionless in terms of how they're used, right? So technically, anybody can take STE, Rabbit, and Bridgett if they want to. The question is, how do you kind of focus the activity so that you don't fragment liquidity too much? Because if there's like five different bridged versions of a token on the destination, whatever, chain, L2, even maybe L3 at some point, you really, really decrease the usability of the token itself from a user perspective. So you you want to take an approach that is like coordinated from the perspective of providing the best possible liquidity and experience to a user. The way that LidoDAO contributors and the Lido itself in terms of like the things that it's ratified have put together a process around this is that

there's a team of contributors that's called, it's dubbed new network expansion working group or work group, I think is what it stands for. And basically they're there kind of like a node operator mechanisms is from a node operator perspective to coordinate the efforts between host and target chains, but also the actual bridging protocols themselves, around A, making sure that kind of like the right process has followed and the right process basically means,

hey, are we sure that this is like the best user experience for the user on the target chain? B, is kind of like are like the risks around the bridging mechanism, the minimum that they could be, are there improvements that could be made or other bridging mechanisms that might make more sense? See what is the interplay between the token that ends up on the network and like the DFI protocols that exist on the target chain because you want something that is immediately usable by what the defy environment is on that side. You don't want to like end up creating a token that then needs to be

rewrapped into another token because again you face liquidated your fragmentation. And then D is, is there a way to take a consistent approach with as many of these bridges? possible. And that's why if you look at the layer zero post and the kind of like governance kerfuffle, I guess, let's say that happened when that was posted is that there was kind of a set strategy, especially with regards to layer two deployments, in the sense that like native or canonical bridges should be used whenever possible. But in this case, this was kind of an alternative to that that hadn't necessarily been reviewed by the new team yet. So one thing we also wanted to talk about here is, you know, Ethereum is still there's a lot of evolution, right?

And there are a lot of, I mean, it evolves kind of slowly in some way, but there's a lot of thinking always, right? From Ethereum researchers around, you know, protocol changes and things they want to, ways they want to evolve Ethereum. And of course, some of those also affect Lido. So I'm curious about you thinking on that. Like, what do you feel are the most important things on the Ethereum roadmap that are coming in the future? And how do you see them affecting LIDA? Yeah, that's a great question. So hopefully sometime in the next hard fork, which I'm trying to remember like the nickname for it now.

I think it's Petra. But basically, Prague Electra, the, the, kind of discussion happening now is whether EIP 7002 will be included or not. That is the Ethereum Improvement proposal around triggerable exits. And basically, right now, the only way to exit a validator is by using the validator key on the consensus layer. And what this proposal would allow for is a way for users and node operators to exit validators using the execution layer. So basically sending a signal from the withdrawal credentials of a validator to the consensus layer to exit the validator. From a staking solution perspective, and this applies not only

to liquid staking protocols, but like centralized staking solutions and even solo stakers, this is something really, really useful. It means that if for some reason you lose the validator key, you have a way to exit the validator and recoup the capital and pending rewards that are still on that validator, but it also means that protocols that want to be decentralized and therefore should have permissionless ways for node operators to join the node operator set, have a defense measure against node operators that go rogue or do something malicious, or like even in the best of cases, you know, just go inactive for long periods of time. So like, let's say I'm a solo staker and I join a permissionless liquid staking protocol, but something happens and like I'm offline

for nine months. Should all of those penalties be socialized to all of the liquid staking token holders, every protocol might approach this decision a little bit differently, but what this does allow is for the protocols to make, create like, let's say, a rule around this and how protocols protect themselves going forward. So at the same time, yes, it kind of changes the balance of power between the protocols and node operators because you no longer need node operators to, like, let's say, acquiesce to a validator being exited. But that's why for Lido, something like the rule governance is really, really important, because you can shield those kinds of decisions. So, for example, under which cases, like, where do the rules and criteria under which

validators exits may be triggered from the execution layer? And also, even if you want to make the actual exits themselves objectionable, let's say, by through the dual governance process, to limit the risk of that functionality, that feature being abused by a protocol or by a Dow. And the other EIP that's being discussed now that would have a very, very large effect on a lot of liquid-staking protocols is the one around check. changing the maximum effect of balance of a validator. So currently, all validators on Ethereum basically have a minimum in order to be active and effective, which is 32Eth, or to be activated.

Technically, you can go below that number once the validator has been activated and still be active, and a maximum, which is, again, 32Eath, which is why we have hundreds of thousands of validators on the network currently. And what that's doing is that it's congesting the peer-to-peer network of Ethereum. and although in general the network is performing all right right now, people are afraid that if the number of validators doubles or eventually even triples, the network will either stop running well or perhaps not even run properly at all. So there's a test that was done a couple of months ago and basically they tried to run Ethereum with I think like 2.something million validators or, you know, sorry, like 1.7 million and it didn't run properly. A lot of improvements have been made to clients since then, but another way to do it is to increase. the amount of stake, they can actually be allocated to one validator. And that's what the max effect of balance EIP would allow you to do. So you could see large node operators. So for

example, the node operators that are in LIDO's Q-rated set or Coinbase and Cracken and other centralized staking solutions or even like large node operators for the validators that they sell to customers directly, obviously like KORS1, begin to consolidate their validators. So instead of running like let's say 100 validators of 32Eth on a specific machine, on a specific like validator client, you might just have 3,200 worth of stake on a specific validator. Although I think currently the proposal is to go up to 2048, but like the general concept is the same. So you reduce the amount of stress that's on the peer-to-peer network and that gives you better

performance, which eventually potentially lays the groundwork for something like like a single slot finality, which which needs block times to be like relatively performant. So in that scenario, so maybe just expanding on a little bit on this. So here, I mean, I presume right, the staking rewards would also scale proportionally with the amount of eF in there. And is it also the chance of being selected as a proposer would then also be like, let's say, if you have a 320 EFundavalaider instead of 32, you'd also be like 10 times as likely to be selected

for the different kinds of roles, you know, that like kind of read, I mean a proposal, I guess, mainly that leads to like, you know, additional rewards. Yeah, that's correct. So basically the allocation mechanism for, like, if you're selected to do something, will be based on stake weight as opposed to this idea that there's like a nominal value,

which is just number of validators or one, right, if they're all 32. With regards to the weight between how likely you are to be selected to do something. Although technically it has to do with the effect of balance, right? So not the maximum, but what the current effect of balance of the validator is. And the other interesting thing here from potentially, even from like a small staker perspective, is what this means from compounding of rewards. So like let's say that you're a solo staker and you only have 32. ETH, so you can only run one validator right now. It's very difficult to then compound those

rewards because anything above 32Eth on a validator doesn't get rewards. So you have the partial rewards mechanism that allows you to take these rewards out and you can do something with them, potentially, you know, get a liquid staking token. But it doesn't allow you to directly restake it if you want to do it, like restake it, not restaking in Eigalera sense. So what this max effective the balance allows you to do is potentially start a validator with 32-Eath, because the maximum balance isn't necessarily the balance required to activate the validator. It'll probably stay at 32. And then that means that the rewards can accumulate on that validator, and you will compound your rewards until you reach whatever the new

max that you've selected. So it might be 64, it might be 128, it might be 208, it might be 2048, at which point the partial rewards mechanism will kick in again, and everything will be skimmed off the top. I think another solution to this problem, right, is that that's been often discussed is sort of to like lower the staking rewards so that like less people participate in staking, which is that correct? Or like what's your thoughts on that? Yeah, this is pretty controversial, I guess, as an idea, even within the lighter dot contributors. So I think in general the idea of minimum viable issuance is correct, right? You do not ever want to overpay for something if you can afford not to. But I think the biggest question here is, like, what are staking rewards actually

paying for? And is the economic security from a technical perspective, as in like what the network needs to run? The only thing that matters? Or are we minimizing the importance of a lot of other things when we only look at it through that prism? And to be honest, I think we do. So there's a couple of things that play here, and part of them is also like convention or history. If you set stinking rewards to a certain number, to a certain extent, it doesn't really matter what that number is. But then you go and change it, you almost break a set of expectations that the users of the protocol have with the protocol itself. Now, you can argue, and I think it's a convincing argument that like there's no actual set. of expectations, it's code. If people agree to do something else with the code, and that's

basically what a blockchain is, they're free to do so. And so those expectations are null and void. But expectations build culture and they also build community. So, and we can even see this kind of like with the recent kind of proposal that happened in Cosmos, right, with the change to staking rewards on Adam. So you risk a potentially having like a schism, the community and even like a fork where some people will go one way and some people will go another way. And then you also basically risk having negative externality, so negative effects as a result of this decision, then maybe you don't account for. So if we reduce the issuance of Ethereum right now, I think what you effectively do is price out a lot of solo stakers. It will no longer make sense for you

to run a validator at home because the amount of rewards that you get is drastically reduced. And unfortunately, what matters for solo stakers is absolute rewards in fiat terms, because that's what their costs are basically framed as. If eventually we live in a world where, like, ETH is the stable coin, right? And that'd be great. Then it matters less. But right now, it's not the difficulties that users transact in, like, local fiat currency. They pay their taxes in local fiat currency. And so it needs to be economically appealing for them to remain as stickers of network. And I don't think you achieve that by minimizing issuance even further. The other thing that you do is you essentially trigger a centralization race because the more you push issuance downwards, the more you compress

margins. When you compress margins, you make node operators like compete even more on, well, margins, right? So they will do things to cut costs. This means centralizing the way. that they run validators, I think you will see probably a lot of node operators go out of business and then like a consolidation effect in terms of the overall landscape of how many node operators are out there, how diversified they are from an infrastructure and an operations perspective, and perhaps even from a geographic and jurisdictional perspective. So those are the kind of counterweights that one has to think about in terms of like what is a minimum issuance useful for? Is it only useful for economically protecting the technical aspect of the network?

Or do you want to protect things like, you know, the cultural aspects of it, the inclusiveness of it in terms of allowing solo stickers to participate, and also the robustness of it from infrastructure and diversity perspective? Yeah, I mean, it also seems like a very flawed, like if the goal is to reduce a number of validator, then this seems like a very flawed approach also. because is that even going to work, right? Because if you do use, for example, liquid-staking tokens like Stake-Eaf as a sort of, you know, the money thing and the denominator that you use in Defi, then, well, that's kind of attractive to do if you earn 4%.

And it's still kind of attractive if you're in 2%, right? So, like, it's not really, like, I mean, I could totally imagine one does that thing, and it doesn't really drive down the number of validators in the long run? Yeah, if it doesn't drive them down in absolute terms, I think it definitely doesn't help the concentration risk. Let's put it that way. So if one of the things you're trying to do is minimize centralization or saturation within certain types of staking solutions or staking entities,

then I don't think MBI does that. Yeah, and I guess the big challenge too is, I mean, at least in cosmos, also, you do have this governance process, right? So you can ask the atom, well, listen, okay, it ended up being like a close vote, but still, it's like a majority was like, okay, in favor of this. And so in the end, I think it's like people okay with it and they can accept it, right? But only in the theorem case, right, you don't really have that kind of mechanism. And then in the end, and I think that's always been like one of the big, you know,

criticism and the challenges of this whole kind of Ethereum governance process, that it's something that's very in transparent. I mean, it's being forms and it's in different places and, you know, a bunch of researchers and community members have all these discussions and maybe they think about what the community wants, but it's like

really hard to gauge it. And then decision happens like that. And for most people, they will just sort of, they will not feel they have a say in this. Yeah, that's a really, really good point. And like, to be honest, I like the Ethereum governance approach, even though I'm often,

at odds with it, at least in my position, like as a Lido Dow contributor because of like the breadth of the criticism that Lider receives as a protocol. But I think there's like you make concessions when you choose that kind of governance mechanism. When you have on-chain governance, that's very like you're saying transparent and clear and like it's obvious what the effects of what you do will be. And you give people the ability to accept that or not. then it's much easier to have those kinds of discussions and those kinds of votes. It's kind of like how, you know, at Switzerland, you have the cantons that have direct referendums whenever they want to do things that really, really impact the populaces, and they do it all the time because this mechanism exists. But in networks where the governance mechanism is a lot softer, it's a lot more nuanced, it's a lot more intricate, and to a certain extent, it's also less accessible by the people that it impacts being like the users. And Mike, Noder at the EF did this really, really great analysis where he's looking at, like, the sets of users that participate on Ethereum, but blocks change in general, how they intersect and what kind of representation you want of these different sets from a usage and from a governance perspective. of it's difficult to both think about all of these things, but then also kind of figure out ways for people to express their opinion

about what they want to see in a way that is visible to everybody. So it's kind of like what you said. So the researchers that are thinking about these things and honestly doing a really, really good job about thinking about them, maybe don't see things from the prism of like a defy user or from like a solo staker or from a large staking solution. because that's kind of like outside their current field of view. So I think protocols or communities basically like Lido have to take a bigger role in not necessarily

representing users because I don't think like Lido is like a union of users, but trying to think about like the economic impact of EIPs and offer not necessarily deferring points of view, but at least like other points of view about what the effects of these things might be, whether it's something that users want or not, and if it's something that is desirable in general from an end state from an Ethereum perspective. And we're seeing it also not only for staking, but also for a lot of other sectors. So obviously like eigenlayer is doing this a lot from a restaking perspective. But restaking is not only like about staking.

It's also about incentive alignment between networks, like settlement layers, data availability layers, tokenomics, and if you want sustainable flywheels or not, you're seeing it with defy protocols. If you look at kind of like how Uniswap as a Dow has involved kind of like their user education strategy, if you want to put it that way. And obviously, Avey as well. So as users take on a more important role on the network, like not only as people that kind of like interact with a protocol, which is like a little bit indirect and maybe not so, not so serious, but like inhabitants of a protocol, like people that live there, right? Because, like, you might have most of your life savings on Ethereum.

And so therefore, what happens to it is actually a vital importance to you. So you will see that users start to express these preferences the ways that they can. And those ways might be through the protocols that they choose to interact with versus participating directly in governance. And then you would say these. protocols basically interact in the forums or like talk to the researchers. I guess that's kind of what's happening a bit more now. Like for example, you know, like Justin Drake also being at these light of events,

you were having like some panel with them. Is this sort of the path that's happening now? Or could there maybe be, I guess, some evolution of this with a bit more direct representation or is this something that, yeah, I don't know. I guess there could be. I mean, that's a really good question. I don't know if there will be like direct representation, you know, like a Lido ambassador on the all core developers calls or something like that. I don't think that makes sense, to be honest.

It breaks the paradigm of the way that governance works on Ethereum too much. And I don't necessarily know that that's desirable either. But what is desirable is like you mentioned better communication and interaction between, protocols and researchers and client developers. To a certain extent, I think the existence of the LIDO protocol has already actually helped that a lot. There's node operators on the LIDER Q-rated set that are client teams, right? The issues that have been unearthed from a technical perspective, having client teams run thousands and thousands of validators and the tunings that have resulted in the clients and the improvements that have been made in terms of like how client's

interact with MEV boost and relays and things like that have been really, really important. The input and the interaction that client teams and their representatives bring in governance discussions in Lido about what are mechanisms that work well for node operators in order to ensure that we continue to run robust and diversified setups and we're not having a centralizing effect on node operators. All of those things are very, very available. And basically, you only get that value by creating venues for. these parties to come together. So like the lighter connect event, like you mentioned, where it was like a

half-day conference, where we went into like a little bit of a more nuanced take on a bunch of kind of topics around staking and defy and a bunch of other conferences in this vein, you know, like the staking summit, I think are things that we'll see more of going forward. And the willingness of EF researchers and client teams to participate in these discussions, which is like very, very high, to be honest. The discussions are very open of really good caliber. And even though they're like, like testy at times, I think it's for the best of reasons from both sides, mostly because people just really believe what like, whatever viewpoint they're espousing and it's not kind of like, because of animus. And so I think that only good things can come from like constructive

of engagement like that. Yeah, I guess also another big player in this is like sort of flashboards in MIV. Do you, how, I guess, and also like as we record this, right, in, we have seen like other like sort of liquid-staking players, a very big like G-Do with M-UV and the liquid-staking story. Now, I guess my question is more, yeah, how does Lido, I guess, engage also with M-E-W? Is this something like you're working with flashboards? I guess right now most of the curated validator set runs, MEV boost.

Now I think there's also like a bunch of changes coming in terms of like MEV architecture in Ethereum, but yeah, I guess general, how is LIDO approaching MEV? Actually, this is a good segue into a discussion we were having earlier about EIPs that might affect liquid-staking protocol. So the two that we didn't get to talk about are EPBS and Shrined Proposor Builder separation, so basically building something like M.V boost into Ethereum and MavV Berg, which is basically like smoothing out M-AV across all blocks as opposed to having very volatile rewards.

So like rewinding just a little bit from those EIPs, a protocol the size of LIDO, I think, has kind of like has to take into account that a it should never play kingmaker um with things like this so it shouldn't necessarily like be very very specific and say we will only use one relay um because in general you want like diversity in these kinds of things because diversity breeds um like excellence and evolution which this and this part of the industry really really needs um so if you look at what uh Lido Dow has done around this, there's like a block proposal rewards policy. The way that the policy was crafted was to give node operators the maximum amount of optionality possible to A, make sure

that they're compliant with local laws and regulatory concerns if they have any. So if, for example, they feel like they need to use filtering relays that they're able to do that. But the protocol as a whole looks at the effect that it has on the network. So Lego, which is the grads organization within Lightout, like a couple months after the merge and MavV Boost was live and we were kind of looking at censorship on the network and there was kind of like a lot of concern around how much was going through relays that were quote unquote censoring. We, like the Lego commission, a bunch of like studies, I guess if you want to call it that or analyses about actual censorship that was happening on the network and then to try to use that to inform, hey, should

the Dow or the protocol do more here to decrease censorship, or is it at an okay level or should we keep continuing? So one of the things that came out of that process was that in the update to the Block Proposal Rewards Policy a couple months after the merge, node operators were allowed to use minbid. So midbid is basically like a setting on the an MEPB boost or on the consensus layer client, if you will, because you can connect the relays directly now, that allows you to say that if the bid that I get from the MEPB boost network is not over a certain value, I'll just always build locally. And always building locally, basically,

like if you're using stock standard clients, you know, we'll just build, like, whatever's in the MEP pool ordered by priority fees. So this optionality that node operators get is something that actually really, really helps from a credible neutralistic perspective for the network. And there's a lot of other large liquid-staking protocols that basically don't take this approach.

And then the other thing that we're looking at is, so there's like a vetting process, for relays that node operators are allowed to use, but currently all relays that have applied have been bedded and are able to be used by node operators. So it's more like, is the relay and the team that's running the relay like technically competent? Can it handle, you know, thousands or hundreds of thousands of validators being registered at the same time? And are there any issues with regards to like the timeliness of blocks and things like that? And it fulfills all of those conditions, you know, purely from an operational perspective, there's no reason not to

include the relay in the list of relays that operators are allowed to use. The only real concern here is from a staker perspective to make sure that node operators aren't somehow engaging in MV theft. In the curated set, it's not that much of a concern, to be honest, because it'd be very obvious, and the node operators in the curated set have a lot to lose in terms of potential future revenues and reputation. Where it gets tricky is in, like, the community staking module that allows for permissionless entry. So then the question becomes, like how do you monitor things like that? What are the protocols, like, rules that you put in place to combat that happening?

And if it happens, like, how do you deal with it? Do you, do you eject the validators using something like EIP-7-002? Do you use some sort of other mechanisms? So some liquid-sthinking protocols may use, like, pre-signed exit messages. Basically, like, node operators need to sign something and, like, put it in an envelope that says, like, open later in case of emergency where somebody can exit their validators? or do you come up with other mechanisms like recouping or clawing back

like a portion of a bond? So like all of those things are design considerations that are going into the CSM right now. Sorry, and to go back to your question, who does the LidoDow work with here or at least the contributors? And basically like the answer is everyone. So obviously there's a relationship with flashbots

especially because like Hasugu is with flashbots is all. also a strategic advisor to the LidoDAODAO, but also because they were kind of like the thought leaders in this space, but we're also closely working with other relay operators and MEV researchers as well to make sure that the tools that are being provided to node operators aren't ones that, like, harm the network, ultimately, and also that give them the amount of optionality that they need in order to operate

in the manner that they see fit. But so this is also like, I guess, do you see this changing I mean I guess you kind of touched upon it but if it were more permissionless potentially I guess this optionality might mean you know less rewards for certain operators

that like let's say use some filtering relay I guess is there some force there that would like force people to like accept all relays if it's more permissionless and is in that sense the curated set may be like actually a good idea or like how do you how do you think about that

since I guess like permissionless might be like profit maximizing in at least in my mind somehow. Yeah, no, that's a really, really good question. So I think what you need there is more tools to look at that like the actual effect on the network. So Tony who like recently joined the EFD and you're doing a researcher like at NeroEath, I think on Twitter, has this really great site called censorship.pix, which kind of like lets you see what the actual effect of censorship on chain through MIV boost is and really like the problem right now is mostly builders and and less so validators and relays. I think as we have more and more tools like this, then we will empower DOWs to make more apt kind of like decisions and pulling like those protocol levers that we were talking about earlier in terms of what they want the protocol to look like. So if you have a really large liquid staking protocol, which in my opinion needs to enforce

credible neutrality, otherwise it's too much of a harm to the network, you could put in things. So for example, using like the lighter staking router that say that if a certain node operator is only using filtering relays, then there is like a maximum amount of state that they can receive and the state goes somewhere else. So like right now that functionality doesn't exist. I think it's important to build that functionality piece by piece. First of all, you need a way to be able to reason about that on-chain and to reason about it in a verifiable manner. The truth is, like, these mechanisms don't yet exist

to take this data from off-chain, bring it on-chain, analyze it on-chain. It's like super laborious and super, super-supor-gass-intensive or expensive, basically, to do this. But eventually there will be ways to do this, like on L-2s and submit proofs of the calculation back to the L1 and do something with it, that'll be, like, easy to do it. And so you can combine that together with additional modules like the CSM or eventually like DVT modules that are permissionless

to make better staking allocation decisions between these modules. And you'll be able to look at node operators not only within each module, but also across modules. So if I want to look at like node operator, I don't know, I'll just say Bob, right? Maybe Bob has 1% of total stake through the curated module, and so they've reached their theoretical, like, soft cap within Lido, but they're also running a lot of permissionless nodes. Maybe you want to reduce the amount of curated stake they have that to kind of like counterbalance that. Or you see that, like, Bob is actually running really, really diversified because they're like in 30 different countries, and they're all in bare metal, and you want to diversify stake away from public cloud like AWS and Google Cloud

and OVH together. And so you allocate a little bit more stake to Bob until, other node operators can prove that they're also running their infrastructure, you know, like in local data centers, and then that state can be rebalanced away. So you create not only kind of like restrictions, but also opportunities for different types of competition by having robust reallocation mechanisms. Well, let's talk about restaking and eigenlayer. I mean, this is one of the areas that's very hot at the moment in the blockchain world. What? So again, maybe just briefly for those who aren't quite clued in to what restaking is, can you explain what restaking is? And how do you, what do you see the significance of restaking for Lido?

So restaking is essentially the ability to use the same capital that you've staked for one reason to state it for something else. So when you stake 32 if, uh, into, a validator for Ethereum, the risk of all of that 32Eth being, like, let's say, slashed right, on the network is so close to zero that you're basically not optimally using that capital. So you can make an economic argument that some amount of this ETH, let's say four, let's say eight, let's say 16, in order to have like the utmost amount of capital efficiency on it should be reutilized. You can it's kind of like re-hypothecation, but not exactly, should be reutilized or can be reutilized for additional rewards. And what EGN layer wants to do is say that, okay, this amount of extra if can be restaked for either like another blockchain or a data availability layer

or some other protocol that somehow wants to secure the transactions that are happening on that network by utilizing the economic security properties of Ethereum in lieu of doing it themselves. Now, why would a protocol want to do this? Well, one, it saves them a lot of costs. Maintaining a node operator set, finding people that want to run nodes and validate a network is actually very, very expensive. And it's like actually the largest cost item. If you think about it, when you create a new one in terms of where tokens are going, because you need to have issuance, and then you need to issue those tokens to node operators or validators. And then the reality is if the protocol is not sustainable in the long term,

they're probably just going to be selling it to recoup their costs. So A, this removes downward pressure on a native token. B, it takes away the operational complexity of having to worry about these things in the first place. And C, it also creates like a cultural alignment between whatever product it is that you're creating, whether it's a network or data availability layer or another chain with Ethereum itself. So it kind of allows one to hitch itself to like the wagon of Ethereum and say that, hey, we're aligned. And that's really, really important from a user perspective. The difficulty with restaking is that in my perspective, at least, I think that liquid staking adds, like let's say a multiplicative

risk on top of like the normal stake that you have. So if you're using it in defy, right, depending on how many layers deep you're going in defy. But restaking, I think, adds exponential risk because you can not only like take the restake token and put it in defy, but then you can spread it across multiple networks. And the issue is that the collateral, which is like way at the bottom of this giant kind of like tower of restaking can be like leanable by a protocol that's way at the top that has very, very different, let's say, security guarantees, technical considerations, requirements, and thoroughness than the other different layers. And the difficulty there is that it's very, very difficult to actually accurately price this risk. I think it's already difficult,

for example, of people saying that like staking is risk free. Like I don't think staking is risk free. And I definitely don't think that like a liquid staking token is, is risk free either. So the difficulty, though, is that like APRs all look the same. There are just like a couple of numbers and they see a percentage. And then the thing is you don't know what's what's behind that number. So just because something that says that gives you like 5% APR and something else gives you 5% APR, it doesn't mean that the risk of the APR is the same. And markets are. very, very bad about reasoning about this risk. And the inherent kind of challenge with something like Eigen layer and the node operators that will be offering restaking rewards to users is how to come up with this like risk adjusted rate if you want to think about that way or risk adjusted like reward for users. Because like one of the biggest problems we have in DFI right now is that it's very

difficult to to properly educate users about like all of the risks. Like you can write it all down on a on an FAQ like next to this staking widget. It doesn't mean that they'll read it. And it's also like actually difficult to understand to a certain extent. So when we introduce additional layers, it just makes it much more more complex. That said, I think like eigen layer in general, the mechanism design makes sense. In restaking is kind of like liquid staking in the sense that it's kind of something that's going to happen regardless of whether we want it to or not, because money wants it to happen. Like capital will always find a way to do like the most optimal effect for its allocation.

So the question is how to accomplish doing this in the safest way for users? Yeah. And I mean, I guess one thing one could do, right, is to say, oh, there's like, you know, 20 billion worth of E that's backing that state. if and you know lighter could say oh we we are going to now use that to also secure some other things and then we can pay like you know a higher APR for this EF but of course you're absolutely right right you're adding a lot of complexity and risk and and I guess it's also seems to go kind of counter the Lido's strategy at least my understanding of LIDA strategy which has been to basically try to make their protocol pretty minimal

and neutral. He's also trying to address this whole thing with people saying like, oh, but Lido's too big. Well, I think the more neutral it is, right? And the more non-offensive, the governance minimized, it is the less people will be upset about it,

although I guess people still upset about the size of Lido. So I don't know how well that strategy is working. But it probably is working to some extent because I think if now Lido would be doing also, yeah, use that EF to, you know, also secure a bunch of other speculative things happening somewhere else. I do think there would be a lot of backlash there, right? So I guess this whole thing of having people built that thing on top, independent of Lido,

it does make sense. And that's kind of the strategy, you know, that's the Lido basis says, okay, we are staying out of this and people can build it on top. So, like, I mean, technically Lido hasn't said that. because only the Dow can save things and that the Dow hasn't had a vote on this. But I think that is definitely one of the concerns, or at least one of the concerns around doing it too early. Because as you aptly pointed out, we're talking about, I mean, at current like ETH prices in terms of USD, like 20 billion, right? So how much of that 20 billion would need to be restate in order to have an appreciable effect on the rewards rate, right?

Which is currently like between 3.8 to 4%. A lot of it. Like probably more. than, I don't know, 70 to 75%. Are there enough protocols out there that are robust enough to support, like let's say 15 billion worth of capital being restaked into them where that's like a good bet? I mean, personally, I would say no. So until those protocols exist, the way that Lido thinks about restaking needs to be, I believe, like compartmentalized a little bit. you can't offer it for all STEth holders

because you need to basically restake almost all of STEath and that's a very, very difficult proposition right now, right? Like, what exists that will give you enough issuance in order to be able to move the needle on that? And so the cool thing is that through the staking router, it might be possible to build modules where the stake that is staked into these modules

is explicitly restaked, and then you can kind of create in-proticle mechanisms, like tranching, for example, where you get exposure to this module, but the rest of the SDF holders don't, and then, like, you know, this kind of like a counterbalance in between where the exposure is. The difficulty there is like prioritization. What do you want to focus on first? Do you want to focus on, like, restaking?

You want to focus on, like, permissionless node operators being able to join the set and, like, kind of like building out the market around the staking router. Do you want to do everything at the same time? I think the latter, like everything at the same time, isn't currently possible. It might be if the contributor set grows. But right now the impetus and like the value alignment in terms of like what contributors have been thinking about, honestly, for the last two years is growing the node operator set, making it more decentralized, allowing anybody to be a node operator.

And then like restaking and other stuff is like a problem for like a little bit further down the road. So talking about prioritization, you know, Lido, of course, almost everyone knows, yeah, Lido Ethereum, but of course Lido has made, and Lido was also originally very much, you know, designed around Ethereum liquid staking. The LDO was used a lot, right, to incentivize state ETH adoption, especially in the beginning. I guess now I think these liquidity incentives, my understanding is maybe much less. I think it's almost only in SDEth now. Basically, it's more sustainable once you have the rewards to give rewards in the same

token of the rewards as opposed to the treasury. Yeah. Yeah, exactly. But now, of course, there was or there have been attempts also by Lido to expand to other networks. I mean, of course, one, we were pretty involved in the Lido-Silana thing or kind of initially built that. So there was Lidilana.

There was Polka-Daw. There was a whole bunch of other. efforts. Lido, Solana, right, recently was there was a decision to kind of close it down. I think Pocod thing was also closed down. We had Cheeto now, which is one of the competitors in Solana that, you know, launched their own token that has, you know, very high market cap. Cosmos for a long time, right?

there was a lot of discussion about Lido coming to cosmos. Now we again have, I think, a native protocol there's stride that has done, you know, has been doing pretty well. I'm curious, what is, is, what's the thinking sort of in the Lido community around expanding to other networks? Is that still something that's kind of an intention or, and do you think it's something that Lido can succeed at or is it just the case that? that we have such a huge advantage if you have a governance token that's specific to a particular

ecosystem community can be used there, fully focused on that. And that, you know, it's actually a hard thing for Lido to go and win in, you know, in these other ecosystems. That's a really, really great question. And it's, I think it's also one that there's no clear alignment on between, like within the Tao itself and even across contributors, if there was clear alignment, you would probably see more action, let's say in one direction or another. I think the recent things that you've pointed out, kind of like the sun setting of Pokerat and Kusama and Solana as well, is indicative of a, the realization that in order to, in order for light on Ethereum to become the best version of itself, it's going to require most of contributors' attention.

If that attention is split across other Lido-on-X protocol initiatives right now, it's very difficult to have that kind of focused sense of purpose and to make sure that all of the things that are being said from a value in a principle's perspective are stuck to. And it also makes it very, very difficult to fight those battles, if you want from a market's perspective, perspective. Like what you said is really, really apt. Every token that, like, natively launches on another chain means that it has, like, its whole treasury to fight that battle, right? Lido with only one treasury, which, like, was funded, you know, like, two bull markets ago, means that, like, if you spend it once, then, like, it's gone. And then was it worth it in the end or not? So,

even though I think a multi-chain strategy from like an in-state perspective, I don't know, I'm talking like 10 to 15 years in the future, when it's clear that there's a couple of chains that have like withstood the test of time. And when you're thinking about capital allocation at a very large level, you know, from like an institutional perspective, they will want something like a basket, you know, of state tokens or basket of bonds, right? Like, you know, you have like world indices that are like treasuries from specific markets. You will try to want to have at least like a say.

in all of those different products. But right now, the best strategy is to focus on where you think you can create the most impact and where you think you can create the most value. And personally, I believe that that's an Ethereum for Lido, right? For other protocols, like obviously, Cheeto has made tremendous success in Solana. And the kind of like vertical integration aspect of it has been interesting. You know, like first they came out with an MV client. and then they part laid that into liquid staking.

On Ethereum, I think it would be much more difficult to do something like that because culturally, I don't know if something like that would fly. There are attempts to do something like that. You know, there's like Maveth. But I think it's up against like much more headwinds from a values perspective in Ethereum.

Now, I was also like, I guess the interesting one here is again like sort of the restaking story maybe where you are sort of expanding, but it's still within the Ethereum, like sort of narrative or alignment type thing, because it's like still using ETH. So I guess that seems to me much more aligned there or more needing to worry about that

because I guess if someone stakes soul, right, it doesn't like directly attack the value proposition of STEath versus restaking where it kind of does. Yeah, I agree with that. And I think that's why like STEath as a like a base Lego makes a lot of sense,

which is kind of what Brian was saying earlier, right? Like if you give this optionality to users, like so IGA layer has supported being able to wrap steak teeth into their protocol from the beginning, then like the protocol has done 90% of his job. The drawback there is that none of those rewards are trickling back into the protocol. but from a usability proposition for stakers, that's like you've already done 90% of what you need to do.

So then the question only becomes like the other 10%, when is the best time to do it in order for you to get exposure to that value. I think there will be a time. I just don't know when it is. And I think that the restaking space needs to, like I don't want to say mature, but like develop itself a little bit more so that some things become a little bit clearer.

because like like eigen layer is is forging a path right now and it would be like honestly stupid to try to compete with what eigen layer is doing right now because it would require a refocus of resources and attention that like it doesn't make sense. So as that kind of like ecosystem develops, what the Dow in my opinion should do is like keep an eye on it and see what would make sense to to integrate with and how, but also the best way to do it in a way that ensures that, like, users have the optionality

and the access that they need, but doesn't sacrifice, like, safety or security of the protocol in any way. One more thing I wanted to ask about. So liquid staking has been, I think, one of the areas that has had a lot of interest, right? I mean, I think LIDA's success is the primary reason for that. And including on Ethereum, right, there's been a lot of new protocols coming.

Of course, none of them have had anywhere near the success of Lido, but it's clearly an area of a lot of investment and interest. I'm curious, like, how do you think about liquid-staking competitors on Ethereum? And are there particular protocols or approaches that you think are interesting? or like taking, you know, different approaches that, yeah, you feel like are innovative and cool? Or like, yeah, how do you feel about sort of the competitive landscape on Ethereum? So I think the competitive landscape is actually pretty healthy right now. So like a lot of people are saying Lido is a monopoly and like Lido has dominance. And like, to be honest, I don't think that's true.

I mean, the monopoly thing is kind of like false on its face. if you can take the share that Lido has and find another three actors with the same share and there's still room for them in the market, like I don't think that makes a monopoly. And the second thing is like, okay, so you can have monopolies where something doesn't have like over 50 or 70% of share of something

as long as the power that is afforded to a protocol or a group or an entity or whatever by virtue of having that share allows it to do monopolistic things. And then I think again, that argument fails. So at 32% Lido can not really do anything monopolistic. At over 33%, you know, which is the first technical threshold that a lot of people are talking about, the thing that it can do is if it's somehow like it being the Dow, right, or if the protocol itself had a way to force all node operators to like turn off their validators, which it can't because like there's no requirement

for all Lido node operators to use common software, right? The only thing that it could do was stop finality on the network. And the validators that would bear the penalties for that are the ones that would be offline. So essentially, the argument is that somebody would, might pay the Dow more money than it and node operators would lose. Like, even setting aside kind of like the reputational component and the future revenues component. And the fact that like some of these node operators are actually like client teams and that's not a mistake. like there's a reason that their voices were chosen to be like part of this milieu to turn off the network for I don't know like a couple hours because that's how long it's going to last

until the amount of money lost is like crazy high. So that doesn't make sense. The next threshold is like 50%. So add 50% if there was a way for somehow the light for the Dow or the protocol to enforce that enough node operators to like cross the amount of 50% to run a clock. that accepted another fork, which is not like a legitimate or canonical fork of Ethereum, and then change the history of Ethereum, that that would be bad for the network. I agree that would be terrible for the network. The reality of doing that is, well, first of all, you're not going to find enough node operators to convince to do that, especially if by then, you know, you have additional modules,

and it's not just a curated set, and you have permissionless node operators, which, like, in my mind, that's like a given that that's what it'll look like within a year or two. but even if you did, the threat of the user activated soft fork is there, right? So the only thing that the network would do is basically like find all of the people that were involved in this and then fork them out because like that is the ultimate defense mechanism. And that also happens at 67%. The only thing that changes there is that at 51%, if you take over there, you will wait for some people to kind of like leak out.

And then at 67% you could slash them right away. So what changes there is like how fast you would be able to execute an attack. The amount of money like in terms of stake required to be able to execute those attacks is like I don't know if there's any one entity in the world that has that amount of money unless you know like Powell hits print on the machine and it's just there like smacking the button every day. But from a practical perspective, I just think it's also like it doesn't make sense. So of course there are like that's a concern and that doesn't. doesn't mean that we should ignore it. I just think the risk from a practical perspective is really, really small. Smart contract risks, of course, exists. Like, malicious kind of takeover of a Dow exists. And things like dual governance and eventual ossification and stuff like that,

like those will, those are like the right answers to the problem. It just takes time for it to happen. And like, that's unfortunate. But it took Ethereum like one and a half years to have withdrawals after staking. It took like another one and a half years to eventually potentially have triggerable exits. So being able to exit your validator from your rewards address. And like to a certain extent, like protocols evolve. And then that's that's something natural for them. Some don't, I guess, because they don't want to evolve anymore looking at you Bitcoin.

And if that's your selling proposition, like that's okay. But Ethereum's proposition has always been that it adapts to its environment and like and where the future is and I think it's fair to treat the protocols that live on Ethereum in a similar way. Yeah, no, I appreciate you explaining that because yeah, I think often

these like scenarios is just like it's so implausible, right? Like, yeah, I think and that's the beautiful thing about proof of stake, right? It's actually like very, very resilient in a way that proof of work is not where like in the end the

the losses for someone to attack a network by like using their tokens to do something is just like so catastrophically high that we've literally never seen it right there's not been a single proof of not even small proof of stake networks you know of like 20 million dollar market cap right we've never seen something like that and it it it absolutely makes sense right because okay maybe it takes you then 10 million to attack this small network but you know what can you gain And then you're still a risk of losing this 10 million. And so it's just, I think, the economics, the game theoretic properties of proof stake, which is really fantastic. And I think that's still the case, even with Lido and even at scale. Yeah, and that's why something like dual governance is kind of great, because it almost codifies that into the protocol, right? So why do you not want to attack a like a proof of stake network by buying a lot of tokens?

Because they're going to be worth nothing after the attack, right? Either because everybody's going to leave the network or because you'll be forked out. So dual governance kind of accomplishes the same thing. If I take over LDO to try to change the withdrawal address, like to my, you know, my metamask call wallet, Felix will just go start the veto process, then you'll join, then everybody else will join, you'll withdraw, and then, okay, like, maybe the process takes six months, and then you have enough LDO for the vote to pass, but there's zero, like, stake left in the protocol, so you're going to get nothing. And that's, that's the really cool thing about, like, mechanisms like that.

Cool. Well, thanks so much, EZ. It was really great to have you on. I think we covered quite a lot. And I know there's like so much going on still in Ethereum and with all the changes coming. And a lot of going on in Lido too, right? A lot of innovation there and a lot of great people working on it. And so yeah, it's been great to talk about it. And I'm sure there will be a time for another Lido episode in the future where I'm sure there will be a lot of new exciting things to talk about. So thanks so much for joining us. Thanks for having me And I've also seen that you're like Pretty involved in Erbit now So you ever want to talk about Erbit? Let me know Oh yeah, definitely I may have you to talk about Arbit

Thanks, is it Thanks guys Cool Well, thanks so much Thanks to thanks to everyone for listening in If you want to support the show Leave an iTunes for you for you for us Or just let us know what you think

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