LSDfi as a New DeFi Primitive | KBW2023

please go ahead with the next session thank you thank you very much uh thank you everyone to be here I think I see a lot of familiar faces here as well uh it's a pleasure to be here moderating uh three experts here in terms of this panel I think the topic today we are talking about is more towards like LSD lsdy as the next um defi primitive itself I think let's start off the panel and all this itself with a good introductions maybe we can start with uh Shu from yeah hi everyone uh I'm s I'm from ity and we are building our liquid staking dtive service and let it's nice to be here talk with us yeah hey guys uh my name is Guy founder of Athena and we're building out the uh Vision that Arthur Hayes had for a scalable decentralized stable coin hey hey everyone my name is uh Amit Kaja I'm one of the co-founders of of uh sta Labs we are a multi-chain liquid staking platform with about $130 million of TBL live across ethereum polygon B&B and a few other chains okay very good so uh let's start off with very very basic question uh in your own opinion can you share what exactly is LSD what is LSD uh maybe I can start uh so in order to stake and underst staking reward you need to run your validator so you need Hardware software expertise and you need Capital 3 to e which is a lot so with LSD we remove these constraint or requirements and let everyone can stake any amount as they want so that is my Just One summary U I think in my in my words uh LSD is like a simplified form of staking where uh in in general in a in a plain staking scenario you actually lock up your tokens and you can't immediately unlock them so LST or liquid staking tokens are going to add liquidity on top of your tokens where you can instantly swap them out of your position while you still uh earn staking rewards on top and then the additional advantage of lsts is they also help you to participate in defi while earning staking rewards uh let's say for example ethereum staking rewards on an average we had about 4% and then on top of that if you actually use that liquid stake token on any of the D5 protocols depending on the uh risk level you can probably earn up to earn double digit rewards right so the ability to part it it also gives you the ability to participate apart from the First Advantage which is which is liquidity on top of State assets okay cool stuff I think uh actually wanted to ask you guys uh you know why do you guys launch LSD instead of PTI but I think both of you already cover it right so I think for guy maybe you guys have a very uh interesting concept at ATA so can you tell us us tell the crowds tell the audience more including myself as well why do you guys choose LST uh you know to back the Stables uh yeah yeah sure so um stable coins are interest rate driven business models right uh where they depend very much on having some form of an interest rate sitting within the product itself so you actually have a business um stable coins have sort of gone down two different paths I think in the last 18 months one has been trying to leverage actually the yields that you find within the real world and that comes through rwas or holding bonds within the real world and then defi found sort of an issue where real rates in the in the world sort of came uh in defi came down while rates in the real world went in the opposite direction and really Stak e became the only asset where you could actually find a durable and scalable source of yield sitting on chain and so really I think it was just the Natural Evolution of yields in the rest of the ecosystem coming down stake de becoming the only source where you could actually have an interest rate sitting behind that business model and now stable coins have a choice do you want to use us treasuries in the real world or do you want to use an internet bond with stake D in defi all right thank you so much um I think in terms of the market conditions right now I think a lot of people have been uh talking about ls5 how to ear additional use and you know just a quick one um what's ld5 what's the f is it decentral Finance or what exactly is the F what's ld5 U just let me take a short edit I think it's all the associated decentralized or like potentially intermediate Financial applications that are being built on top of liquid stake tokens uh cuz the the the entire space is evolving quite a bit so far we only had uh amm's leverage on top of lsts and potentially some perss on top of lsts but now the space has been evolving into cdps I think Etha Labs is trying a bunch of things around uh uh like Bridging the Gap between C5 and D5 and then like who knows right tomorrow in a couple of years there might be like 100 other different types of applications that might be built on top of lsts so this entire space is known is getting to be known as like lstd f very cool you want to share anything anything to add on uhy so for ity it's so it is one of LSD projects right so for us the goal is to make it composable in with other defy applications including the Hot Topic EG and layer as well so what we're trying to do is to make the integration native so deep down in the smart contract level so that uh we can minimize those risks involved there yeah I think it's uh just extending on your point uh defi is pretty basic I think as exist today you've got trading um money markets derivatives uh and stable coins and uh for me it's just sort of replacing assets that sort of sat within each of those financial activities uh and did not have a yield that that was sort of sourced from stake de and now it's just embedding that stake de return into all those financial activities and building infrastructure around that okay got it so I just have found very in interesting question right so the main thing is that everyone is talking about ld5 right now does it really help in terms of driving the adoptions and the future utility yeah I'm not sure about the adoption thing I think uh it to me it feels more sort of like a response of uh the collapse that we've seen in in yields across the space where we sort of had to look and find where is it that you can now find the source of yield to to sort of sit behind the whole of defi uh I don't think ultimately a bit of yield that sits within St eth is going to drive new Adoption coming into the space um or anything new in in many respects I think what we're doing with uh uh with LSD still is basically just quite a bit of copy pasting with stuff that we've seen in the past so the same sort of financial applications that existed in 2020 but just using steak teeth as a different asset so I think we're at the early Innings of sort of innovation for for new ideas that could bring people in uh but I think as it exists today there isn't a ton that is sort of pushing things forward in a materially different way I think in uh with very specific reference to to LSD fi yeah got it got it what's your thought I mean I mean that's like uh uh you guys do itan stickings and all this itself with LSD samey right so do you think that this concept of lsdy actually help you guys in terms of or or even ethereum in general itself increasing the amount of steak people coming into Stak the flow of if into staking does this LSD F actually help to drive that future sticking on M yeah so I think it's a it's definitely a good question and merits a nuanced answer there uh so like if you actually think about it like the total number of users who are uh staking etherium and then probably if that Pi is 100 there are like 50 users who are doing liquid staking and then out of the 50 users maybe 20 of them are actually participating additionally in D right so obviously lsdf is going to improve the bottom of the funnel which is like more and more liquid stakers actually getting into D and and trying to actually use the ethereum blockchain as a whole because they have to participate in different protocols will this drive the top of funnel Maybe not immediately but over a period of time as more and more users kind of start adapting to some of these applications the entire p is going to grow a lot more is what I fundamentally believe got it you have anything you go ahead okay cool we've been talking about our sd5 benefits how Drive adoptions and all this is St so these are all good thing right so is there any caveats any bad things about uh yeah yeah I think I can add one uh so LSD is easy to use so easy to stake right so you can deposit or withdraw but when you decide which staking service that you're going to use you need to know what kind of risks that you're are facing so for example in LSD if you st you don't have the control of the validators like how to exit the node and how to withdraw so you are delegating the custody of the keys to those protocols so uh for example if you are a institutional Staker then you need to understand the worst case scenario like we all observed what happened to FTX right so I think I wanted to point out that got it you guys have anything you want sh add on to the point yeah I think one of the main things one of the main things to consider is uh the smart contract risk when you're participating in any kind of uh liquid staking protocol and Associated D opportunities uh and one should actually go through the entire smart contract audits make sure that you participate in protocols that have uh conducted exclusive extensive Audits and and also leverage proper security practices before you participate in any of these protocols like as as all all of you know crypto has this smart contract risk especially decentralized Financial applications yeah I think just one more point to add to that is uh we're starting to build and compound different types of Financial Risk on top of each other with with new tokens and so the first iteration of defi was sort of based around eth and that was a pretty deep and liquid Market uh back in 20 2020 21 and 22 and now you're sort of seeing the same Financial applications being built on stake eth and a bunch of different um uh lsts from a bunch of different providers whether that's Lio rocket pool but actually the underlying liquidity for a lot of these tokens is quite a lot thinner than if you're just building that on eth uh by itself and so I think there is a risk that we're sort of starting to compound a lot of these risks in the search for yield um and we're doing it on sort of thinner and less liquid markets than they were before all right very cool okay since you mentioned about the keys and all this itself right we are just direct this question to you like you know for ity I know you guys are non custodian can you probably share with the crows here the audience here that how do you guys yeah so we provide several options for the stakers to St their e LSD is one product and the other is non custody or delegated St solution so where the stakers canot still hold their keys including the validator key and withraw key and they can just delegate the node operation to some node operators so what they have is the full control of the validator they can accit the validor when they want and withdraw it and they can have the full control of this withdrawn fund as well so uh yeah so what we do is just to make it super simple you generate the key you encrypt so that the corresponding node operator can decrypt to run your node on behalf of you and yeah that's the just explanation I think interesting I'm I'm going to do this panel a little bit different anyone have like questions so far that you want to ask anyone anyone oh okay it's okay then let me just to the next okay um okay we talk about key encryptions you know non custodian and all this so um IIT uh I know that you are working something like a DBT pool um with SSP let me show later as well all right can you tell the audience about you know more about their uh Integrations how you guys working together and uh how does it help you guys achieve the vision or goal that you guys are going to for sure thanks Maas for bringing bringing the concept of DVD uh into this uh mix I think uh DVD is a very interesting technology that uh we we believe uh is going to fundamentally alter the way validation or node operators are going to operate in the future and SSV is one of the Pioneers in that uh technology along with several other players like oall Etc uh we've been uh we've been actively working with the SSV team to build out this integration for our liquid staking Solution on ethereum uh in a nutshell how this technology works is today a node operator runs his own validators that means he uh he does the attestations and he manages everything on his own but DVT enables uh a bunch of node operators it could be 4 7 12 uh node operators to come together and uh ensure that they actually operate a validator together so what this kind of helps in is reducing the fa tolerance and keeps the uptime of these validators to a significantly higher percentage uh compared to a node operator operating his validator on his own right so we have seen very promising results as we ran some of these uh tests and Pilots with uh SSV and oal Prim SSV primarily and we're also doing this with p uh doing this pilot with obal networks uh so what this fundamentally enables as as we are a permissionless node operator platform is uh two things one uh we can reduce the capital entry barriers for these permissionless node operators which today stands at about 4.4 e we believe we can bring this down by almost 60 to 70% maybe closer to 1.5 e uh that's as you can imagine that that's 1 by 17th of what is needed for somebody to start a solo validator today uh so that's already like close to 5 percentage of what is needed to start that so that's a significant Improvement that uh we believe DVT technology can uh bring aboard ethereum staking the second one is obviously lower Capital entry barriers and at the same time uh higher uh higher attestations and as a result higher potentially higher yields as well so that's where uh DVD technology and sswe fit in uh in with respect to lsts is what we believe thank you I know I'm trying to be neutral okay I know you guys work with OBO as well you want to share your experience running on OBO yeah yeah go ahead uh so we are working with obal which is one of the DVT entry Pioneer right um so as I said when you run your validator you need hardware and software expertise and or capit so as a at home validator what you are missing is capit and and as an LSD project what we have is the capit so what we do is we have our project called operation solo Staker or operator where we uh support the financing their hardware and also we the over provides the software and expertise to run the validator and we provide the capital so that they can run those validators at home and we use this DVT technology uh to make those at home validators robust and do the good stops for the network okay thank you um too much of LSD maybe shift a little bit guy maybe you can share more about atena in terms of like why did you guys decide to use like what I mean it's like U what do you guys see LSD emerging like as like as a growing category in terms of for stable coins do for back more to like the mechanism how it works for AA as well yeah sure so I think um there's kind of two different models we've seen emerge around stable coins connected to to LSD so the first is a CDP model that I think most people will be familiar with you put up some amount of lsts and then you borrow a stable coin against that position uh I think part of the issue that we've sort of identified with that is it's pretty Capital inefficient so average collateralization ratios for for projects like that run north of 200% so you need to put down more than $2 of Stak E versus sort of the the stable coins that are created there I think um where we think this might start to shift in in sort of the next 12 to 18 months is uh more towards ideas around delta neutral design so in effect what that means is you're putting up $1 of Stak eth and then taking out a hedge against that $1 with with a 1x short eth Perpetual position and in effect what that does is remove the Delta of of that position and create what is a synthetic dollar position what's interesting about that is it only needs $1 of capital to create $1 of stable coin which is fundamentally different to to sort of How It's been done in the past we're seeing other projects like liquid who are sort of very famous for actually their CDP design in the past starting to shift towards this idea uh in their V2 that's coming out next year um and so yeah I think the interesting piece and the role that lsts play there is providing a source of yield and then also Capital that can sort of collateralize that stable coin um and as I said it's really the only way you can compete with with sort of yields in the real world now which is trying to leverage that that return and stake tee in some way got you got you okay um doing a a little bitty work for liquid sing protocol out there so is there any plans for you guys to you know can of integrate with uh different LST in the market so if there's a road map and plan what are the criterias for selections to be part of aena yeah I think one thing that might look slightly different for US versus CDP designs or other projects is we have an incredibly strong focus on liquidity uh Above All Else and the reason for that is we sort of have platform dependence of where you're putting that collateral to take out the short it's not really our decision what we can put down as collateral it's going to be the Perpetual deck that sits on the other side or or the sex um and so really it is just driven by liquidity and I think uh there's been sort of different approaches I think some people are more focused on decentralization some have a greater focus on on making sure that they're the most liquid token in the market and I think we would love to sort of work with as many as as sort of possible but there is just sort of liquidity restraint around that and um I think one other piece around this is also we're working quite closely with centralized exchanges and and their stake de um offerings and I do think that that it's a potential area where we're going to see uh quite a bit of change over the next 12 months uh which is actually the exchange versions of liquid staking tokens which I think people don't sort of discuss as much very cool very cool uh this is a personal question for me all right uh not really learning about internet Bond and all this itself itself but uh you know the later in terms of like LSD changing LSD into internet Bond can you kind of elaborate and share with us any me as so about it yeah sure so we kind of stole the name actually from colon from Obel so in 2020 they came out with this idea around eth being this internet Bond Stak eth sort of having characteristics that looked a bit like uh an internet native version of a bond all we're sort of doing is saying if you take St eth and you hedge out the eth price risk with either a pep or a dated future you start to create something that looks like a dollar denominated Bond but the interesting characteristic around that is that it's permissionless and anyone in the world can access it and so we fundamentally see that as important because most of the people who want access to Dollars outside of the US don't really have an easy way to get their hands on them and just being able to have the most basic Financial instrument on Earth which is just a dollar that you can you can sort of save and get a yield we think is a pretty important product to S to bring to the well any question from the audience so far anyone okay cool um I me been reading you know before the panel been reading into forums and all this stuff to try to understand what you guys are doing right so I think there's one thing that kind of caught my interest itself is about the what LRT is it something like that is that RT or something like that can you can you share a little bit more about it I think it's a liquid with stick token or oh yeah yeah sure thanks for bringing that up uh it's a pretty experimental uh solution that we've been working on and uh some of you might be familiar with this uh uh with with the New Concept called reaking that has been Making Waves off late in uh in crypto what we working on is uh building liquidity on top of uh restake assets today you can potentially restake lsds and also ethereum U so like people restake I mean the the promise of reaking is that uh you not only get the eth staking rewards but you also get reaking rewards from multiple protocols that are leveraging the uh ethereum security now when now when you actually do reaking uh what you are you're gaining reaking rewards but you are losing the opportunity to participate in D5 and also liquidity on top of your restate ethereum or restate lsds right so we are trying to solve the those two problems with a single solution which is lrts which is called the liquid restate token so when you actually restake the E restake e or lsts with our smart contract you will get a liquid restake token called RS e and that RS e will have all the associated defy opportunities and liquidity built by us on top of this so that's the New Concept that we are building on it's it's pretty we're close to Finish Line we are already on test net and main it about a month to two months away is this considered ld5 as well it is kind of probably probably probably okay interesting okay uh how about def f are you guys do you guys have any go to market strategy in terms of adoring more than I think I can mention one point regarding that reaking stuffs so we are taking a different approach from you so like for example in LI or rocket pool you restate your LSD and then you issue your liquid token right but what we are doing is we are trying to integrate with those raking product in a more native way so that our LSD is just naturally liquid while it is staked and restak at the same time so yeah that is one point that I want you to bring up thank you your plans it five plans mhm go to market uh go to market uh uh yeah so I think we should just provide a higher yield while securing the protocol there is one obvious strategy and we are also building more fun to use staking product for example we have this e fan project which is a little bit different so when you stake you get actually an nft which is associated with a cool art piece and you can deposit into your nft and your nft will on the staking reverse and we made it like a game so for example when you stake you start from bronze tier and as you st longer period with us you our nft can be upgraded to the higher deal like Platinum then we rever the long-term users with higher eels so yeah that is our one of the strategies thank you got it got it okay I think everyone here have their own goto Market strategy I want to talk about something that's a little bit more sensitive so we have seen nowadays regulat States you know they like to hammer US during the bare market right so I want to try to understand itself is that will this regulation set of things itself kind of affect how you guys are going into the market anyone can stop with yeah sure I think um we're not going to be able to service us customers with the product that we're bring to Market I think it's a shame but uh just sort of the the state of where we're at at the moment I think that well we obviously have a hope that that does change through time but I would say that uh you know trying to bring a stable coin to Market ultimately you're actually just trying to service people outside of the us in many ways you're trying to export the dollar to the rest of the world so that it's as easy for them to get a hold of it and so uh yes regulation has had an impact but I think fortunately it hasn't impacted us yet so that we're not sort of uh forced to not be able to sort of service our core customer which I think is actually a non- US person anyway U I think uh regulation is a very important area that is uh uh I mean it's it's it's a little uh I mean we are unable to sort of figure out some of these things because regulation is not very clear to be very honest across the globe right like not even in the US um it's a very very tricky space to sort of tread in especially with regards to lsts whether they considered Securities now obviously we are reaching a lot of Institutions and funds uh to kind of increase the adoption of lsts across the board be it ethereum or Matic or even in the future probably RS U so without regulation it becomes very hard to sort of bring adoption among the institutions so we work with several legal experts to kind of uh craft the narrative around why this is potentially not a security and what what are the implications of using these type of Solutions on taxation on on their compliance Etc so so it's a very important part of our GTM so we do take it quite seriously cool how about uh so it is affecting a lot but for the stakers like a users for our audiences I think uh the regulations it hits us like the the service providers like node operators taking protocols but not you but it affects your funds because your money is with us so what I saying is uh you need to be anti- fragile managing your fund so what I say is you need to hold your keys in your wallets so that you have the full control so yeah because the regulation is too unclear so what I do is just to protect myself yeah that is just one comment from me got you got you I think we are running out all time so just one last closing question right so how do you guys see the market in the next 5 years uh let's put it in your own specialization your LSD more towards the stable coin RSD 5 so how will the market look at in the next 5 years in your own opinion and also want to put toy and sta as well I know you guys are doing a lot on uh DBT as well um also more to like do you guys think DBT itself really will help in terms of the Securities of uh the base layer of eum and all this yeah a quick one maybe gu you want to St us yeah I think obviously five years pretty long time to be looking out but I think um we think stable coins are maybe one of three trillion dollar sort of opportunities within crypto I think uh it's our view that we sort of reach numbers that's not too far off that number at the peak of the next cycle um and I think it's reasonable to assume that we continue seeing fouryear Cycles where things go up way too high and then back down to where we are now um so I don't know where we end up at the end of those 5 years but I think between now and then we sort of expect stable coins to push on to a trillion dollars thank you sh you want go for us uh yeah uh so five years like forever for cryptos I would just just add one comment regarding DVT and so the way we are seeing is so it makes the network very decentralized it can contribute in that part so uh we are working uh with some at home validators as I mentioned I think DBT can do good for ethereum Network decentralization so I think it's yeah plus for all of us I think it's it is a little hard to imagine the number of iterations that the market would go through in the next five years so like at least I personally think the future for crypto and especially e staking and all the associated applications around e staking is is going to explode from where it is today and some of the applications that will potentially be built are hard to Fathom even even in today's uh I mean given today's scenario so I think the place is the space is going to explode the number of applications and Innovations will be much higher than what they are and as a result potentially the adoption and capital inflow will also be much higher thank you so much so I think five years itself is really a trick question the main thing over here is that right I want you guys go and follow all their Twitter so you guys know what will happen the in the next five years thank you if you guys have any questions please feel free to you know approach all of us thank you thank you very much thank you very much please again once again again give a big round of applause for forth gentleman here to uh giving us a insightful