Economics and Evolution of the Ethereum Staking Landscape - adcv

um cool thanks for your time ER as you said my name is adtv and I've been diving deep into staking and reaking over the past couple of years as our company has been the the finance work stream for Lio since 2022 and I wanted to go over uh few key points from some research that we did to try and understand what reaking was and hopefully provide a novel perspective for to help people understand it uh we work with a bunch of different projects I spend most of my time on Lio and what we tried to do was bring our trafi backgrounds to try and understand reaking as sort of trafy small brains and to explain things in for from a first principles perspective the paper is available on our website and we also have an Associated June dashboard on the following links and and on this presentation I wanted to go over sort of three points firstly to describe what is a cryptoeconomic network or an actively validated service or abs and provide a mental framework for how you should think about the unit economics of reaking and talk a little bit about what the market expectations are looking like at the moment and so some of the takeaways from that you can take away from this presentation are that well firstly ethereum and proof of stake systems create this system of sort of collateralized cryptoeconomic security and reaking extends that further by creating a Marketplace for that trust however we find that reaking is still not quite ready for prime time yet and is still in very much active development and it's not clear from a market perspective that the amount of capital that's committed today will be sufficient to load bear the expectations for raking yield from these services and then finally we provide uh sort of heuristic way of calculating the return on trust similar in trafa you have a concept of return on equity and you can have a similar type of framework for return on trust in crypto so to start on the different questions a crypto economic Network also known as an ABS in crypto jargon or an actively validated service you can think of ethereum as an ads the first one in in our ecosystem where it uses cryptoeconomic incent Ines to allow transactions to settle in a decentralized way so you need this amount of security to allow the network to execute and these transactions without depending on a single counterparty and putting yourself in the shoes of an investor looking at the ethereum landscape uh a useful framework is the one of Total return which is borrowed from trafi and we've sort of turned it around and applied it to crypto where Total return has a price Total return is the financial return from your investment in an asset over a random time period let's say 12 months and you can decompose it into price return and work yield the price return component is a function of the change of earnings of a network the multiple change which in crypto we call narrative and the change in supply of the underlying tokens and where work yield is the staking issuance and in this instance is which is dilutive to eth Holders you can actually decompose the total return for ethereum in a very neat Way by it's a it's a tautological formula similar to like the dupon model if you are familiar with it where you just sort of add the the denominator and the numerator so you break it out and break it up into different components and we have this dashboard on our on our June page that shows the evolution of these different factors over time and what's interesting is that the sources of Total return vary for a network depending on its level of maturity so for ethereum at the moment you can see that multiple growth is a Big Driver of Total return so how people are thinking about ethereum overall relative to other crypto assets and relative to other assets overall the reason this is important to keep in mind is because creating a new crypto economic network from scratch the way that ethereum did it for example or Bitcoin or what have you can be very expensive because at the start there's a balancing game where you need to attract new users but the users won't come if they believe that the network is centralized and their transactions won't settle in a in a this intermediated way and a useful proxy actually is to look at Cosmos mini chains in the IBC ecosystem because the net issuance is not a perfect proxy for state of decentralization but it's a useful signal and you can see that many of these Cosmos blockchains that require validators are having to pay an enormous amount of capital to subsidize the activity of the network and to bootstrap these Network effects whereas ethereum at the top is in a position where of maturity where it can afford to burn some of these and have a negative net issuance the centralized security relies on a diversified group of node operators to avoid capture by any one entity even though proof of stake has very strong centralizing aspects to it to its design um here you'll forgive me for Shilling the project that we work for Lio but you can see that Lio has been very successful at using this Market Force for centralization and turning it around and making it into a force for decentralization instead by forcing by sort of rate limiting the growth of any one node operator Lio actually contributes significantly to an improvement in the concentration of ethereum validation which you can see in the line graph on the top right is a which is a measure of sort of Market concentration with and without Lio and you know the tldr is that it would be a lot worse without Lio and so that's so much for staking now moving into reaking we can sort of wrap this up by summarizing that reaking is basically one of the options on a buy versus build consideration for a new cryptoeconomic system where you can build something and the advantage is that you can end up with a sovereign chain if it works and you end up with something like ethereum you have something that's very valuable because it's decentralized on the other hand it's very expensive you need to bootstrap this and you have this sort of cold start problem where you need users but the users won't come if the validators aren't secure and so and validators won't come if there are no users reaking the idea is that you can rent this security instead and shortcut it completely so instead of having to do the CICS of doing a big token inflation you can pay a restating fee to restake Capital that's already secure the pros/cons is that you don't have security of your own but you inherit it from the security that you rent so if you inherit it from ethereum it's quite secure and from a financial perspective we like to think of things in terms of balance sheets at Stakehouse because that's just how we're wired and I think that they're quite useful models for thinking about things in General ER where you have three different analogies the first one is a typical company where you have on the left hand side assets and on the right hand side you have liabilities and equities so it's like uses and sources and uh in ethereum you can make a similar analogy and you know with the caveat that this is an imperfect analogy so it's obviously not suggesting that ethereum is a company or a security or anything like it but you have this concept of sort of preferred with the recipients of the work yield and ordinary holders and in an AVS you extend that further where we consider that restake capital is the type of liability or senior debt because it takes the first claim to the recking fees before anyone else that's the theory anyway and the security that it gains can be capitalized on the other side of the balance sheet because it's a it provides tangible benefit to users who know that they can trust an ABS because it's secured by ethereum now at the moment the landscape of restate networks is very emergent this is one taxonomy that we propose in our paper it's not you know complete or perfect but it's sort of what the paper had at the time more networks have emerged since there will probably be even more and very likely that a lot of there will be some sort of darwinian selection as some of these networks test the waters and realize that they can't survive on their own but we we see things sort of as like blockchain utilities uh rollup utilities and application Utilities in different levels of abstraction from the underlying blockchain and this is relevant because it helps inform how we think about the business model of these networks so in this graph we have from left to right we move from native eth to Lio stake eth to reaking that reaking that pays in hard tokens eth or usdc to reaking that pays in more volatile tokens to the points basically and you can arrange these sources of return in relation to so at in the different colors you have the price return the work yield with the consensus and execution layer rewards and then you have a new source of work yield which is the reaking component and as you go up in Vari as you go up in Risk you go up in variability you uh so we have the sort of you know price return all the way up to maximum variability with the points being the most uncertain of the whole stock and our point is that networks and or avss should be evaluated like infrastructure businesses to determine whether they have the ability to maintain enough security for to perform to to function safely and deliver enough reaking fees to make it interesting for the providers of capital to secure it so we come up with this concept of a restak operating affordability ratio which is an the acronym is Roar and this is taken again borrowed from trfi which has a concept of a depth service coverage ratio that investors look at when choosing to invest in a company to see whether a company has overleveraged and taken out too much dep and whether that poses a risk to their investment in the equity and in a similar vein a re a restake Network can be over secured or under secured so it can be paying too much or basically have enough too much capital for the amount of yield that this Capital expects or it can be unders secured and not run safely enough for its users and we have a this sort of balance so adding all of this up gives you a useful framework to start from an so you have a sort of fictional Network balance sheet where you have the assets and the amount of restake capital on the top part and you can draw out what the required return to restake is on the x-axis and you can work backwards from there to see how much fees a network has to generate in order to deliver this level of rest return to Providers of recking capital and you'll notice that you know we have big numbers here 5 10 15 30 and so forth percent the implied AVS cache earnings are on the order of magnitude of the entire ethereum network so when someone says four even four five 10% resticking yields this is enormous and would require avss to be extremely successful at generating Fe and what we found in our paper apologies for the sort of word DSE slide but to summarize we wanted to try and triangulate what the market potential was for reaking fees in in a given Network and we looked at sequencer revenues for rollups and sequencer profits and we found that on the current base of all the reate capital that exists at the moment which is about 5 million eth if 100% of sequencer revenues went to uh resters the yield calculation would output 4% if 100% of profits ured it would be 1.5 and if you took some random sort of feasible sounding number like 20% of profits it would be less than 1% and I think that's probably at the current level of restake capital I expect real reaking yield to probably be in that order of magnitude so what this says about the market expectation for recking at the moment is that there's a lot of capital that's expecting to secure not a lot of restake networks yet now granted this can change if for example the amount of restake e decreases a lot the the fees go up in percentage terms or if there's some new use case and utility that emerges that someone invents then that that can afford it then obviously the fees can increase uh as well if we want to triangulate what the market expects we don't have a lot of signals but but we do have the price of a point Igan layer has raised a significant amount of capital on the back of its points Campaign which was a very clever way of promising points in exchange for a significant amount of eth and this gives them the luxury of being able to calibrate exactly how much that token issuance would cost them ultimately and the way that we founds to estimate what this implied APR is is with a tokenized point so it sounds a little bit absurd but there is a or was a concept of a tokenized IG layer point in a token called kep and this token traded on SEC on dexes and you could backwards imply what the implied uh APR was and it was in the order of or still is in the order of sort of 30 to 40% and since then cap has dep pegged because it's kind of it's a stable coin and N layer points and it didn't have withdrawals so you know happened they announced the token it dpeg it was w and then but I think that this gives you the point of the slide is to give you a sort of idea of where the market was expecting at some point resticking yields to end up in which in our view was a little bit overshot and then to touch on liquid reaking tokens which is one more layer of securitization and abstraction on top of reaking the idea is that a lot of networks will emerge it will be very difficult to parse what they are and what they do and liquid reaking tokens will play the role something like a fund manager or a money manager and they will do the underwriting and curate these networks and select the ones that their users would allocate to Mone is not they they're called liquid reaking tokens but I we don't feel that money is necessarily as big of a feature for lrts as they are for lsts because they are if they are sincere in their curation they will all end up looking a little bit different and provide a slightly different risk and return profile in our sort of you know small IQ perspective and way of looking at the world the way that we see lrts evolving is that you should look for their ability to underwrite their the quality of the collateral and the idiosyncratic risks from their particular design and here is sort of a schematic of how a arbitrary LRT could be could be set up with one or more different types of reaking platforms the other point is that native staking is actually way harder than people think a lot of these lrts that launched with Native staking features are finding that having to submit having to run staking to begin with is very difficult ER reaking by virtue of the smaller amount of node operators is having a centralizing effect on ethereum validation at the moment unfortunately though you know Trends can reverse and so our expectation is that eventually people will you know LRT managers and designers will eventually conclude that using stick teeth as the underlying collateral will prove to be a source of competitive advantage and will let them focus on you know curation quality of collateral and idiosyncratic risk management and then to touch on finally on the risk aspect this is an illustration of why reaking is still very early stage because the risk absence is other than sort of smart contract design for reaking middleware at the moment is completely fugazi like it doesn't exist there are no slashing conditions yet uh so from a common sense perspective we can imagine that once these slashing conditions become public and they start become they start growing live you can imagine that they might have a correlation between infrastructure providers A lot of these networks are basically doing slightly different flavors of the same thing and a lot of them will therefore likely be quite correlated which will imply some kind of a diminishing return curve on effective yield after accounting for risk and we also consider that multiple terms of reaking probably adds more risk and that some networks will inherently riskier than others to validate for there may be some networks that are quite straightforward and don't add a lot of risk prec confirmations are one example that come to mind but others could be potentially riskier and you know we want I just want to touch on pre confirmations because the reaking landscape we talked a lot about sort of the grounding or the coming down to earth experience that we had looking at the reaking landscape and it's not all sort of cynical like there is a lot here it's alike reaking is very very promising as a way of scaling ethereum's ability to sort of become the Bas layer for more things which I think is a good thing precon informations is an example of a valuable service we liken it to we you know we feel it's sort of like me boost nobody thinks about it anymore but it's a it's a quasi ABS that a lot of validators run already and perform a very valuable service for all of the users on ethereum and pre- console will be similar for l2s in terms of like accelerating transaction latency and and what have you in these these are real tangible benefits that have that very likely have a real business model behind them as well but to close like reaking especially from an Institutional perspective is probably nowhere near a state where institutional Capital could or should touch it you know non Crypton native Capital allocators are still figuring out Bitcoin and eventually they'll figure out ethereum and eventually they might get comfortable with staking but staking reaking is on a very much preal experimental stage at the moment there's no risk or slashing conditions which suggests that there's a way to go still and there are s there are certain centralizing and discretionary elements that make reaking platforms and services look a lot like regulated Financial Services which is likely going to be a dissuasive factor for institutional adoption and with that er sorry I just rushed through a lot of things but yeah please clap thank you [Applause] are we good on time okay I don't know if anyone has any questions or you guys are satisfied with the the presentation if not thank you very mucha and have a nice day