The Future of Liquid Staking - TOKEN2049 Singapore 2023

all right well thank you everyone for joining us uh for this panel the future of liquid staking I guess we're joined with a fair few heavyweights here who've been in crypto not only for a long time uh but in defi liquid staking so let's get straight into it starting with Darren let's go through a round of introductions not only about yourself but your project moving down the panel cool so I'm Darren Langley I'm the general manager of the rocket pool core team so rocket pool is a liquid staking um protocol so we're actually a decentralized liquid staking protocol we currently the third biggest um in in ethereum uh we have about 1.3 billion um in tvl um and because we're a decentralized and permissionless protocol we have around 3,200 uh individual node operators uh across 133 different locations sarim yeah Hey I'm sarim um I'm a b a defi expansionist at Lio so I'm trying to push steak teeth into all the layer twos layer ones out there um Li is a liquid staking protocol it's the largest in the space as you probably know um it's uh the most liquid the most um kind of um mature protocol in the space um in terms of liquid staking so uh I'm zaky buan uh co-founder of similia Finance similia is a platform for adaptive defi Strat IES so relevant to sort of the liquid staking conversation one is similia has turned out to be uh our most popular strategies with the largest tvl have all been sort of liquid stake ethi based um and so we've become like the strategies have become a platform for like very significant Market actors like providing liquidity on St leverage staking making it all accessible uh so doing sophisticated things with liquid staking becomes accessible and simil and then um I'm also so uh I'm also the author of the liquid staking module that goes out live today on the cosmos Hub um which is uh taking which is taking the cosmos proof of steak protocol and making it much more friendly to liquid staking uh allowing people to immediately convert their staked atom to liquid Stak atam uh and so it's a big day for liquid staking in general uh hi everybody I'm Shri Ram founder of the igon layer protocol ion layer is uh a mechanism which allows stake in ethereum to provide security to additional Services these Services could be new Chains new data availability Services Bridges oracles secure multiparty computation machine learning anything that anybody cares to build on a decentralized network the idea is already there is a large validation Network on ethereum already there is a lot of stake on ethereum why not reuse it for anybody who wants to build systems with the decentralized trust so that's what I L is and I'm Kevin I'll be your moderator for today so I spent most of my journey in web 3 with a team called band protocol we were one of the first decentralized Oracle Solutions on the market which meant we had the opportunity to work with not only some ogs in liquid staking but one of the very first few D5 projects out there so let's now look at the Here and Now of liquid staking if you have crypto Twitter you probably saw a showdown photo between sarap and Darren so we'll start off going straight into that there has been some drama about how much Leo has in terms of staked ether in particular I believe was around 32 33% I love to start with Darren does this make Leo the bad boy of ethereum how do you see this I I think how we think about it is uh there there are certain thresholds um that uh ethereum researchers have said are quite dangerous for um a staking protocol to kind of breach one of those thresholds is 33% and then another one is definitely 66% uh so at 33% you can start to kind of um uh influence the chain in in both subtle uh and sometimes devastating kind of ways now it really does depend on the the protocol to a certain degree but they they've basically said that no protocol should kind of breach that um so in in that Essence it's but it's particularly bad for permissioned node operators because they essentially know each other right so uh because they're uh a smaller group they in theory in theory and I'm not saying that L would do this but um you know in theory they could collude and start to you know do these kind of subtle or devastating effects to ethereum um and so that's why um they've kind of said that you shouldn't so from our point of view we've limited ourselves to 22% now that's easy for us to say because we're at 3% at the moment um but for us it was a choice between uh you know undermining ethereum which is essentially the thing we've built our you know protocol on and we rely on it for our sustainability um but also you know it's uh if you under if you basically if you undermine that you you you don't have anything left that's for that's for us of course and sarap your take I mean before we get into how ler works and what these two at hand uh in this in this audience who actually thinks that Lio can impose certain transactions for its node operators on the ethereum blockchain you can raise your hand if you think that's the case okay no one's doing it I mean at least one or two like okay you guys think if light is great that's fantastic but but important is to note that what happens is people look at the pie chart of stakes ethereum in the ecosystem right and they see 32 or 33% is with Lio then goes coinbase at 8.5 then 4.5 with bance rocket pool Etc 28 is UN not identified and people are like oh 33% Li though that means they can just do what they want they could uh prevent finality from occurring Etc what's really happening is within Li though there's 31 node operators at the moment so if you look at that this way you actually see Tiny slices of one two three uh one 1.5 Etc percent and in reality the largest uh Staker in the space is actually coinbase coinbase has has 88.

5% uh the node operators within Li each has like 1% or something like that um Can liido impose its will and know the operators and say on the protocol level ban this transaction ban that transaction in its current form no it cannot do that can coinbase or binance tell its node operators to ban certain transactions maybe right they're more likely to do so uh I can talk about the things that lier is planning to do in the next few few years basically that will eliminate the risks that like we talk about but at this moment the know operation know operators are not beholden by Lio Lio just pushes the ethereum into you know the right pockets and creates a liquid staking protocol uh to maximize utility that's it right so it almost sounds like this very well could be a misunderstood Milestone of lios I I I I can see why cuz like you see again that P ch with 33% and people freak out but the reality is a lot more nuanced than that and within the next year we're actually going to have Community staking not to the similar from rocket pool where you have not 31 no operators but thousands so there's just there's going to be I hope and that's like the big goal that there's no way you can do anything it's just the middleware that does its job and has no kind of uh um kind of there's no there would not be an ideology of centralization within ler at all it would just not be possible to begin with of course that makes total sense and to TI together I'd love to get your take on this as well zachie so I guess my I I I have multiple perspectives on this so from a like similer perspective um you know we just view the sort of emergence and maturing of liquid staking as something that like we want to facilitate in as many ways as possible uh we think the growth of liquid sticking is generally good um our sort of ye sort of uh leading product is somewhat neutral towards different liquid staking providers um but the majority of the capital gets allocated into uh staked eth because there are the biggest opportunities I think like one of the biggest challenges is like the way the interplay between Defi and liquid staking does create a bit of a lockin network effect and so you have multiple layers of lock in in the ethereum network you have lock in at like the base layer which is it's very difficult once you've Stak with Lio to move your eats somewhere else um then you have uh uh the lock and effects of you know D5 protocols that you know for instance a has hardcoded like one Stak eth equals one eth uh into the lending protocol which is a sort of level of privilege that other competing protocols don't have and that allows simier to be more aggressive with our leverage on top of uh you know simila strategies to like more aggressively leverage their the eth uh and maximize their yields when using stake eth and so therefore that like translates into a larger amount of stake de being out there so like Market structure is just as much a part of like consensus protocols as you know like signatures and peer-to-peer protocols um and that's always been like I think like one of the biggest challenges for protocol designers sh R yeah um as designer of Ian layer we don't have a horse in this race so we equally support all the different liquid staking protocols but if I wear the hat of a researcher and a consensus protocol designer um one of the things that I would say is when we're Building decentralized permissionless Systems we have to build these systems to be resilient to arbitrary actions at the application layer we cannot build a protocol today and deploy it and then tomorrow come back and say hey you guys should do this or not do this that's the world that we are trying to move towards a decentralized trustless permissionless world so how do we internalize these complexities into the consensus protocol I think that is something that I think about a lot for example the one of the reasons that we need the decentralization in these protocols in addition to economic stake if it's purely economic stake it doesn't matter whether like1 billion St comes from one one whale or it comes from 1 million individual units but but decentralization is crucial in ethereum in order to maintain sensorship resistance and inclusion guarantees so how do we design protocols where actually these guarantees uh either do not assume decentralization or we actively incentivize decentralization in protocol that's the two angles that I think we need to consider deeply as protocol designers and particularly from our own Viewpoint as igen layer we are trying to build extra protocol incentives for when people restake you know uh Services which want to leverage stake can choose which kinds of node operators they want to allow to restake and this can create a marketpl where decentralization can be valued and waited if decentralization is simply a public good which nobody is willing to pay for you get exactly what you pay for which is nothing if decentralization is actually over value to a service to a user then they should be able to Solace it and pay for it that's the ion layer view I think I completely agree there and on the topic of protocol design let's let's dig into this a little bit more I think very commonly a thread that we've seen is that with lsts lsds there's a value triangle a value triangle between decentralization cost and incentives looking at how your Protocols are designed looking at how you've seen other Protocols are designed do you believe in concept we'll start from Shram and we'll come down the panel yeah U like I said we're not building a reaking protocol so we're not building a liquid staking protocol but when you think about these three axes and how it affects what we are doing I think the thing that I like to think about the most is the angle of decentralization and incentives for decentralization and today there's a lot of thinking into how to minimize the incentive to centralization right and the the best you can do is to make centralized services and decentralized services work the work very similarly but actually I think what we need is active incentivization of decentralization and solicit people who want decentralization to pay for it so that's really how we thinking about it when you're reaking so how do we enable it when you go and do a transaction on ethereum you cannot go and ask for more decentralized set or less decentralized set that's not a scope that the ethereum block space offers when somebody is building a restake service on agon layer they can specify very precisely who can opt in to that service this lets them set the bar for who you know which set of nodes they want to actually opt into run their service creating an active Marketplace for decentralization and tilting all the fundamental incentives towards where what people value that's what at the end of the day should drive the protocols rather than theology which is where we are today MH zachie so I've been a big fa fan of natively enabling liquid staking within like proof of stake protocols uh so that's that's that's the work that I've done that's going live today on the cosmos Hub uh it's just a coincidence that it happens to be today I had almost no control over this um the uh I worked on it for two years it just happens to be going live today um the uh so the idea was that like by making it easy for um any Staker to turn their stake into a liquid stake token voucher that can then be submitted to a LST protocol and turned into staked atom or Q atom or we have a variety of different uh uh providers on the cosmos Hub you get this effect where you are incentify well it both makes it easy to go from staked atom to liquid staked atam but also provides the protocol features to go from various forms of liquid Stak atom to other forms of liquid Stak atoms easily it creates an interesting sort of game theoretic structure where liquid staking protocol designers yes they could put barriers to people being able to leave the protocol to be able to go from their liquids to from one to the other but that also makes the protocols less attractive from a defi point of view uh requires them to provide more in and incentivize more liquidity on dexes U from the liquid stake asset to the underlying underlying atom acccept so there's like a lot of parameters that you have to play with as a consensus protocol designer um to get to what sh Ram's talking about which is a marketpl for decentralization yeah I guess your question was initially about decentralization right the value triangle between uh decentralization cost and incentives this is a concept yeah so there's different layers of decentralization you can look at right um when it comes to liquid staking just to make sure the audience is still here uh how many major LDS or liquid staking protocols actually have onchain decentralized governance two three two I think the pretty much just one really Li is one of them uh that's the surprising bit Li is like the only large protocol it's one of the few large protocols in in the entire space that actually uses onchain governance where you lier token holders indeed vote usually there's usually snapshot vote of some sort and then there's a multisig vote implemented you know um and that's really important because when you have so much value at stake how can large stakers trust a solution where uh it's not fully decentralized in that terms now there's obviously issues with the governance at the moment of lier which we touched on I can touch on that later but in its current form at least there is onchain governance which is a huge differentiator right second is just a big mentality shift is occurring in certain circles in terms of osts people start talking about about institutional great Solutions like kyc AML all that stuff uh and quickly on node operator so that's where rocket has thousands of them and that's great we have 31 at the moment we want to build them but we also prioritize a lot jurisdictions like you can't have all the a th000 I don't think that's your case by the way but I don't think there's it's okay when there's 3,000 node operators and they're all in the state right or they're all in an Amazon kind of um Computing center right that defeats the purpose of it it should be in the state in Europe and Japan in north um uh North Africa Etc uh and that's kind of what we're pursuing uh jurisdictional decentralization as well rather than just purely 3,000 node operators but they're all based in Virginia or something so I don't think it's your case by the way anyway but yeah and to tie this one off so um I I i' would say so being a decentralized protocol is uh is a very hard Road up the mountain um uh you have to compete with kind of more centralized um uh competitors who are can scale much faster can can deliver you know things much faster uh than a decentralized protocol because we are relying on node operators you know bringing their own uh Capital to the to the table uh being economically aligned with our liquid stakers uh and kind of having that essentially built in Insurance Fund um so you know but the reason why we take that long road up the the mountain uh is because decentralization gives us characteristics for ethereum uh that will eventually make it the uh the open and Global Financial and non-financial uh platform that we really want it to be so decentralization brings you know high security uh it brings credible neutrality uh it brings censorship resistance you know at some point when you own when your Deeds of your house uh on ethereum you really don't want you know a small small number of people being able to deny you access to that so that's why the decentralization is so so important because uh this you know ethereum should be an Unstoppable kind of open and Global um platform which we can we can deliver all of this fantastic stuff and on that actually that's exactly where again these kyc institutional Solutions come in who are trying to pitch that oh we should actually completely gatekeep who's going to put their money in and if you look at institutional the size they rate is so much larger than we have at the moment There's an actual risk that like people worried about Lio when we're in middleware and black rock walks in and just Stakes 50 billion bucks and just going to approve one sort of trans you know only OAC compliant transactions right uh I think I'd be more wary of that than Lio uh and people that pedal these Solutions essentially and obviously I know the Alia people pretty well they're great and stuff but and they're catering to a specific Market but since we're not in the states like right we should really be careful about about these Solutions right that's just my opinion at least on a topic of that um looking at a long Horizon now let's look at two major forces in play uh number one especially a topic of this year Regulatory underpinnings and two the ethereum road map how have these two factors influenced maybe your liquid staking Journey so far but also into the future and Beyond a good person to start from here would be definitely Darren so uh so the regulatory environment essentially kind of like dampens uh you know what we do pretty much on a on a daily basis um we we kind of obviously have to be very very mindful of it on a every everyday basis uh you know not be not be too kind of outrageous in terms of uh being in the market and that sort of thing so it is it is something that is kind of you on our mind quite a lot uh I think it is exciting things you know back in 2018 it was uh it was crypto will be dead soon and today it is is now we're actually having the proper fight so I think that is a much better situation to be in than than it was before um in terms of like the ethereum road map ethereum road map is fantastic for decentralized staking protocols there's a couple of things that will be delivered in uh the uh dancon um release that uh will will change the game in terms of decentralized staking protocols so we're definitely um taking advantage of that to be able to kind of scout even further we've we've kind of doubled in the last two months but we we're kind of like making sure that we can keep that that scale coming uh and and kind of make it super efficient for for everyone to use amazing sarim guess your main question was about regulatory environment right or two major forces in play looking at I guess lsts lsd's Regulatory underpinnings and the ethereum road map right yeah yeah I mean regulatory stuff it's like it depends on is it America or is it everything else uh when it comes to the States they're like a lot of people are betting on regulatory Clarity which means may never come right and I don't think you should base your business on it to begin with uh regulatory Clarity regulations in America are staken are basically non-existent it's a little uh it's a fairy tale essentially when you look at other jurisdictions we've developed financial markets actually in APAC and that's the reason I think that's the reason we here in Singapore um if you look at Hong Kong Singapore Korea Etc there's a wide um acceptance of the idea of liquid staken uh there's plenty of Institutions already staken uh using osts and not too afraid of uh they don't need product updates or institutionally compatible Solutions actually is pretty much on the rise which is exactly why I'm here and not a permission list right um America eventually will find its way and I think it might be a mix of some sort of permission SL liquid solutions but I don't think they're going to take up the whole point of defi is you can you can exchange value very quickly um that's just my opinion on ethereum um yeah we're waiting mostly for uh think trigger trigger triggerable exits is an important update cuz uh if we want to implement Community staking we need to make sure like that is on but yeah ethereum has a fantastic road map as well uh I think we're obviously watching what they do and it's really important to us and we're trying to align ourselves as much as possible with what they kind of implement there so uh so yeah amazing take zachi um from the regulatory point of view I guess my main perspective is that like we can't plausibly get to a decent ized World by like trying to like hypothesize what Regulators will think and then build protocols based on those like hypothetical ideas about like what Regulators it's better to start from like first principles decentralization uh and uh uh first principles economic uh correctness um and trying to like fight the existence of like liquid staking and delegation is probably not going to be a a winning strategy for achieving true decentralization I think from an ethereum Road map point of view I think like one of the most exciting things is exactly what sarim is working on which is taking representations of like eth yield uh and bringing them up into the application layer uh and into the l2s into the app chains uh where that's what applications will build on um so that's like one of the things that similer is really excited about uh you can think of our real as like real yield eth on our on our our platform is a representation of of sort of the best staking yield on eth L1 best repres ation of each scking yil and that becomes a primitive that you can compose on top of on top of the application layer it can be money it can be collateral it can be used uh in in uh like per protocols it can be used in all kinds of different places and I think that's probably like where liquid staking is going to be like the fuel for the fire of driving the sort of uh multi-chain e re sort of road map sh Ram I have a little bit of of uh counter take on regulation and liquid staking so if if so the I think of Regulation as a proxy for where real world trust is needed yeah right why do we have regulation We the People organize to actually create um certain ways to uh bring real world trust as well as you know when you're taking for example what is it when you're saking you you're creating a very Ultra limited liability entity where you're basically putting your stake at risk whereas when you're operating according to a legal jurisdiction you're putting a lot more at risk you take criminal liabilities if you actually break certain things so one of the problems that we see in like you know liquid staking the problem that liquid staking is actually solving is actually the trust bottleneck problem and the cost of trust is actually Capital efficiency and we might see Solutions if we don't actually put these things together correctly we might see Solutions which do not have the protection and backing of legal trust and neither have the protection and backing of economic self-enforcing trust we may get the worst of Both Worlds if we don't actually bring these things together correctly so I think you know there is a role not for like you know Patchwork regulation without understanding the fundamentals of what crypto is actually offering and what their real world trust can be supplanted into the crypto ecosystem I think delegation is a great place to start thinking about first principles I'm not optimistic we are going to get there but it is something that I think about a lot it's not a crypto maximalist position to say that we've solved all of the world's trust problems but it is a realist position to say what we can solve internally versus what we need real world trust to augment things and where things can become much more efficient actually augmenting it with real well trust is better so that's my position on the first one on the second one whether the how ethereum road map interfaces with what we're doing at ion layer we aspire to be the place where the ethereum road map is tested as an on an opt-in framework for example there is on the ethereum road map one of the most important upgrades over the next three years is Don Shing which is a mechanism to improve data availability what we're building on IG layer IG da igen data availability is actually taking The Core Concepts of dong sharing the core cryptography and the economic incentives and build it in a permissionless optin manner that ethereum stakers can opt in and provide hyperscale data availability in the coming months rather than having to necessarily wait for 3 years but what this does is enable these Technologies to be battle tested at a smaller scale before enshrining it into ethereum so that's our general framework of thinking is can we actually be a playground for testing out new ideas before they then get internalized into ethereum I actually really like the point about Capital efficiency I think sarim also had notes of this a little earlier in the panel in terms of capital flow into industry it's without a doubt it's slowed down this year year to date we're about 75 80% from last year could there be an opportunity here for more institutional participation in lsts lsds I'd love to get every single panelist take on this we'll start from sham for this one yeah um in in terms of institutional adoption I think we badly getting started I don't know whether this is the year when we are going to break that door open but I think it's definitely you know coming up um in in in in that context the one thing I want to add is adding to my previous point which is when major entities want to stake they want to have assurances which are stronger than I trust you and I trust you based on what what jurisdiction are you in what regulation I and this is real this is the real world real Capital which is because they're not managing their money they're managing third Pary money and they have obligations unless it's crypto economically assured that they're not going to lose their money they have to lean in on legal liabilities so I think that is something that we will see people may opt into their own like staking service providers in order to participate in this economy Zach so yeah absolutely one of the thesis behind similer was that institutions people like chrisy and I when we created the protocol what we wanted to do was create an environment in which there is sort of an an entity that and a set of entities really not just like a whole protocol of validators and offchain compute and strategist who can help protect users who are participating in these systems so as users go out and seek yield um there's a lot of Market complexity that they need to understand and we found that institutions are you know they're sort of very much on the early stage of the learning curve about the liquid staking Market the risks the M the like micr structure of the market when you might be able to exit when you might be able to enter um and similia has turned out to be like an enormous force uh for like there are a lot of family offices there are a number of Institutions who are starting to use our protocols because it gives that sort of expert advise structure but with a high degree of safety and like uh to sort of participate in this market yeah I mean institutions is kind of the reason I'm here and Lio team is here amongst other reasons I hope there's a poor party tonight B for haze so that's another one but mostly it's institutions really um there's basically a lot of interest in liquid staking as an asset uh in some ways we're in the educational stage of things in some ways pretty Advanced where people really do it um I think um like like a lot of people have no idea that actually Franklin temperton for example which is one of the biggest asset managers in the world build like a tokenized money market or like that Fidelity actually has crypto custody Solutions ready and already working uh there's a huge interest in usd5 Structured Products among mon Fidelity as well for example or other guys so there's already interest there just needs to be more education than I think we get there and what they always look for is liquidity that's what I've noticed at the maybe this year maybe next year or maybe in a few years yeah we see see about that uh so liquid staking is is is tough for institutions uh as as San said there really still getting their head around that uh on the Node operator side though so rocket pool offers liquid staking and node staking and on the Node staking side there's definitely a lot of interest that's something that they can quantify that's something that they can manage themselves uh or with Partners uh so we're definitely seeing a lot more on that node op opor side of things rather than on the liquid staking thing uh we're also kind of seeing kind of uh it done by proxy uh by buying equity in uh in staking businesses and that sort of thing so I think there's definitely a lot of that stuff happening of course and that really ties off this session for liquid staking today I hope everyone here thoroughly enjoyed not only the Here and Now of liquid staking but the future and Beyond uh big thank you from myself to the audience and also to the panelists for joining us today thank you