Opening a New Era of POS: Liquid Staking | KBW2023

[Music] thanks everybody um really appreciate everybody showing up here and thank you guys for flying in for this um so today I'm going to open up with some disclosures uh we are all friends uh you know in as much as you know some of us are also also competitors um but wanted to give you guys a heads up we're not going to be covering the absolute basics of liquid staking we're going to get into some of the meaty and and more delicious topics um and one other set of disclosures is that I invested into the Lio treasury diversification round and also into the aluvial uh most recent round and so I have a bit of vested interest in in both and I want to disclose that it's not a conflict if you have interest in everything that's that's right that's right um so to start off could you please uh both introduce yourselves and tell us a little bit about your projects okay uh hey everyone I'm Izzy um I'm I'm a contributor to Lio da as the master of validators Lio is a decentralized liquid staking protocol headquartered on ethereum uh it's present on ethereum Solana and polygon currently and basically it's a two-sided coordination protocol for for stakers um people that want to hold liquid staking tokens and node operators who want to run validators as a part of the protocol awesome uh I'm Mara shid I'm the CEO of Al fuel uh where the development company behind the liquid Collective protocol focused on providing Enterprise grade liquid staking to participants in the market particularly through the issuance of receipts on stake positions uh that we're able to offer to Enterprises exchanges custodians and other players in the market awesome uh and this is going to be the only basic question that we're going to be asking um but can you guys tell us uh just a tldr of liquid staking uh you know why is it useful how is it being used today and was it what is its role in onchain use cases like defi I'll keep it super duper simple um you can think of liquid staking as basically a technology solution that allows the issuance of receipts uh so a proof that you've basically staked your tokens um on ethereum or other blockchains um it's a really interesting use case because if you think about it it's actually a pretty basic primitive it's basically a title of ownership that you uh can prove on chain and build things around or on top of um I think a lot of the early adoption that we've seen in the market and around this primitive has been in defi um I'm sure Izzy will talk a little bit more about that um but I'm super excited for us to get into some of the future use cases uh that we're enabling yeah absolutely and so one of the main use cases of liquid staking tokens as opposed to Native staking is liquidity I.E you can move the capital around um also it's unlocked so you don't necessarily have to go through the bond in on bonding periods which may be dynamic in certain networks and up to weeks long um and the most important thing is that basically it turns an asset which may normally be non-productive uh in an ecosystem into a productive asset so if you have eth underpinning all of defi for example why would you not want something like eth Plus+ underpinning all of defi something that on its own um increases in value and at the same time secures the whole network that is creating this new Marketplace of uh Financial uh dis intermediation yeah and uh and for what it's worth over the last I would say maybe like year or two we've seen more and more of a change in the proportion of liquid staking tokens that are eth uh being used in defi relative to regular e uh there's not being staked and so that proportion of liquid staking tokens continues to increase um which bodess well for the bodess well for the defi narrative um so and then Mara you talked a little bit about um what some of the future use cases are going to look like which coincidentally is in fact my next question um so can you tell us a little bit both of you uh how the liquid saky Market will evolve in the coming years uh specifically how will the you know use cases the user profiles distribution channels uh and so on be different from what they are today yeah happy to touch on it um I think you pointed to something really interesting which is the General market Trend that we've seen over callid the last like 18 or so months um when you think about the relative market share of traditional staking relative to liquid staking we're noticing a pretty consistent Trend um that liquid staking is just garnering more and more adoption in the market I think the value proposition no matter what type of user you are is very clear um as zizzy mentioned of course you know being able to stake um you know an asset or a token on a blockchain providing security to the network but then having a receipt that you can basically move around in the market Leverage is collateral it becomes a lot closer to what we see in traditional markets you know we use receipts in all kinds of activities today including you know the Commodities trading world for example um that a lot of use cases buildt on top of um aside from just the general adoption Trend I think one thing that's been really interesting is when you think about some of these Innovations a lot of the early you know adoption if you will has really come from crypto power users and so when you think back to you know December 2020 when ethereum you know launched proof of stake for the first time a lot of the early adopters um that were really supporting staking in the market were you know truthfully you know Crypt native retail users that really wanted to see what else they could do with their staked ethereum and I think you know Lio has done an amazing job you know capturing that market um and and the and the demand that we saw on that kind of you know Crypt native retail segment I think as we think about the future and kind of going back to some of the more like traditional use cases that we see in the traditional markets you know today when you think about a trade financing transaction or just general Commodities trading receipts that you get you know in the context of you know uh when you're trading corn for example or when you're trading gold you basically leverage receipts that you might have in warehouse storage and you do that pretty consistently to support a trade Finance transaction or to leverage that as collateral for other transactions that you might enable and so in the digital Commodities Market when you think think about ethereum in that way you know these types of receipts start unlocking a lot of interesting use cases um in the traditional world and so what's really interesting for us as a project that is predominantly focused on supporting institutional grade and Enterprise grade adoption of this technology it's really enabling you know things like Structured Products the enablement of you know the derivatives Market enabling you know exchanges and custodians and other players in the market to really offer this at scale and so things that we're starting to see in that realm are things like you know hedge funds trying to think about putting on Market neutral trades providing access to you know staking rewards for example through these types of solutions we're starting to see a lot of movement now in the structured product space it's obviously very big topic of conversations as we start seeing you know ETFs emerge as something that becomes really interesting in the market well guess what those players are going to need to fulfill certain Redemption periods certain liquidity needs and this type of product is actually really really well positioned to enable them to you know both provide security to the networks that they run on top of but also offer a really compelling product that is able to fill you know Redemption periods and you know the the right time frame and so that's really how we think about the market it's like everything in crypto moving from you know Crypt native power users that are mostly on the retail side to slowly activating sort of Enterprise and institutional segments with the right products and solutions that you know are designed to meet their needs that was really great I probably don't have much to add but I will add something anyway so I think the other kind of like core precept to to keep in mind here and we can hearken back to the presentation that Arthur Hayes gave a little bit earlier today is that um staked assets and especially liquid staked assets are like de facto also resistant to the inherent inflation uh that might be applicable to most uh staking networks now on ethereum it's a little bit different because there's also the burn so there might be deflationary Supply periods and inflationary but of course is of course if the asset that you're using to both secure the network and transact on the network and hold your Capital as value in is gaining rewards at the same rate of that of the block issuance and the inflation of the network it's not only a natural hedge against the inflation of the network itself but also of inflation of assets outside of the network um so when you're contending with things like uh raising rates um in in the trafi world or or inflation of stable coins being able to use assets that have this built-in Hedge especially as for example as collateral in order to Mint Stables um is something that really unlocks further power and capital um and the the biggest kind of driver or or vector for any of this kind of demand is going to be uh utility and the utility of liquid staking tokens primarily comes from their liquidity right yeah for sure um and and I think something you guys both kind of touched on is just the financial instrument side of things um but Mara you in particular also touched on like the ETF and ETP space you know you talked a little bit about you know Redemption period stuff like that would you mind you know kind of explaining you know both of you guys uh or or one of you uh to the audience what like why is it that liquid stake eth tokens are so pivotal to what can make an ETF or an ETP successful uh I try to explain in simple language of course but um I think that's like one of the nuances that I people aren't really grocking but I think it's going to be incredibly important as these products are getting developed you want to take this one sure um can definitely elaborate on on the ETF and ETP space in particular but the reasoning or or with the you know value proposition is actually pretty simple if you're building any type of product or solution uh that depends on Capital efficiency um and being able to for example you know fulfill redemptions in you know the structured product world or be able to you know facilitate the trading in and out of positions or at least even create the certainty that you know if and when you can come out of a stake position on ethereum or any other network you know re tokens or liquid staking in general is going to be pretty instrumental to facilitating that if you think about the market today staking is really a one-way Street and so there's only so much you can build on top of around it um that is going to be able to mature the market and really create you know interesting Solutions um that that are going to be really important for us to you know build for you know mainstream adoption and in the liquid sing context you know we start unlocking a lot of these use cases where you know izy spoke about you know um effectively like stable coin issuances or other types of fixed sealed instruments we are starting to see a lot of appetite or interest where you know institutional players might have a particular requirement from Regulators or for compliance purposes to fulfill certain Redemption periods in the ETP and ETF space that's prettyy much a mandate and so when you think about recey tokens or liquid staking Solutions in that context it starts becoming really interesting what we can build you know on top of this Market yeah I I I agree and I think that you know unless you're taking and this is just my you initial thoughts but unless you're taking uh you know an LST approach to the creation of these products what you'd essentially need to do is have is you know even if you're taking most of the eth you're going to have to have like a fairly large portion of it that remains unstaked um because you want to be able to honor these withdrawal requests yeah or you're going to want to constantly cycle it which puts a drag on your rewards and also a drag on the network itself right and you don't want to do that it can actively harm the network if you're sitting there pumping eth through the queue the whole time yeah exactly exactly um awesome so we're going to move on to a spicier spicier topic uh as some of you may know Lio has been getting some heat uh recently about approaching 33% of staked eth on ethereum again again again they they've been flirting with this limit for about a year and a half now uh but they're getting very very close and so love to explore that topic there's a couple of questions that that I'll you know we'll be walking through the first one is like you know is it a problem uh and if not why not and then we're going to talk about you know some of the other liquid projects and why they haven't you know been able to really challenge Lido's dominance uh and then talk a little bit about Lal and the approach you guys are taking how um that might give you a little bit of a different different strategy so you want to take the first one yeah sure so I'll try to provide a little bit of background here because unfortunately this is a Nuance topic which a lot of times gets lost uh on the Twitter Pulpit but we'll do what we can to uh elucidate it here so um a lot of times we say lto this or Lio that in essence Lio is actually two separate things there is the Lio protocol that is a collection of software that runs on ethereum it is a middleware that users uh use to interact with each other with regards to liquid staking tokens and there's two types of users in this protocol there's stakers so people that take eth and get receipt tokens in return for that which is uh the liquid Stak e and there's node operators that run the validators so the Lio protocol currently has a node operator set which is permissioned which means that node operators are selected by the Lio da the Lio da is an purely onchain organization headquartered in ethereum it does not have a legal entity wrapping it um and this Dow has ldo holders who are basically the people that get to make the decisions around which node operators are on board and when um but not how much stake they get that is actually determined by the onchain protocol code and so there's like a fair stake distribution mechanism currently there are 31 operators um so if you think about the fact that there's 31% of stake running through the lighter protocol and 31 operators each operator has on average if you do like very basic um math a little bit more than 1% of stake share running through that operator and because of the staking mechanism basically this stake always gets well distributed uh over time it doesn't happen like in a week um which does quite a lot to to distribute not only the stake itself uh but also the risk and potential impact of something going wrong with one operator or one type of setup um to minimize possible risk to the network uh you see a lot of other operators on the ethereum network that run much less than 30 or 33% in aggregate but it's actually only like one company right or or one legal entity behind it that has contracts perhaps with several node operators but is ultimately one um in Reflection Point let's say from a regulatory or jurisdictional perspective with regards to uh ways that the network can be attacked so there are legitimate concerns around tail risks that are entailed by um certain protocols and especially if there are like single entity single business entities or single operators controlling over a certain amount of share of of ethereum um these inflection points are at 33% at 67% and like arguably at 100% where if all eat the staked I don't think there's enough e to pay for gas but we can figure that out later um so at 33% the like the attack that somebody could do on the network is actually a bit nonsensical what you can do is refuse to finalize the network I.E stop participating if you do that what'll happen is that the network will go into like non-f finality mode um and validators will will enter a state where they get more heavily penalized the longer this happens and you will start losing the eth that is collateral against these validators so the only reason to do that would be to like dynamic ically denial of service attack the network and you would need to get as the Lio protocol currently is all node operators on board to do this at the same time so there are known uh node operators that participate on the Lio protocol that are ethereum client Dev teams um this SE the selection process isn't arbitrary um it looks for entities that are aligned with the ethos and the values of the ethereum ecosystem um and it makes sure that not only do they have voices but they have the ability to to like say no to what might be dangerous demands posed by token holders and the protocol itself being on the execution layer actually has no direct effect on what the validators can do on the consensus layer so the concerns are valid um I think the overall estimated risk impact especially as the protocol is now and as ethereum currently Works um is probably assessed a little bit higher than it should be uh and there are a lot of things happening within the Lio protocol in terms of um potentially new modules that are being developed to allow a larger swad of operators to join both permissioned and permissionless uh as well as improvements being made on the governance side to give stakers like veto power over uh decisions that the Dow might make that might not be in the interest of stakers or of the network so if you take all of those things in consideration and also consider the fact that ethereum is like a moving Target there are a lot of upgrades coming to to ethereum that um all liquid saking protocols will have to adapt to and a lot of those upgrades are not even finalized as as a designer a thought yet uh one of like the biggest kind of like issues or difficulties is figuring out the right way to walk that tight rope in between where the risk is now how to mitigate that risk to the fullest extent and where do you want to end up um in a couple of years from now I don't know if you have anything to add Mara it's okay if not I'll let Izzy take this one yeah um so then the other the other thing I wanted to cover is you know there's so many liquid staking protocols you know something that have been in the market for a while a lot that have come to the market recently uh why is no one been able to challenge Li's dominance and I I'd love for you to touch on that and I I'll I'll preface this by saying like I'm very much in the camp of like when people ask Lio to self-limit or they ask Lio to do this or do that I'm I'm in very much the camp of like the only way that you can you know if you think it's a problem the the only way that you can fix a problem is through competition um and so why isn't the competition been more uh more thorough so there's probably a bunch of different factors that affect this right there are early mover advantages I mean there's a bit of revisionist History that goes around that Lido was the first mover in the space this is absolutely not true uh Lio not only launched after a few other liquid saking protocols but its kind of like Ascent in the early days of liquid staking was was slower than those protocols um it was I guess fortunate enough to not suffer some of the the fates that those protocols had that had to do with uh things like mass slashings misconfigurations or uh like I don't want to say cut Corners exactly but you know things that that if they weren't missed or if they had been properly reviewed would not have like uh ended up in that outcome so I think it's it's a combination of um being in the right place at the right time assessing the needs of the market in an appropriate way to deliver uh a scalable liquid staking solution in the sense that it it met enough of the demand to displace the current threat at the time which was large centralized exchanges picking up all of that stake and essentially running it completely by themselves so like before light uh entered the foray there was like two or three exchanges essentially running like over I think 40% at that time of of ethereum stake eth and then slowly that diminished over time and a lot of that stake like migrated towards liquid staking tokens um the second thing that I would say is like a a fervent commitment not only to to the values of ethereum and now a lot of people like disagree with this but uh it's up to everyone to decide on their own what they think the values of ethereum are and how they see their own uh projects or the tools that they use in alignment with those values um and the third thing is like a commitment to to Excellence and almost paranoia about things like security so just to give an example lto V2 an upgrade of the protocol was rolled out in May um and there were over seven audits done uh I think amounting to like over $800,000 in terms of costs on different pieces of of this protocol um it included things that are at the Forefront of Security reviews like formal verification and even things like anticipating where whether there might be compiler bugs in certain in the languages that are being used to write the contracts and writing tests to see if those compiler pugs would would affect how the protocol runs or not so there's not a lot of projects that execute like neither at that speed nor at that Excellence nor um at the rate that the users want so uh the the chappella upgrade of ethereum was mid April the light of V2 upgrade was miday and it was the first fully fledged liquid staking token to offer like real robust withdrawals for users so at some point somebody unstake like 400,000 stth and they got it within 3 days there's no other protocol that can do that yeah um that that has been super impressive I remember that withdrawal I was like oh it seems like a lot and then it just worked it just worked right that's the thing it just works yeah yeah yeah and and for what it's worth I think that you know not only has Lio done an incredible job but I also think that you guys are like really true to ethereum values however they Define them like like in the way that I them I think you guys have been doing doing a great job although I still don't like 33% I'll be clear um but with that you know Mara uh you know the CEO of alial aluvial is a liquid sing protocol that is trying to provide that you know competitor challenge that is Market Dynamic um and what I'd love to do is mar I'd love uh to kind of hear from you about why you think you know having seen all their approaches of all their liquid sing Solutions uh you know why is aluvial designed the way that it is is and you know how are you trying to really like present this alternative to Lio for sure um I think we've touched on a lot of really interesting points um and definitely you know as mentioned before I think one of the biggest questions is where is the market today where are we seeing adoption and where is it going to be tomorrow um I've worked in the staking space for a lot of years now and so I've seen you know kind of the movement of the market from you know slow on-ramp on the institutional side to now I think a more viable path to seeing you know large scale adoption um across institutional and Enterprise players and I think that's probably the biggest differentiating point or the way to think about this um we're going to need different products in the market that are going to meet the needs of those customer segments uh if you're an Enterprise today or an um regulated institution there are things that are going to be critical for you you're going to look at Solutions and uh the way that they meet your compliance needs you're going to be very conscious about counterparty risk understanding which node operators or vendors are inside of these different solutions and you're really going to care about making sure that you know whatever solution you implement has the right commercial model right um having come out of coinbase um I obviously saw a lot of kind of some of these considerations from you know internal to the business but also across other exchanges or custodians that we're starting to think about the market and really the question was very similar to what Izzy said earlier which is how can we build for a diversified infrastructure um you know sort of avoiding this like centralizing force that you know single companies centralized organizations may have and how can we build a standard or Baseline that can actually meet the institutional and Enterprise gr needs that these businesses have and that is actually what we're trying to solve for and so we have a uh a typical origin story we actually you know built the business with support of early Partners including coinbase Kraken figment today we have over seven Integrations uh with leading MPC providers exchanges and custodians that are opting into this type of architecture um and I think that that is truthfully you know the way that we think about the market which is how can we get you know uh the robin hoods of the world you know to start using products and offering that to their customers how can we think about you know activating the structured product providers in the market that are looking for solutions that meet their needs and I think you know we're positioned to support that um as the market continues to evolve and grow yeah that's um it makes a lot of sense and I think that just in general one kind of like way of viewing the world that I think about a lot is how the mixture of asset ownership continues to move from like total self custody like if we assume that you know it was 100% self custody it was just you know Satoshi with his initial 50 Bitcoin from the very first block uh to more and more we're going to get our you know parents and grandparents everybody uh to have crypto but like they're going to be using it through you know whether it's coinbase or JP Morgan or or whatever um so there still be a lot of individual ownership just within this kind of like institutional uh you know framework so enabling those people to stay and S the right way I think is is is different from what anybody else has really tried to tried to go after um so um you know one thing I'd love to cover so we only have about five minutes um I love to hear about there's a lot of middlewares that that are up up and around uh a lot of them are very exciting I'd love to hear from you guys you know one if you could know I'll Define middleware and then I'd love to hear from you guys kind of like which ones are you more most excited about uh but specifically which ones are you most excited about from you know the liquid staking perspective whether enables you to save money or have greater security or more offerings or services or whatever it is um and for the audience middle Wares are just um additional infrastructure that validators can run that enable them to do different work or enable them to behave differently and so for example there's something like obal uh which which allows you to take a validator key and split it uh and then you have let's Essen kind of like almost like a multisig for controlling the validator in in a sense um you have things like flash Bots that allow them to do me activities and so on um so yeah we love to pass it over to you guys which uh middle Wares are your most hyped for yeah so from from my perspective at least because I mostly deal with stuff like node operations um the middleware that I think is the most interesting and the most poised change uh like the staking landscape on ethereum is things related to distributed validator technology so like you mentioned earlier like obal Network and SSV Network um because they do a couple of different things so they reduce technical risk uh if you have let's say a multisig controlling a validator the the risk that the validator goes off by itself is greatly reduced because essentially if the multisig is four people you need at least two people to go offline for this validator as a whole and aggregate to go offline so you're you're spreading operational risk um and so there's an interesting model where even an operator by themselves might choose to run this validator in a distributed fashion to reduce operational risk you add a little little bit of like operational complexity and maybe latency perhaps but actually the the feedback and the performance that we're seeing so far from both testet and Main net test is that latency or at least performance can even be better because it's not so often for for that crucial amount of um like operators within the clut to go offline the second thing is that it allows multiple people to run nodes together uh and this INF franchises the addition of new node operators like net new node operators into the ethereum ecosystem so pre people that previously maybe didn't have the technical chops to run a validator completely by themselves or if they live in a place that doesn't have consistent internet or electricity can run a validator together with somebody else like their family or their friends or somebody across on the internet you know that they met like on playing EV on line you know we had the like the COO of CCP here earlier um and run a validator together and share the rewards and also share like the the business operations of of running that without the fear that if they go offline because they're like on a holiday in Greece or whatever and their you know their modem cuts out um they're validated stops working and the third thing is that it allows for changing of the risk mechanics within liquid staking protocols in a way that also introduces in that new node operators into the mix so when you think about permissionless staking um on network uh sorry on on the ethereum net Network in general what you do is you require some sort of bond from the operator to ensure it against either bad performance or malicious behavior uh these bonds are currently quite High uh between like 4 to 8 e depending on or even 16 e depending on the liquid staking protocol um and so if you can run a validator in a shared capacity and it's much more difficult for that validator to go offline you can more than linearly reduce the actual bond that would be needed and so you can get even more operators that previously didn't have the capital required to participate um and enable them to participate so like all of that stuff just means more people running more nodes on ethereum and that's that's the best thing that can happen for the network yeah I I agree I'll biasly second that just given my involvement with the projects but um yeah it's it's really interesting when you kind of think about our Market um and particularly you know the folks that we work with who are I would say probably the most conservative on the risk scale um any type of security innovation is obviously extremely interesting um DBT in many ways is an insurance product right it reduces the cost uh that you need in order to put up Capital to provide principal protection right if you think about it that way um having threshold configurations across different validators just provides more safety in many ways you can think of it as a as a way to create active active configurations and so if a node goes down and you have the right threshold nothing actually happens to the core stake um and I think it's it's it actually will probably be a requirement to see that in the market especially as we think about you know scaling this uh to to to levels where we can really support the market at scale and ensure we have the right security and risk protection in place um to make sure that you know assets are safe and customers you know feel feel good about that and so do the providers that support them amazing well we're almost out of time uh so to close out where can people stti with you and where they can go where where can they go to get more information uh www. light.i um and that has all the information as well one of the really interesting things to check out on Lio is the forums there's a lot of really really cool research and Analysis analysis that happens there from everything around like the censorship resistance of ethereum um to how node operators are selected awesome yeah you can head to our website ali.

Finance so a l UV i a l um you can also you know link out to the liquid Collective protocol from there today you have access uh to stake eth and you know issu LS eth which is our receipt token across uh coinbase figment hash node um Bitcoin Swiss couple of other providers so um we're super duper excited to continue expanding access for all participants and across different geographies amazing thank you both so much thank [Applause] [Music] you