Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Vasiliy Shapovalov: Lido – The Liquid Staking Solution for Ethereum 2.0

Episode Date: October 6, 2021

Lido is a DAO that provides a liquid staking solution for Ethreum 2.0. It lets users stake their Ether, without locking assets or needing to maintain infrastructure, whilst participating in on-chain activities. Lido attempts to solve the problems associated with initial Ethereum 2.0 staking - illiquidity, minimum requirements, immovability and accessibility, by making staked Ether liquid and allowing for participation in DeFi.Vasiliy Shapovalov, Co-founder of Lido, joined us to talk about all things Ethereum staking and the benefits of liquid staking with Lido.Topics covered in this episode:Vasiliy's background and how he got into cryptoAn overview of Lido and the problem it solvesHow Ethereum 2.0 staking worksLido's fee structure and business modelLido's governance model and the LDO tokenHow the ETH/stETH peg is maintainedLiquid staking and its role in DeFiLido for other blockchain networks like SolanaThe LEGO Grant programEpisode links:LidoVasiliy's talk at EthCCLido on TwitterVasiliy on TwitterSponsors:Gnosis Safe: Gnosis Safe is a smart wallet for securely managing digital assets and allows you to define customized access permissions. - https://epicenter.rocks/gnosissafeThis episode is hosted by Friederike Ernst & Sebastien Couture. Show notes and listening options: epicenter.tv/412

Hi, and welcome to Epicenter, the podcast where we're used for crypto founders, builders, and thought leaders. I'm Sebastian Kutur, and I'm here with Frederike Ernst. Today, we're speaking with Vasili Chapavlov. He's the CTO of P2P validator and the co-founder of LidoDAO. Before we talk to Vesilio, about Lido and all things staking, we'd like to tell you about our sponsor this week. NozaSafe is a smart wallet for securely managing digital assets. What makes NOSAFafe different is that it allows you to define customized access permits. So Gnosis safe enables users to control digital assets with granular permission involving multiple private keys, a subset of which is required to execute a transaction.

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Cool. So all of the EVM chains, I guess. Great. So thanks Felica and Vasilia. Thanks for joining us today. Hey. Yeah. Thank you for invite me. So before we get started, tell us a bit about your background and how you got involved into crypto. I come from software engineering background. I used to be a software engineer in in field of information security in Russia, and then I became an engineering manager. And in 2017, I just got sucked into crypto part-time first then. I think in 2019 full-time and 2020, I became a CTO of P2P. What does P2P do?

We're a professional node operator. We run nodes. for multiple blockchains and blockchain protocols, that's essentially what we do. Like many validators were also active in communities and participating governance. So that's part of what we do as well. This is why we're talking about Lido today, right? So basically you're here to talk about Lido and your role in Lido and to explain to us how Lido works.

So tell us how you got involved with Lido. So I started working in P2P in February 2020, and in March 2020, basically the second thing I did after I just got acquainted with the team, I wrote a first draft of what LIDA would be. Why? Because when I took a look at the staking landscape, I relied that the most important event of 2020 for not operators for all the staking ecosystem will be. finally, the launch of proof of stake version of Ethereum, the Biccon Chain. And it was extremely likely that it would launch in 2020, which people started to adapt to this point. But I was sure that it will happen. And it did in December. And I took a look at how the stake in Ethereum is made.

There is no delegation and protocol. And I understood that there is no place for professional not operating. in the Ethereum, like it's not like there is absolutely no place, but it's very hard to attract clients and work with them. It requires paperwork and legal agreements and like B2B marketing and all the stuff that is pretty cumbersome for not operators. And I took a look at staking protocols, of which there was only a rocket pool building at this time. They are low G in staking protocols. And it also wasn't really great for not operators because it required them to have a significant self-bond in rocket pool tokens, which is not very capital

efficient for not operators. So I tried to design a staking protocol that would be, would work well for users, for not operators and for Ethereum itself. Hence, the draft, the first draft flydo. Okay, before we dive into this, can you maybe explain in a nutshell how East Staking works? So basically, what are the requirements for Stakers and what is it difficult to meet these? Or why is it difficult to meet these? Ethereum Staking Protocol is technical marvel. It's very well designed from technical point of view.

it allows tens or hundreds of thousand of individual validators to participate in staking. The way it does this, it allows a validator, which is essentially in this context, is a validating key. To sign an attestation or to propose a block, and this attestation aggregated in an aggregated signature, BLS signature, in a very efficient manner. So there can be a lot of nodes in the network potentially. But to run one single validator, first of all, you need 32 others, which is pretty expensive. And second, you need to run a B-Conchain client node and you need to run a validator node. There are penalties for your node being offline and there are pretty serious slashings for your node. being equivocating.

For example, if you run accidentally run two notes with the same private key advance. Ethereum running a single validated client, Ethereum is not very hard. It's not as challenging at some other blockchain protocols. But it's still, to run an Ethereum node, you need to run a full 95% uptime service in the internet. You need to check health to upgrade to the newest client version. and you get penalized if you don't do this. So for most people, there are two barriers to run in a validator node.

One barrier is having 32Eth, and the other barrier is having enough technical chops to actually run a node, which is not very hard, but it's not very easy either, and it's an unpredictable, pretty much unpredictable workload on you. you might be like pull it off your vacation to restart a node or something like that, which is why most people don't do this. Most people don't run blockchain nodes. This is a professional activity. So how different is it from, say, other blockchains?

I think like other, our listeners will be familiar with like staking on Cosmos or perhaps like Solana and other proof of stake blockchains. What's the fundamental difference here? because it feels to me like the main difference is primarily the fact that we don't have staking delegations built in. But are there other things that are like fundamentally different. Yeah, yeah, that's what I was getting to. The real difference between Ethereum and say, Kastmas or PolkaDot is mostly there is no native delegation protocol. Most modern taking protocol, they have delegation protocol because they acknowledge that most people don't run, they own nodes and they can't do that but they they own some capital and people who own like

a lot of a lot of some coin they don't want to to do a complex technical task of running a node they want they like they money graph to go up onto the right and running no that's not for them so Ethereum doesn't there there is no delegation that by design that there is no delegation protocol. What's the rationale behind they're not being a delegation protocol? So it's a number of reasons. The Gist of Eden, the main vector of all of these,

boils down to that Ethereum is well optimized to have at least a few small stakers run the EO nodes. So while Kasmus or Polka Dot were optimized to have as much stake as possible, basically. Well, PolkaDOT, not really, it targets about 50% in staking. But, like, Cosmos is optimized to have as much in staking as possible. Ethereum is optimizing to the ease of use for a small, small-time validator, which, like, with operational requirements and capital requires,

the small-time validata is actually not a very small-time, really. So Ethereum is optimized for decentralization, I guess, is one way to look at it. That's optimized for as many nodes as possible. So what do you mean by decentralization? It doesn't optimize for decentralizations of stake concentration at all, for example. The way it's designed is actually pushing people to stake in pools, and first of them, like custodial staking pools, like exchanges and stuff. But it makes, if you really want to run your own note,

you, that would be participating in consensus. You can do that more easily on Ethereum than on Cosmas. On Cosmas, you have to fit into like 150, I don't remember 20, to 200 not operators by stake. And on Ethereum, you only need

like this 90,000 to run not operator, which is like 90,000 dollars is not a small amount, right? But it's not millions, at least. So it's really well, really makes easy for you,

it makes easy for a not operator to get into a validator set. But it doesn't make it easy to distribute the stake equally. The way there is no delegation means and the validation is hard. That means that people who want to stake,

they will, basically, they will need to trust protocols and custodial providers that can take their money stake it basically. Okay, so in terms of staking providers and I will call them staking assistants, can you describe the spectrum of possible solutions from a technological point of view? I don't quite understand the question. Okay, so basically, I mean, at the very, at the very trusted end of the spectrum, obviously, I could just give someone my eth like a centralized exchange and they would stake it for me and give me most of all of the rewards, right?

But then if you look on the decentralization spectrum, you could have something that is non-custodial but trustful and then you could have a solution that is non-custodial and trustless and so on. So can you kind of give us an overview of what's in principle possible? Yeah. So I actually gave a talk about this on Ethereum. community conference in Paris recently. So if anyone wants to add-dive-in, there is the stock available.

But it boils down to a few parameters that can be chosen. First of all, the stake in Withrium can be custodial and non-custodial. You can still have your keys to at least the ability to withdraw your stake back when the staking is finished. Or you can give it up, for example, with exchanges. It can be fully custodial or different degrees of non-custodial. It can be done natively in protocol like RIDO, LIDO and RocketPool do it. Or it can be implemented as outside of the protocol, like staking on exchanges or staking

using a thricehold signature protocols. I think Stafi is doing that and to an extent anchor. So there are a few other, the staking can be liquid or liquid, and there are a few other parameters, but it boils down to the fact that we believe in Lido that the liquid, the staking should be liquid because there is no way around this. Liquid staking just much better product and liquid staking will win, and if there is no liquid staking on in native liquid steaking in Ethereum Protocol, then the flavor of liquid seeking that will be like custodial one, which already exists and is pretty popular.

Can you explain what you mean by liquid staking? Liquid staking means that you, when you stake, you get basically a voucher of your steak, of your staking position, and you can transfer it. So usually the regular staking mechanism like in Kasmus in PolkaDot, Ethereum, they don't do liquid staking. They lock you with... In a way, my claim is locked. Whereas with Lido, I actually get a fungible token in exchange for my locked Eth, namely

steak, eth. Yes, yes. And Lida, you get fungible token. There are multiple flavors of liquid staking. Not all of them give out fungible tokens. There are, for example, the form of quickly staking that is called delegation vouchers that give you a non-fundable position that designates who you stake with with what not operator and what's your total reward by this point, like a non-fundable position is taken. But it's also

liquid because you can sell this NFT or transfer or give it as a present, I guess. But at LIDA, we went for full-on liquid fungible as much as liquid as possible staking. So when you stake with LIDA, you get a staked if token that represents your staked, your amount of if stake in LIDO and is fully fungible, fully transmittable, and can participate in defy protocols in centralized finances if need be bestowed on wallets, in custodies, and stuff like that. So just to summarize the way that I kind of see Lido is Lido solves the problem, well, it solves two main problems and then, you know, has some some advantages. So one is the requirements, the technical requirements in order to host a node, an Ethereum node for staking, and also the capital

requirement of 32Eth. So with Lido, you can forego that technical requirement because you're sort of delegating your stake to a staking provider, and you can stake any amount of ETH that you wish, so, you know, under 32ETH or above. And what you'll get is you'll get a, a, token that is liquid and fungible and that represents that eath that you can then use to do whatever you like whether it's traded for you know die or you know participate in defy or whatever it's a it's a liquid token that you can use uh in decentralized finance i would put it like we we solve uh for for for users we solve uh three uh problems that uh are not possible with base idioms take one is easier delegation

There is no native delegation in Ethereum. So it is possible to have someone stake for you while maintaining the custody of the funds using different keys for staking and for withdrawals. But it requires, it's not a protocol. It requires paperwork and agreements and stuff like that. So it's not possible for most people and to have a large position and it's like cumbersome.

So one position is ability to delegate, which is there is no such ability in Native-Zerian Protocol. So we solved that. The second is capital requirements. And the third is liquidity. All three are very important because, like, we solve capital requirements for most of our clients by numbers, but not most of our stake it.

Like I think 80%. of maybe more of stake teeth, they don't have a problem with stake in 32Eth. They have much bigger positions. And Vasily, what do you mean by liquidity is that currently, if I deposit ETH into the ETH2 contract, it's a one-way street, right? There's no way to actually get it back out. For a long time, yeah. For a long time.

It wasn't clear at all at the start when LIDA launched, when Ethereum Bicon chain launched. how much time will we wait until withdrawals are implemented. It's more clear now, but it's still not soon. It's probably like mid-2020 or something like that. And that means that your money is held hostage by Ethereum, basically, and if you mistake with a native protocol. And for some people, it's okay, but for many people, they want to have at least some measure of liquidity for their staking positions.

Yeah, I mean, that makes total sense. So maybe let's talk about how the peg between ETH and Staked ETH is maintained. Because, you know, inherently it's one way straight. So basically, if someone wants out, you need someone else to take their position. And so basically what's, how much percent does it currently cost to get someone to take a locked up ETH until it's movable again on? on ETH too. So that very much

depends on the way on the staking basically protocol used because for LIDO currently Staked Heath to Eat pack is held very well. It's more than 0.99

Stakedith to 1Eth, like a bit cheaper than ETH. For other protocols it's not so clear cuts. Some maintain the discounts of 20%, 15%, 5%, depending on the protocol. It basically boils down to a perception of risk. And this perception is really nuanced, for example.

There is a perception of risk of the fact that this staked Ethereum will not get, like, withdrawn by the protocol you're not fully trust. There is also missed of opportunity risks. Like, for example, Ethereum is pretty productive asset right now in defy-eco-system. you can locket and maker have some die and farm on liquidity farm on on on on on on diet and get some not a lot but like a few a few percent of IPR probably so when you have your Ethereum locked and staking you miss out on these these opportunities and sometimes they are very lucrative like we see this in when we are monitoring our liquidity pools in in

curve and there are weeks when people withdraw like 300 result in east to the quenity farm on Arbitrum, for example. That was very interesting to see. Vasily, let's talk about what to do with Staked Eth in a bit. But let me ask about the peg again. So basically say, I'm a Staked Ether whale and I withdraw enough to actually move the pack. So basically now the pack is no longer point.

I mean, obviously the pack should never be above one because then it would just make sense. to put, I mean, that should never happen, but basically say it goes from 0.99 to 0.97. Is the pack solely maintained by other people then buying in at a 3% discount? We have a fairly big liquidity mining position, the liquidity mining rewards program for steak leave to each pair. So, steak teeth is a pretty good way to use. utilize your idiom. So how does it work currently? We've had two months like this when the pack dropped below 98%. One was in March. One was just like a month ago or so. What happens is, yes, people start buying steak feed with discount. And they generally buy up to about 99% discount

and then it slowly close back when people deposit more if into a curve pool because it's something that they see it a good way to earn some some rewards and staking rewards and ill-farmine rewards on top of their ease. So it happens exactly like this. We get sometimes drops in pack and it gets better up to like about 99% pretty soon and then slowly grows back to almost one-to-one pack. So basically incentivized market mechanics. And people actually bind the deep.

So this both make sense. This both are the factors here. Okay, cool. So let's talk about the Staked Eve. So this is a fungible token that can also be used for yield farming, thus meaning that people who partake in eith two staking don't have the opportunity cost of not partaking in defy anymore. So tell us about what you can do in principle with staked eth.

Right now with staked it, you can use it as a trading player in defy just when you want to move your like significant part of your portfolio to if you can move to steak teeth instead. That through the very liquid curve pool and balance pool and also we have a pretty liquid pass to dye on sushi and one inch. You can do it with a pretty low slippage and if you intend to stand in your Ethereum position for some time, it's a good trade to use Stakeith instead of Ethereum

because you will earn staking rewards while you stay in the position. You can use it to farm the liquidity mining on these pools. These are all incentivized. And that's how most people use it right now. You can use it as a collateral in a number of protocols that deals with lending on money markets. Right now, it's, I think, anchor on Terra, anchor on Ethereum.

Those are two different anchors. protocols. Called the same, but like they are different. And it's inverse finance anchor in one of the fuse pools, very capital fuse. And I think it should be pretty soon in Maker and Ava, but that's like up to them. That's governance decision that is not, hasn't been past yet. Just we prepared a lot of material for them to make this decision. Yeah. And these governance processes that typically they take time, right? Yeah. So can you talk about how Lido actually makes money?

Do you take fees out of the staking rewards? Yes. Lido takes 10% fee out of staking rewards. And five percent, like half of this fee, five percent of total staking rewards, is distributed between not operators for Lido. So they're getting paid for their service. there are a lot of node operators for LIDA right now.

It's 14, and I think we'll... That's only the room. LIDO is not only staking in the room. I'm talking about it really mostly right now. So on the theorem, we have 14 not operators, and I think we'll have another round onboarding new node operators in October or early November. So we have more stake in destrialization.

14 node operators doesn't seem like a whole life. If you compare it to, say, like, you know, Cosmos with over 100 and Solana. Why 14 and what are the mechanisms to add more operators? So right now it's not permissionless. Right now, I didn't know more not operators is done using a governance process when there is a sub-governance group that evaluates not operators and white-piced them. And when they are added, we try to flatten the stake so that everyone in

in LIDO has more or less the same stake. We are working toward more permissionless algorithm, but right now it's not the time to do this, because for now when withdrawals are impossible, there is no forced to withdrawals command that can allow staking pools to withdraw from a fault you not operator. If you're basically hostage with them. If they misbehave, that means that all Lido

is at risk of the misbehavior. And there is a risk. the other is locked until withdrawals are in. So that's basically no recourse if something goes wrong with not operator right now. We need to be very selective because right now is not the full-fledged form of Lido that will be able to deal with not operators that are not up to standard. So we need to select them before when withdrawals are in and SSV is also a major technology.

The secret shared validators when multiple not operators can share one validator key and not be at fault of a single not operator. We will be able to implement a protocol that allows people to come in without a governance process that is cumbersome and pretty slow and earned a basically they stake by... So can you elaborate?

a little bit on the risk here. The risk that so the fact that the withdrawals are not enabled yet presents the risk. Can you elaborate on that? So the risk here is an individual not operator can misbehave.

They can, for example, turn off their notes for whatever reason. For example, because there is data center fire or they I don't know, there is government credit down not operators. that's a tail risk, but it can happen, right?

And if they do, they will start getting penalties. And these penalties, instead of staking rewards, will chew up an amount of ethereum at the stake in LIDO. And instead of rewards, we will have penalties for all the LIDO. We will actually make a blog post about this with a detailed simulation, which we took like I think about one month and a half to do. It was pretty involved work.

But I can say that not operators going rogue or being or malfunctioning or being compromised can be really bad for Lido, especially if it's compromised or malicious and is slashed instead. of being offline. So I understand why Lido Stakers behaving maliciously is dangerous to all

staked eth holders because they are all collectively penalized for this. I mean, this is kind of, it's kind of a problem in all staking protocols, right? And in most staking protocols, you have mechanisms such as

each validator or staker needs to put up a bond. And you have decided, you have actually, decided against this, right? So basically, the validators, they're currently trusted. And if they misbehave, they lose reputation and they can be excluded from the process, but there's no way to penalize them within the protocol. So why was this design decision made? That's a very fair question, because it wasn't an easy design decision. The reason is mostly the capital efficiency of the protocol.

The reason is I firmly believe that there will be, and most of the LIDA actually does as well, that there will be one winning liquid staking, the way of liquid staking, because liquid staking is so much better than staking,

and their main quality liquid staking has is liquidity, and liquidity, biggest liquidity, basically. So there will be one major liquid staking, maybe protocol. It might be an exchange. It might be like some custodial solution for liquid staking, but it will be one of them. And if the growth of the protocol is very limited, for example,

by having a lot of bonds, enough bonds that liquid staking can be made, well, trustless to an extent, not exactly trustless, but to an extent, right, it maybe can be made more safe on this front. So I understand that liquid staking protocols are better the more people participate. But this is actually a strong effect because basically the marginal use of each eth you put in, basically if it's between the second and the third ETH, I totally get it. But if it's between the 20,000th and the 20,000 first ETH, it's not that big a difference, is it? So LIDA currently holds 87% of all liquid-staking idiom

that might be attributed to execution or maybe, I don't know, support from people who participate in LIDA or something. But only to a small extent, I think that's exactly the thesis that is playing out that liquid staking is one winner. But do you think it's... a networking effect, or do you think it's just because, you know, so much eth is in this that it's now essentially, you know, vetted and tried for this amount of eth, so it's the most secure of all the liquid staking protocols. Isn't it the same thing, basically?

Oh, so basically I understood liquidity differently. So basically, I understood liquidity in the sense of if I want to withdraw my stake, what's the slippage I have to take? That's how I understood liquidity. Is that not how you meant it? That's exactly how I meant it. But that liquidity is based on trust, like I said. People trust steak teeth to hold the back because they trust their

steak is to be withdrawal when withdrawals are possible. It's exactly that. The liquidity of liquid staking token is basically what's the buyer side of this? How many people

with how much capital are ready to buy it and at what discount. And the amount of capital that is ready to buy your stake teeth or sell you steak teeth is basically based on how save the thing this trade is. How save the thing the future for this token is, how usable it is in trading and staking protocol and exchanges. That's exactly the network effect. People use staked it because other people use staked it, because other people use

So I'd like to come back to just the governance for a second. I guess I'll track there. So you mentioned that for now it's a permission process. So validators are added because they're vetted by the community and you've chosen the validers that have a track record. Can you talk about the kind of roadmap towards decentralizing this process or making it more permissionless? And I understand those the LDO token and perhaps like explain what the role of that

token is in this process? What we're focusing right now is right now at LIDO, we are focusing on implementing and good withdrawalers protocol. So we are spending our focus at making and designing more trustless weight on board, not apparatus. But it's a secondary priority right now because primary priority is getting ready for when the merge happens and there is a, MIV and

the transaction fees in the protocol incoming that is going to change a bit of smart contracts. And then withdrawals, a bit after that, that are pretty hard to make. So that's not like our first focus right now. So what there is

is not a straight plan that is fully plotted out and ready to execute. What we have right now is a number of design decisions. is possible to us that we are debating right now. And the way to have more permissionless protocol for not operators after some time, I think that current process of onboarding not operators

will serve us well for quite some time right now. The way to do it is we basically need to vet not operators about how good they are. We have multiple source of information that we can use here. One source is the past performance. We can evaluate the past performance and use it as a way to, like the not operator who has been active and was working well for a year, is probably can be somewhat more trusted than a fresh one. The other stuff is built down to basically reputation and social trust, which is not really easy to quantify. in the protocol, but it can be quantified exactly the same as

delegation protocols do it. We can use stake dealers basically as a proxy for understanding who, what an operator they trust. We can also use bonds eventually for at least for less

trusted not operators. So, for example, you can come in a protocol with a bond and eventually after you get some rep and stake in history, you can reduce your bond requires bit by bit. So there is a number of Lego bricks that can be used to make a working

protocol. I think they all need to emphasize one thing is past performance, the other thing is basically community input, and they need to flatten the stake anyway somewhat. You said that Lido has like 14 not operators, which is less than much less than Kasma or someone. Yeah. The thing that right now, Lido is distributants take as flat as possible between not operators. There is no mistake right now.

So this as flat as possible looks like we get every not operator to some point. And then bought new and they're filled up until they get some number of what it is. But there is stake. the stake should be distributed flat, which does increase the Nakamoto coefficient, basically. We have more than 15% of Ethereum staking with us with 14 not operators. And, for example, exchanges together have about, I don't know, 25, 30%, for example. And they have, certainly they have less not operators between them. it seems to me like the model the delegate the sort of like this delegated staking model in

Ethereum presents some risks for stakers because I mean I'm I don't stake in Ethereum but I have been staking in Cosmos for like a really long time and like my experience there has been that I change validators you know on a semi regular basis for whatever reason maybe fees or maybe like, you know, I've unstaked and I want to stay with another validator. Like there's different reasons why you would pick, you know, specific validators on cosmos. But with Cosmos, if your validator is is acting maliciously or, you know, is getting slashed for whatever reason, you unplug from that validator, okay, there's a three week period, but then you go and move somewhere else.

And you always have that opportunity to move to another validator. whereas here if your vision of like how delegated staking should have happened on Ethereum comes to fruition, which you've explained as like there will be one winner. There will be like one big staking pool on Ethereum. Your options are sort of limited where if you're if you don't have 32Eath and you don't have the technical chops to build like basically like if you're a customer of Lido because you can benefit from the features that Lido proposes, you're sort of stuck there. You can't go to another pool if there is another pool. And if that's your only way to stake, then there's no other options for you. So if validators, something happens where validators are being slashed, your options are limited. How would you like, what's the way around this and like, is this a fundamental flaw of this model?

My answer here is that liquid staking is inevitable. The question is how it will be structured. So if you compare liquid staking to delegated staking and that you say that delegated staking is more safe, I will agree with you that yes, it's less, it's more straightforward and more safe, though like not much more in my opinion. Because there is less principal agent problem here. So you can choose your node operator in Kastmas if you're used to or in the room, if you're choosing staking and in lydar you choose for liquid staking pools you choose a liquid staking pool and they

buy some algorithm or governance decision they choose a non-operator and you you have no say in this except they say that protocols does allow to to you that is true and that's not really very much relevant because liquid staking is winning even now even in Cosmos, liquid staking is winning, with Binance being the top one not operator. And exchanges together, like there is also

Cracken and a few I think unnamed not operators. So liquid staking is winning even when there is no defying world. And with just wallet gardens of exchanges. And with Define world,

especially Define on Cosmos, through IBC and stuff, liquid staking in customers will also win the day. And there will be probably one winner. So realistic outcome. And basically the point where you can apply your efforts to make this word better is to design a better liquid staking protocol that is capable to having this first place and still good for the ecosystem.

I mean, it's kind of too late for this. but do you think that a better design decision generally for proof of stake systems would have been for liquid staking to be built into the layer one protocols so that essentially the layer one protocol provides a token when you're staked in validation?

So that's probably better for the protocol because it will be easier to build staking pools on top of this. The protocol can't, itself, the protocol like Kasmus or Ethereum or something, they can't decide for themselves the set of not operators. You can't make it in the protocol that's something that users have to do either directly or indirectly to the protocol or the custody they use. So there is like the, the key for security of liquid staking pools and fungible liquid staking is a selection of

of a pool of not operators. And this selection cannot be baked into base layer. It should be baked into an application that does it. So it boils down to the same question, how the not operator pool is selected. That can't be in the base protocol. So the base protocol, all this, it's a good thing to have liquids taken in some form in base protocol,

but you can't use it to circumvent the security of an operator set problem. Yeah, I agree. So clearly there's a whole host of governance parameters here that have to be set. And for that, you have the Lido DAO with the LDO governance token. So can you talk about the token and how it was distributed and what kind of parameters are governed by the DAO? Yeah, so LIDO is fully upgradable.

set of smart contracts on the view. So, and it's governed by a voting based on LDO tokens. So essentially at this point, LDO govern everything about the protocol, either direct this through setting parameters in the current set of smart contracts or potentially by upgrading to something absolutely new. That was not a light decision, and that's not where we want to end up. for the reason that, like, why we couldn't have a non-upgradable version of LIDO is that when LODA launched, the Ethereum Staking Protocol was not even fully designed yet.

And I think it's still not. So it's not, it's not a CIFI it yet. So the Liquid Staking Protocol built on the protocol, the protocol of Staking on Vium, also needs to be fully upgradable. when Ethereum staking is a bit ossified, we can transform to a model where upgrades are either like more time-locked or locked by a stake thief holders or maybe fully ossified. That's up in the air yet. But the current state is not long-term maintainable. We don't want to have it for long-term. Most decisions that DAO makes these days are more or less operational.

It's the selection of not operators and raising staking limits for them. It's managing the liquidity mining programs and a plethora of one of initiatives like participating into grants for the ecosystem or funding Lex DAO and stuff like that. so the grants program and stuff like that. So the one exception was the upgrade of smart contract for better security that Lido did in May. So how was the token distributed? The token was minted in December, which is an initial set of distribution that contained some early Dow members, the blockchain venture funds and initial not operators and a couple of angels,

angels, I think. The team and about 35% of the token were held in Dow Treasury deceived by Dow voting. Their initial distribution was fairly, it is still locked and the wasting will start in December. so most of these tokens, like all of these tokens are locked. And the way we did this was exactly because we wanted the initial governance set up to be stable and maintainable until the withdrawals are possible. Okay, I see. So the initial governance should be powerful enough and stable enough to guide us.

through this initial period when it's not fully formed and vulnerable to governance and tax because it's fully upgradable. It was, again, not an easy decision, but one we made because we thought it would be more secure for the Staking Protocol we designed. Cool. So you kind of brushed over this a little bit. Lido just a couple of months ago raised, I believe, $72 million from VCs, right? So we get a round of distributed tokens from governance to a number of funds and people, the major of them paradigm. It was not like not 72 million dollars.

It was a full sum of 21,000 and 600 if. So we actually used Eder as a denominator. So it happened in May publicly on governance forum. We out of like most important names for their paradigm, which had been great helping and doing a lot in Lido. They are like a proud member of Lido, they contribute a lot. Shout out to Georgia's and our Jod. June. And there are also folks like 3AC and FTX and a lot of Angel that also are very helpful.

Cool. So 21,000, that's still upwards of $50 million, right? So what are you planning to do with that treasury? So far it's mostly just sitting there because Lido is actually it's pretty much in the black like Lido has earning about 10 hours per day right now on rewards Is it not staked on Lido? It's not.

And mostly the reason is that it's debated currently on governance, if this, on governance forum, if this sum should be used as a backstop if something goes wrong with not operators as a cover. So if that happens, at least part of it should be not under the same risks and as LIDA itself. And part of it had been used to fund Lex Dowell. but it's mostly aisle right now, yes. So you recently launched Lido for Solana and I believe also for Tierra. The chorus was the scheme that Spirk had at this. Yeah, so tell us a little bit about that and what are the implications here.

So Lido is active on three protocols right now. It's Ethereum, which has been talking about because the talk went this direction. but it's also active in Terra and in Solana and has team working on implementation for Polka Dot and Kusama and for Polygon. The strategy of the DAO here is to have an independent separate team to slide the work vertically, where a separate team works on LIDO for Terra

for Salana for everything basically and the reason we go this way instead of concentrating it all in a single development team is to have a diverse and decentralized set of developers for LIDA which

like many DFI protocols are struggling to decentralize the development because they have like one product that they do and this you can't really decentralized team working on on the product except in maybe like Maker does in domain teams, which is not very independent as well.

And Lido can actually cut up it works vertically and have independent teams that have all building business on different blockchain protocols, building liquids taken for them separately. So KOROS was the team that made. made a proposal on governance forum and got a basically deal with LIDO that they built LIDO for Salana and have a sizable grant in LDO tokens and the revenue share of 20% of LIDA earnings on Salana. So that's what they did. They did very, very good job and they are handling the Salano liquid is taken very well.

They are great operationally and technologically. I love how they're doing this. Yeah, they're a really great team. Yes. Of course, Brian and we are all chorus fans at Epicenter. You're right to be, yeah. So when ETH II actually happens, right? The withdrawal, basically withdraw a guarantee that currently set you apart from other

protocols, they will no longer be as strong. Do you think your economic mode is going to suffer from that and you won't be able to charge fees of 10% anymore because anyone might just duplicate your protocol and because you can always withdraw, the 10% markup is no longer justifiable? So I don't believe this what will happen, but I'm ready to correct my beliefs if that actually happens. I think that the 10% cut is actually pretty okay for making your stake liquid and having a good secure set of not operators. and the not operators needs to be paid well as well. So it can't go much beyond like the 5% we are much lower than 5% that we are given to not operators.

So I think it will be like it's a number that will work out. But if I'm wrong, that we will see in practice. we will have to, the LIDO will have to adapt here. So, sure. So what else will change for Lido with Ethereum 2? And how does this relate to your roadmap? So, like, one thing that is, Ethereum 2 no longer exist. There is just Ethereum that has execution layer, consensus layer.

So what happens with merge? With merge, what happens? what happens is that stakers, including liquid staking users, will start to earn transaction fees and minor extractable value, which will make staking about twice as profitable, I think, than now. and maybe more. And that will attract more people to staking. So what changes for LIDDA and for all the stake in the ecosystem? And that will more money will come there.

So Vasili, you're not hopeful for MEP-resistant depths? I think that I'm really like in the corner of MV-resistant depths. But I think that it's a long. wait to have them. And it will be a lot of time until we see the majority of economic activity on MIVE resistance apps. That's one thing. And the other is some forms of MV are probably impossible to remove like arbitrage

between different blockchains and centralized exchanges. Yeah, so basically I would only call those, I mean, that I would just call, you know, arbitration, right? So basically, I mean, so basically that's completely fine, right? So basically for me, MEV is value that you can extract because you are in a privileged position in the form that you are the person who can order transactions in a block. right? Arbitration is exactly that. It's M.E. So imagine that there is, for example, a centralized exchange that is trading real time, and Ethereum that has discrete trading intervals of 12 seconds after the match. And there is this 12 seconds uptick that makes like 3% bump in price of weather. So in the next block, everyone,

who is arbitration will want to buy either up on decentralized exchanges, like uniswap or something, and whoever buys first will have the juiciest returns. Sure, but I mean, that's a competition, right? So lots of people can kind of participate in that competition. Yes, and the minor determines who is a winner here. Sure, that is true. So basically the minor of the next block. Yeah, so basically you have external up opportunities.

I see what you're saying. Yeah. So MIV is like the one that is on the edges between different wallet gardens is probably inevitable. The one that is within a like a single big protocol, I think it can be mitigated to an extent, but not fully. Well, before we wrap up, let's maybe just briefly touch on the LEGO program, the grant program, and what kind of projects you're hoping to attract here? So, Lego program is a grants program of LIDO. We have an extremely lightweight grants program,

so basically it's been made to Helicopty money for the greater good of LIDO and protocol that Lido worked with. We are giving out a number of thank you grants for stuff that just is good for Lido and for the room. We, for example, funded the work of

a searcher who is called Pintail on Twitter, who's working on researching the economics of validation on the room. We are using it to fund the the research, the development of stuff that is the ladder.

For example, we are right now working with one developer to make a good data set of validation history in BConChain. So we can run analytics over this. And it's been really fascinating. And as well as community-related efforts and a bit of marketing here and there. so basically everything that is not very not big enough to be only under full down mandate but is beneficial to Lido cool well we'll we'll link to all of that in the show notes yeah I guess the website for Lido is lydo.5. Lido.com.

Okay and that's where people can go to start staking yes. Great. Thank you so much for joining us. Thank you for coming on. Thank you for the interesting questions. It was a little bit of talk. Thank you for joining us on this week's episode. We release new episodes every week.

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