On The Brink with Castle Island - Lorien Gabel and Benjamin Thalman (Figment) on Staking and the Ethereum Shanghai Upgrade (EP.413)

Episode Date: April 5, 2023

Lorien Gabel and Benjamin Thalman of Figment join the show. In this episode we discuss: The founding story of Figment and the focus of the firm. The evolution of proof of stake blockchains and how Figment helps their customers with staking. Ethereum, the Shanghai upgrade and the likely impacts of withdrawal functionality on the network. Views on the current regulatory environment and how that impacts proof of stake participants. To learn more about Figment visit their website and follow Lorien and Benjamin on Twitter.

On today's podcast, I sat down with Ben Thalman and Lorian Gable of Figman, a leading provider of staking infrastructure. In this episode, we discussed the landscape for cryptocurrency staking, the upcoming Shanghai upgrade on Ethereum, and the broader regulatory backdrop for staking in the United States of America. I think you'll enjoy this one. So without further ado, here's my conversation with Ben Thalman and Lorian Gable of Figman. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them where the guests on this podcast are solely their and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast.

You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep.

The federal government is stepping in. to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. And print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Well, Ben and Lorian, thanks so much for joining us today on the podcast. Excited to talk about figment and some of the upgrades happening on the Ethereum network.

Likewise, it's great to be here. So Lorraine, why don't we start with you? We'd love to hear about just the origin story behind Figment, how you got started and what the company does? Great. Thanks. I'm happy to talk about that. So we're over five years old. Myself and my two co-founders were now over 150 people. But back then we had a theory that proof of stake was going to be the underlying consensus mechanism for blockchains, obviously not in the case of Bitcoin. And this is a negative statement about Bitcoin. I own Bitcoin. I love Bitcoin. For everything else, proof of stake was going to essentially

run the underlying infrastructure. We have three decades. I'm embarrassed to say of experience operating in cloud data centers and large network environments from prior startups. So applying that skill set, we wanted to be in the space for a whole host of reasons. Proof-of-stakes seemed like a natural entry point. We didn't know whether that would in fact be true. And through some combination of luck and a little bit of skill and the upcoming Ethereum merge, which we're going to talk about, it looks to be that in fact, that is the proof of stake

is the operating system. Don't yell at me for using that as a bad analogy, but basically the operating system for blockchains other than Bitcoin going forward. And so we really see our role as playing, we're running that infrastructure on behalf of our customers, institutions. And that's a critical layer for the space. You obviously started the company before that was an obvious insight, I would say, that these proof of stake. Yeah, I think the first launch of proof of stake was Tesos right around what we were launching. And so a couple of things had to be true of which we had a very smaller, no role. And that was the proof of stake work for a whole host of reasons. It might not have

scaled. It might not have been insecure. There's a whole host of reasons why that would have been a bad business idea. Like many ideas, you need to have a lot of luck and some skill at the same time. And so thankfully, Proof-Stake did work. And, of course, being proven with what Ethereum has done. But no, at the time, I think it was mostly white papers within the Ethereum community floating around. In fact, I used to talk about the business and say, if you think they're going to be, there's only going to be Bitcoin in Ethereum in five years, and we're probably not a business you want to invest in. And I always said Ethereum in there. And then, of course, they made the transition. So now I just say Bitcoin.

So that makes sense. So Ben, how about you? What was your origin story here that got you down the rabbit hole? Well, so before Bigman, I was working in TradFi, working on a bond desk. One of my colleagues got into it through the Defi route and started talking to me, my colleague about it saying, you know, you got to get into this, got to get into this. So eventually I started looking at it and reading up on it. And yeah, it hooked me.

I fell in love with it. There was another aspect to our business in TradFi. We were doing some subcustody work for some of the ETFs. Bitcoin and Ether ETS. And it just so happens that someone on the sales side of Figment was on a call. And it became known around the firm that I was very interested in crypto, very interested in Web3. So I was included as a courtesy, anyway, long story short, I kept up with some folks at Figment. And as I was researching, as I was reading more and more and became very passionate.

I ended up spending my evenings and weekends looking at all things, Web3. So eventually I made the transition. And it's been great. It's been a year and a half. And love Figment, love Web 3. Very exciting. It's been quite a year and a half to join the industry. that's for sure. Maybe before we hop into Ethereum, we'd love to just get the view of how you guys think about the product line up today. Obviously, it's evolved over time. But, you know, how are people using figment? How do you describe the products, broadly speaking? When we say we offer a staking service, just to be clear, that is protocol staking. Sometimes staking is referred to lending, yield farming, a host of other activities. I think the definition is becoming clearer. Some of those activities have gone away. But just to be clear, when we say staking very specifically, it means participating in consensus as a token holder.

essentially. We serve exclusively our token holders and institutions. Broadly speaking, break that out to the two markets, direct customers, so asset managers, VCs. And then we have our partner integrations, which are custodians, wallets, exchanges, etc. So very often, you'll in fact be staking with this and you may or may not know it. If you're staking on an exchange or through a custodian, sometimes we'll be invisible, sometimes we'll run that infrastructure before them. And then if you're a VC client, of which we have a couple hundred, then you'll work directly with us. And that means people staking what actually doesn't mean. I can do a brief description of what the heck staking actually is. At the base level, you have a computer, a node running either on physical hardware or in a cloud,

and that really depends on the protocol and its various requirements. So we run a lot of bare metal in data centers, which is our background and then interface with all the major cloud providers. And really whether you run that baselay or infrastructure in the cloud or on a server, you manage yourself, we manage on your behalf. Then there really depends on like the specific parameters the network. So we run a mixed hardware and cloud environment. And then on top of that, you have a set of APIs essentially, which is where I think we really sort of differentiate ourselves. So basically abstracting away the complication of staking. So the staking transaction, the unstaking transaction, reward reporting, which is trickier than you would think. You know, it's an open ledger. Just look at a

ledger and I was going to swear, it should just be obvious. But the data structures are mess and it's actually pretty hard to figure out like the reward flows and when and all that. So we then also have a set of APIs and information for our customers around node performance and reward performance, etc. It was actually more difficult. And those APIs sort of enable a custody or a wallet partner to offer staking to their customers very quickly. Our direct customers also use that around to sort of track their rewards and also

sometimes to get to market quicker. And then on that, on top of that, over above that, there's what we call our value propers, our people also insights. So Benjamin's a part of that group. He undersold himself a little bit, but I think he's probably one of the top five experts in what's going on in the Ethereum community. not necessarily from a technical perspective, but from like actually understanding the protocol and the dynamics. So he is somewhat of our secret sauce on the people's side. So we, our customers don't have time to track governance and answer like specific financial implications of every protocol.

So we provide that. You can think of it as like an analyst service for our customers. And then there's a normal SaaS stuff on top of it, you know, SLAs, insurance, customers success and all that. So those are really like the four layers. If you kind of understand like what is a staking service. And those are the areas that we all try to provide differentiators for our clients. clients based on the market. So I don't know if that's helpful, but there is actually like a lot going on rather than just staking, which sort of seems like, it's not that big of a deal. And then there's a whole host of security stuff that's sort of wrapped all around that. I think there might not be a broad appreciation at the retail level of just what could go wrong

with staking and why you actually need to have a robust infrastructure in place. So maybe you guys could talk a little bit around slashing and some of the adverse things that could happen if you're not doing this right. The thing about staking is you're actually, again, I'll probably get yelled at for using this, but you're basically a miner. If you're a token holder and you have 32 Ethan, you're participating in Ethereum, you're running the network. So you're producing blocks, you're securing the protocol,

and you're participating, that's participating in consensus. So you are actually running the protocol. And so these are complicated, distributed networks. There's a whole lot of stuff going on. If we don't do our job properly, for example, if the infrastructure running is down, then you'll miss out on rewards. So you would have lower earnings.

Or in the worst case scenario, there's something called slashing, which is as bad as it sounds. You don't want to be slashed in that case. You can actually lose some of your principal, not 100%. Usually it's somewhere, you know, between sort of 1 and 5%. And that happens if you or if you're using someone like ourselves essentially tries to double spend.

It's called double signing, but it looks like you're trying to fork the network or spend a token twice. Again, not technically quite correct, but you get the idea. And it's basically the worst thing you can do on a blockchain. That has never happened to us. We just sort of built the company around safety over liveliness, which means we'll always except a little downtime rather than risk of slashing. That strategy from customer success has worked out for us over the last five years. I should probably knock on some wood now,

but we basically orientated the company around having that never happened. So those are the things that can go wrong so you can think of those as security and performance and uptime and all that and obviously not doing something that results in slashing, which is bad. That makes sense. You guys also have an interesting perch on just the centralization of some of these networks or the risk of centralization. So I think about the non-crypto examples of something happening at Amazon and the east coast of the internet basically going down. Most of the service is not working.

What does that look like in the context of cryptocurrency networks? And how do you guys think about where centralization vectors lay? So Benjamin can probably compliment my answer here. I think there's two ways to think about centralization. There's centralization of token holders, I think. So there's been some theories that the large token holders because of the way the dynamics will continue to get larger and then will dominate this. state. So a few, a small number of parties will dominate consensus and therefore be able to control the protocol in some way. I don't think in any of the major protocols, I haven't looked at

the stats recently, but I don't think that's become an issue. In fact, I think they got more diversified over time from sort of token holders as there's distribution on the retail side, etc. And then there's, as you rightly point out, there's infrastructure concentrations. So if a protocol is having all the consensus done on Amazon East, that's obviously a really bad thing for pretty clear reasons, both from censorship reasons and basic performance. So we do take an active strategy looking at for if we're launching on a new network. Where are there any concentrations of hardware, my activity in a specific cloud provider or a data center or a region and try to do the opposite of that. So we really try to, you know, in some networks there's something called

correlated slashing. It doesn't matter necessarily discuss it here. But basically, you don't want to be where everyone else is if something goes wrong. And so for those reasons, we really take a pretty the active role in decentralizing, at least are small piece of the infrastructure. And I think more and more people are thinking about that. I think people have seen some of the dangers in the past of having everything in one data center in Europe or as you pointed out, Amazon East. Just at the network level, I think the ethos of Web3 is very much about decentralization. But I think there are certain tradeoffs.

So you look at Ethereum, for instance, and I would say that the goal perhaps of Ethereum is to be, at least in terms of validators, to offer the potential for maximum decentralization. Right. Currently, I think there's something like 560,000 validators on Ethereum. And so I would say that's, you can talk about who's running those validators, fair enough. But I think that at least the potential for maximally decentralized network is there. Whereas other networks are not quite so decentralized, but compared to traditional business, traditional finance, let's say, there are certainly much more decentralized. And I think it's to trade off essentially. There are benefits that come in when you have, let's say, less of a decentralized network. And I'd also point out that you still are at the early days of Web3. So I think too often there's, there's, kind of harsh criticism about the space, that any time that there seems to be a contradiction in kind of the principles or the ethos, it's easy to say, well, you're not doing it the way you said you would. I think that a little bit of grace needs to be granted in terms of this is still a new space. We're early phase here. I think all the networks are striving to get to that. That makes a lot of sense. I think it's also not a binary. I don't think anyone's really

established for which use case, how much decentralization is the right amount. So I think it's all on a spectrum and for some use cases, you won't care as much. And for other ones, you'll care a lot. And we're still related to what Ben said. We're still trying to figure that out. So I don't think anyone can say, this network is decentralized because X and this one is very centralized. I don't know if there's like two people running protocol, obviously that's not decentralized. But somewhere, you know, once you get the thousands of participants, I don't know how much, I really think it's TBD and it shouldn't be like black and white. I guess I've never met a customer that says, I want decentralization. It's they want a

particular product and if decentralization is the means to get there, then it works. I mean, if you want non-state money on the internet, having a decentralized topology makes a ton of sense. You're a Bitcoin maximalist. You definitely want lots of data centers and lots of places and all that, right? Right. But if you want wanting to build something on a L2 roll-up, having Coinbase, for instance, as the sequencer, that might actually make more sense for certain use cases. So there's probably a spectrum there. That's right. So Benjamin, would love to get your take maybe just on what has happened over the past year in Ethereum. And so maybe just tee up the road we've been on and then what is Shanghai? What's going to happen? Absolutely.

Looking back, Beacon Chain was launched at the end of 2020. And the way I like to frame it, it's not maybe a perfect analogy, let's say. But Beacon Chain was more or less, when it was first launched, was more or less a glorified test net. So you had these two chains running in parallel. You had Theronet, proof of work, miners. That's where all the action was happening in terms of users, anyone wanting to do anything on Ethereum. It was happening on Mainnet. But then you had Beacon Chain. And Beacon Chain was essentially for validators to start practicing, essentially, coming to

consensus. Now, what they were coming to consensus on wasn't overly interesting to everyday users because it didn't contain any real transactions. The validators on Beacon Chain were mainly coming to consensus about the state of Beacon Chain itself, so kind of like glorified navel gazing. And at the time of the launch, there was this one-way street that was created from Mainnet to beacon chain. If you want to spin up a validator, you have your eth on mainnet, you send it to this deposit contract, and in the end, you'll end up on beacon chain, and you spend up a validator,

and now you're helping to come to consensus about the state of beacon chain. So you fast forward to the merge, and we all know what happened with the merge. The Ethereum mainnet, which was proof of work, miners merged with beacon chain, and miners went away. Validators came into the picture. Validators took over and they're now the ones that are proposing blocks. Those blocks are now no longer empty. They contain transaction payloads, which used to be the responsibility of miners. Again, though, even with the merge, it was still a one-way street in terms of validators. So you could still get, so Mainette also became what's referred to as the execution layer, beacon chain became the consensus layer. But you still had this one-way street from execution

layer to consensus layer, but no way to get your date, your 32-Eath and your rewards off of consensus layer. That's why Shanghai and Capella are such a big deal. So Shanghai, of course, the name for the upgrade on the execution layer. Capella is the name for the upgrade on consensus layer. There are lots of upgrades in there, but the kind of headline one, of course, is the ability to get that 32E back as well as consensus layer rewards. The other piece I should likely mention is that with the merge,

validators are receiving execution layer rewards. So the way to think about execution layer rewards, If you're a user on Ethereum and you want to expedite your transaction, you want it to be included in a block sooner, you can increase your priority fee or tip. And that's something that used to go to minors before the merge, and now it goes to validators. Those execution layer rewards were immediately liquid following the merge because those were occurring on the execution layer. So they were sent directly to the validator's withdrawal address. But the stake on consensus layer as well as the consensus layer rewards, which were accruing to the same place where the stake is, even as of today, still not available, still not liquid. So that's why Shanghai

Capefell are such a big deal. It's been, you know, over two years for some folks. And so they're wanting their, you know, at least the ability to get their stake and accrue to consensus their rewards back. So that's why, you know, Shanghai Capel such a big deal. That's a great explanation. So I guess the obvious question is what is going to happen here once people can actually withdraw. So it's not going to be one of these situations where everyone runs through the door at the same time. But maybe just explain how this is going to work. Yeah, so in terms of the mechanics, there are two ways to think about the withdrawals. There are full withdrawals.

So if a validator decides, I no longer want to be validating on the consensus layer, they will request to exit. And after some delay, I can get into more details there. But after some delay, their stake as well as accrued consensus layer rewards will be sent to their withdrawal address. There is also another flavor of withdrawals called partial withdrawals. So this is for any validator that has a balance above 32Eath. That amount above 32Eath will be swept and sent to the validator's withdrawal address. Now, the 32, the idea there is that a validator's balance will help to determine the likelihood

they're chosen to propose a block. But the maximum that the Ethereum, the protocol, if you like, will consider as 32E, there's this max effective balance. So the point is, anything above 32 does not help a validator in any way. So that's why the community decided that, okay, anything above 32, let's just automatically sweep it to the withdrawal address. I think may be helpful to kind of go into a little bit more about how exactly the network is going to process rewards just to get an understanding of how this is going to look. So the way to think about it, the protocol or Ethereum essentially will cycle

through the list of all the validators. And what it does when it gets to a validator, a particular validator, it asks one of two questions. First, has this validator requested to exit the active validator set and has it reached the withdrawability state? Because there's this, as I mentioned, there's kind of this delay between exiting and some other things. If there's a queue, you have to wait for that. But once it's come through and it's withdrawable, if those two things are true, then the fake as well as the accrued contested test of lay rewards are sent to the withdrawal address. If the answer to that is no. The second check that's done is, does the validator have more than 32E? If so, sweep that amount and send it to the withdrawal address. And the idea is this cycle is

just constantly happening in the background. So Ethereum is constantly cycling through a validator validator indices. The other thing to bear in mind, in terms of how long does it take Ethereum to cycle through all of the validators? I mentioned there's about 560,000. So how long does that actually take to get through all of them to do this check? Well, there's a maximum of 16 withdrawals that can be included in a block. And there are essentially 32 slots for epic. There's a little bit of math here, but there's 32 slots per Epic, and there are 225 epics a day. So when you multiply that, you get 7,200 blocks. Now, there's a technicality here. It's actually 32 slots, and a slot is the potential for a block, but not actually a block. I think we can ignore that nuance. I can get into it,

but it is a nuance that's there. So anyway, 7,200 blocks, give or take, per day, and 16 withdrawals per block. So you end up with a number of about 115,000 withdrawals per day. We have about 560,000 validators. So it takes, in the worst case, four and a half to five days to cycle through all of those validators. On average, though, that's assuming you're the last one, you have the last validator index. On average, you take the average of that number in zero. So you end up with two and a quarter to two and a half days initially. Now, there's another nuance there. I guess I might as well just say it, but there are different credentials in Ethereum. They're kind of historical credentials known as DLS credentials. That check I mentioned, that

Ethereum is going to go through to check, have you requested an exit or do you have a partial withdrawal? There's another layer of check there. Do you have the correct credentials? The correct credentials are so-called ETH-1 credentials that allow you to withdraw your ETH. You might have BLS credentials. Those need to be upgraded. And Capella does allow for that upgrade, but it's something that validators need to do. Our data team was looking at this, and this is a while ago, so this is a rough number and it will have changed for sure. But around 50 to 60 percent of current validators have these older credentials and we'll need to update. So that's another little nuance to that timing.

Initially, if we still have 50 to 60 percent that have these old withdrawal credentials, they will be ignored. So in the beginning, right after Shanghai, things will happen a little quicker than what I've outlined. That's just another little nuance with the process. And so maybe if you're thinking about staking, is this the correct way to think about this, Benjamin, is that you basically have liquidity with days right now if you want to unstake? Yeah.

Yeah, essentially, I think that's a good way to frame it. I do think initially, no, there's going to be some, there's going to be some level of activity exiting and entering. So that's a whole other thing. But yeah, I think absent a queue, I think it's the exact right way to say it, you have liquidity in about three to five days. And so what do you expect to happen here? Is this going to be the type of situation where you see a super congested mempool? Is the network going to be really busy for these five days? Yeah, it's interesting. It's kind of hard to handicap it. I think I would say, if you had asked me last, year, let's say October, I would have said that withdrawals is one of those features that everyone is requesting, but no one's actually going to use. Meaning, there are a few ways to frame the behavior of validators, I think. There aren't a lot that want to leave the active set. I think that some folks will, by necessity, have to exit.

And so that could come about for a few reasons. One could just be to simply change service providers. That's one thing, depending on which service provider are trying to change. That could certainly be one of the things. some folks will be forced out of the activity. So that's another source. So I don't know. I mean, taking a base case of maybe 5 to 10% of validators, that's just a very rough number.

It is definitely hard to handicap. I would say, again, I don't think a lot of folks would desire to get out. And certainly not to get out permanently. I think there could be some of this rotation. So I think initially what you're going to see is, you know, we've got roughly 15% of ether stake today. I think what you'll see is that level of maintaining. Following Shanghai, that'll kind of maintain as folks are a few folks are exiting.

and then it will continue on upwards. I think aside from the folks rotating service providers and a few kind of leaving permanently or whatever, I think that by and large, this is more bullish for staking on Ethereum than anything. I think lots of folks have been waiting on the sideline, and this is what they've needed to get involved. So I think in the medium to long term, very bullish for staking on Ethereum. I guess the question is, is it bullish for the price?

And so at one level, maybe you have some people leaving that would be, okay, now I'm finally liquid on this. they can get out. But I guess what you're saying is there's also another group of potential holder here that is coming in on the back of this because now they can do so in a different way that's probably more of an attractive value proposition. I'm kind of put it this way. I thought less about the price action of ether. I thought more about the staking behavior. Aside from the folks that are forced to kind of leave, I have a hard time paying the picture where folks would want to leave. And I have a more difficult time paying the picture where folks just decide to sell in

any kind of sustained way. I mean, it could happen, absolutely. But the way I look at it is, you know, Ethereum's trying to be the global computer. They want to reach a billion users. They're stacking up successes in line with that. Beacon chain launch, the merge last year. Now we're at this next important upgrade, Shanghai and Capella. I have a hard time understanding where any sustained selling pressure is going to come from.

As I say, there could be some, but I just don't see it as being an even medium term thing. I just don't see it. I don't see why. This is a success for Ethereum, in other words. If you're a long-term eatholder, which there are many, obviously, and you either hold that yourself or in full storage somewhere with a custodian, there's a few things you can do. You can do nothing and not participate in consensus and then not earn rewards or maintaining, at least your relative ownership, quote, share of the protocol. Or you can look at a host of activities which have various set of risks and awards. And so I think the first, the base level, the quote, risk-free activity is essentially

participating consensus. There's no custody risk. You're not giving a provider or your keys. Like when you stake, you don't give up control of your keys. So you still have that. You'll have liquidity relatively short period. So you are pretty liquid, you know, not locked out for a month or six months. The one, you don't have counterparty risk.

The returns may be lower, but it's about the safest thing you can do and maintain your ownership level and your reward level in the protocol. And then, of course, there's a whole bunch of other activities from centralized lending and yield farming, which have their own attendant risks and rewards. So I kind of see this as like if you're a long-term holder and you don't want to risk your ease yet, you want to have some return on that. This is basically the safest activity and not everyone wants to safe activities. Some people want to do something that has a higher return. For those people who have been long-term holders for multiple years and not doing anything, this is pretty close to not doing anything. That makes sense.

I mean, it's been interesting to see some of these centralized actors blow up. up over the past year. Some of these actors held wrapped up EF, like that they could not access. And so it was interesting to see just the price action. So curious if you guys could speak a little bit around some of the things that are being built in this industry around liquid staking and how you see that category fitting into the broader staking ecosystem. Yeah. So first of all, what's liquid staking? Liquid staking is you deposit your ETH into a smart contract with a liquid staking protocol. The largest is Lido right now. I think it's mostly a consumer behavior for various reasons we'll get into. And then we provide, we're one of the

infrastructure providers in that pool behind a Dow. And then you get essentially a co-check for your ETH and that co-check has value and then you can lend it out or use it as collateral or do nothing with it. So it's essentially a capital efficiency model. It's been very attractive for a certain audience because your state deeth has been locked up up until coming up now very shortly. So now you'll have pretty close to liquidity post this upgrade. So that's sort of one thing that goes away. But it's essentially a model for capital efficiency. Basically getting a co-check that gives you a right one-to-one with your state deeth.

And then you can do something with that if you want. Lido has been pretty popular among a certain vertical. There are some institutional offerings in particular called alluvio. Just caveat, we are a shareholder in that company, which there will be, I think, a number of institutional offerings going forward. Institutions who care about these things will probably look at that as an option to direct staking. But it's been pretty popular, I would say.

I don't know. Benjamin, do you know what percentage of ETH is currently staked that's in a liquid pool? Probably half? I think it's getting close to half. I've seen various numbers, but certainly, I don't know, 35 to 50 percent. Yeah.

Numbers vary. That's right. So if you're an institution, I would take a look at a little view on a liquid collective as an option and then, you know, pure consumer, then Lido's probably the number of options, but there's another one of like Rocket Pool, et cetera, that are starting to offer that. And there is different. You are depositing your, your ETH into a smart contract. And so you need to sort of be aware of those risks.

And there's always some smart contract risk, although nothing bad has happened so far. So it's just as it is there is another risk vector as opposed to just direct staking. That makes sense. One of the things I would be curious to get your guys's view on is just the regulatory landscape right now. It is just incredibly murky, depending on which regulator you talk to. You've had the SEC come out and say Ethereum is a commodity and now Gensler in an interview saying it's a security. You've had the CFTC say that Ethereum is a commodity. You've had the New York Department of Financial Services sue someone saying that Ethereum is a security. So it's pretty clear we don't have regulatory clarity, at least in the U.S. So how difficult does that make what you're doing? Are you saying that there's not coherence, good governance in the U.S.? I'm saying we need a market structure bill desperately, and we don't have one yet.

So also to answer that question directly is it pertains to staking by just on a little bit of a regulatory philosophical rant, if I may. My general view, again, one of the few benefits of being a little bit older is that regulators, I think we're in the regulatory, scramble and overreach part of the regulatory cycle. If you go back to, I'm going to cough when I say this, but early 90s in the SNL crisis, and then you have Enron and Surveillance Oxley, and then you have the Frank Bill. after the great financial crisis, et cetera, et cetera. And I think what you generally see as a regulators are either embarrassed fighting the last

battle for whatever reason, feel like they're behind the eight ball and then have to scramble to cover for that and make some bad rules. They don't do in a coherent fashion. And essentially, what you need to do is you need to survive that stage. And then there's a rationalization process over the next little while. So that's kind of my optimistic take on that. And I think we're kind of in that over-reaching cycle. And there's a lot going on.

and it's not necessarily coherent. It would be great if someone in the U.S. government saw this as like a competitive technology and we're competing with a bunch of other world actors. And we had like, hey, how can we actually grow this with sort of sandbox principles and still protect consumers? I've been said to quote Winston Churchill, the Americans will do the right thing only after they tried everything else. So we're going to try a bunch of other stuff.

And then we'll get to a framework that is usable for everyone in, I don't know, six months to a few years. So that's kind of my big picture. Actually, some of the regulatory actions in particular towards staking, I think have been good, even if they're done by enforcement, which is unfortunate. You know, they've had eight years to make rules and just haven't done rulemaking. Other jurisdictions, you know, there are other jurisdictions where we've gone before the regulator with an exchange partner and a custody and say, hey, here's staking, here are the risks. Here's how we do to mitigate

them. And they've actually, you know, taken the issue seriously, ask technical questions and then come up with a regulatory framework or you can do this if you do X, Y, Z. So it has happened in other jurisdictions. And, you know, it would be nice if there had been some, like, proactive rulemaking in the last seven or eight years. And I think actually the absence of that is going to bode pretty well for some of the probably upcoming lawsuits like the Coinbasewell's notice, etc. In other words, like there is an obligation. There is an act of Congress. They have to make regulations and they haven't done that. So I don't think that's going to bode well for some of the enforcement actions if you get the right administrative law judge. Like, you just can't do that.

You have a job. So you should do it. That said, I think some of the regulatory actions, for example, the crack and staking action is actually pretty positive for us in particular and our exchange clients. It sets out a pretty specific rule set about what you're allowed to do and not allowed to do. So we can now offer guidance to our exchange or custody customers, hey, if you want to offer retail staking, here's how you do it. And this looks like you'll be on board. And here are the eight or nine things you shouldn't do in got cracking and trouble, for example. So even though it's by enforcement and not optimal. Again, I think it's actually that we have some direction now about how you do staking in the U.S. It's pretty useful. We'll see what happened to the Coinbasewell stuff, which they've said they're going to

progress quickly fight and good on Armstrong for that. I kind of doubt at this point that these lawsuits take a long time. And I think maybe the action, the goal is just to slow things down rather than have some specific answers, which again is unfortunate. But, you know, we've gotten some direction in the U.S., which is pretty helpful, at least for our business and our clients on that side. So staking, if you do it right, is pretty clearly not a security primary. Like, I'm not going to go through like all the how we test stuff like one, an investment of money. You don't give up your keys.

You don't give anyone your money when you stake, right? You retain control of that. So where's the investment of money in that case? I could go through all two or three and that kind of apply. So it's, I think if you do it right, staking is fine and continues to be a lot of people do it in the U.S. for that reason. That's kind of my perspective on where we are, both sort of the big picture and specifically with respect to staging.

That makes sense. I mean, I guess for you guys, it's going to be interesting just what this market structure evolves to. I mean, do we have a situation where exchanges can't hold keys and they need to have third-party custodians and then you're talking to the custodians? I mean, or do you have just all these brokerages hold their own keys and then all of a sudden you go to market looks a little bit different? So I guess for you guys and others, there's some real implications here to what this market looks like. Yeah, again, if we sort of had effective regulatory frameworks and rulemaking, you would probably get to something to, you know, where exchanges have to unbundle a stack from custody,

etc. Or settlement, which kind of just makes sense. If that happens, and I think it's, again, happening kind of by enforcement, again, unfortunate, but, you know, assuming that that's where we end up, you unbundle the staking part of that too, and that's good for outsource providers like us, I think. And, you know, we're non-custodial and all that good stuff. So, yeah, I think you're right. We have to get to a market structure that hasn't proven to work.

I will also say just sort of philosophically again, like the technology is fundamentally disruptive to centralized financial models. Like, that's the whole point. So I think the mistake, the original sin of maybe the space was trying to layer on centralized models, centralized finance models onto a technology whose kind of whole purpose is to be disruptive of those models. You know, like lending, you don't need a centralized entity to do lending on blockchain. I mean, that's kind of the point is that you don't need it.

And we've seen a whole bunch of very successful on chain models that don't rely that haven't failed, like some of the centralized models. So, you know, really, I think once you sort of think of the technology is like you're just layering on like an old bank. Well, that doesn't make sense. The whole point is to eliminate the need for the bank, again, to be a little bit philosophical. So I think those are the dangers. And we saw the risk to that. And maybe we know now better than in fact, the whole point of blockchain is disrupt centralized lenders, basically.

So don't try to build on top of that. Yeah, that's well said. This isn't my quote. This isn't me. I don't want to take credit for it. Someone kind of funny said that their secret theory of Gensler, he's actually. he's actually a decentralized maximalist. He's like a decentralized because he's got,

there's been like five different quotes where he said like, not your keys, not your crypto. And so secretly he's actually like a Bitcoin decentralization maximalist. And so that's also my positive take on our friend. So maybe he really actually believes not your keys, not your crypto. And so there you go.

He believes in decentralization. Just going to push everything to the fringes of the network, I guess. Yeah. That's right. There you go. That's right. Again, I can't take credit for that one, but I kind of like it.

It was true. That's a good guess as any. So you kind of mentioned that it's a tremendously disruptive innovation. There's so much new stuff being shipped over the past year. How do you guys stay on track of what is going to be the next network that you want to support? How do you prioritize resources in terms of looking at these new things? Yeah, it's a great question. The philosophy of the company is there is going to be more than two blockchains, I think,

five or ten or twenty years, and there won't just be Ethereum and Bitcoin, although those may be the largest and there'll be a bunch of a specific use case. cases. And so we used to take a fairly promiscuous attitude because we didn't think we had an ability to predict which ones would be successful. And so we would kind of be on every proofstake blockchain that wasn't an obvious scam, et cetera, et cetera, and had a real use case and a real chance of success. So I think at one point we probably supported 60 or something, different protocols. We've definitely started to like cycle out ones that really don't have usage and haven't sort of won in their specific vertical. And then we have a animal,

team that evaluates new projects. We've got pretty good at, I think, thinking about knowing which ones are going to launch and when they have momentum in evaluating the community and participation. I think we got pretty good at that now at this point, five or six years in. And so basically there's now a cycle where we cycle out of supporting blockchains that haven't gotten any adoption use and then bring in new ones, which we think will. So that's definitely been like a change over the last 12 months to the business. We used to be used to just add more and more and more. And now we're actually eliminating some. That makes sense.

All right, guys. Well, this has been a great conversation. Benjamin, thanks for going deep on Shanghai. And Lauren, great to hear just about the broader context of Figman and the market structure. Where can we send people to learn more about Figment? So obviously our website, figment.io, but Benjamin is a great follower on Twitter. Don't know his handle offhand, but if you want to know about all things east, that's a good

follow. Mine's probably a little less interesting, but I'm at Lorient Tree, one word on Twitter. Benjamin, what's your Twitter handle? Builder underscore Benny. Right. And then, you know, obviously if you have any specific questions around either to merge and want to learn more about staging any of those, the websites, the best way to do that. Awesome.

Well, it's been great, guys. Thanks so much for joining us today. Thank you. I really enjoyed the conversation. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. To listen to all of our podcast episodes, please go to On the Brink-Bronk dash podcast. podcast.com or just click on the tab in our website. Thanks for listening.