Validator Receipts: an Alternative to Liquid Staking Derivatives by Steve Berryman

foreign [Music] my name is Steve Berryman and I'm from attestant attestant is a an ethereum only staking company and what we're going to look at today is an alternative to liquid staking liquid staking has been phenomenally successful phenomenally successful and as with anything in the ethereum ecosystem something that becomes that successful becomes centralized and then becomes an issue so we we at a testing and been talking to some other staking companies uh try to come up some other ideas around how to transfer validators from um from one owner to another without going through the exit queue so really this is one idea that we've been floating around and we are looking for you know other staking companies to to to to to be part of this building this out if if we think it's a successful Direction so I've kept is quite light in the way I want to go with this is is um is to really give the justification for what we're trying to do and the detail on getting into the weeds really I think if you're interested come and speak to us and and we can sort of talk through some of the detail but it's really the rationale why we're doing this so let's have some context around what what is staking in the first place what is staking in ethereum so this is a very high level clearly there's a lot of complication goes under underneath the hood of this for ethereum staking but in from a very high level in in how we want to view this is uh we're locking up funds uh 32 each you send 32 each to the deposit contract this was that this started in December 2020 uh you sent your 30 to 8th um to the contract and that basically gave you a ticket onto the beacon chain and that that ticket enables you to build a validator and go through a certain number of steps and duties and if you carried out them duties you receive the worlds so some of the things you see receive rewards for are testing that's the uh you're doing that every six minutes it's the bulk of the rules you receive and if you're online and you're testing you get a very small uh small amount anybody that's used the blockchain uh website has got a validating you'll see their walls the rules keep chipping in um and proposing a block doesn't happen very often now there's 7 200 blocks a day there are 44 000 validators out there so roughly every 62 days you'll get a block but they were the only two uh places to get rewards back in December 2020. then we had the uh our fork and that introduced sync committees sink committees are even there than blocks block proposals you'll get one of these I think maybe now once every three years but when you do when they do turn up you make a lot of money during that period it's only for two days so if you're offline then two days it's uh unfortunate and then of course what we've seen with the merge the merge and this is really everyone's excited because now we can we we're not only getting transaction fees which used to go to the miners but now we can spend it and we couldn't spend before so this you know it's exciting for the first time after almost two years of having money locked up finally we've got some we can spend and of course move comes in here as well you know so that that's that's staking in a nutshell or ethereum okay liquid staking so briefly what liquid staking is and it's hard really not to um really not mention live though because live is the biggest player and there's going to be trying to be other players but again it's another centralizing Force so what is liquid staking and why do people go for this this approach well currently over 30 of the staking rewards go to library and that's not great but then again liveo runs under different node operators so it's not quite as centralized as you may feel but still you know it's an ecosystem we want lots of various different options but why has this become so popular well however easy you know some of us techies think it is to run a node is just not easy and there are lots of complications and you have to keep the thing updated and you know number of people I speak to go oh it stopped working well you know you've just not committed enough in what's going on in the community so it's difficult it's difficult to stay on top of things um and so and so with that people are going to want an easier solution to pick up some rewards and of course you've got slash in I mean you mentioned slash into somebody and they're going that's it I'm not even going to touch touch homestaking but being in the staking company we always try to get people to stake at home but I mean you know the Technologies for most people is probably out of the reach and they've got to be want to do it so when you know Lido came along it's just a perfect it's convenient it's so simple you just go and buy their token you go and take your you know you're easy go and buy some uh token you've got two choices you can go and mint it directly or you can go and buy that buy them for on the exchange uni Swap and and basically you're there that's it you stick it into Cold Storage you forget about it Lido uses a rebase token so your rewards go straight to your wallet there's there's no missing about cost you 10 percent but you haven't got to set up a box and you haven't got to worry about it um so so and it's been you know a phenomenal big success what's the downside to it well one of the downsides is you lose control of your ether uh however good Lido are you are handing it over you're handing over your ether to a pool of ether and you're getting effectively an IOU now for individual small investors less of an issue for large institutions this is a No-No it won't get past the compliance Department there's also some other issues which are very interesting regulatory issues um you're in the pool the pool gets tainted with tornado cash it comes tricky so people don't want to necessarily large institutions don't want to be involved in in a pool system and of course there is a tax thing in some jurisdictions going from one token to another can be seen as a disposal and a taxable event so that is something I think probably a lot of Lido users probably don't realize that many jurisdictions put that as a as a taxable Within Okay so so what is an uh an alternative approach we've been throwing this idea around for for a while but the thing is is you know there was this little thing called the merge that sort of kept us busy for a while but now that we're sort of over that and you know it is I think Danny said you know it was uneventful which was for a staking company that's what you want uneventful so now some of these things come back on the radar and also they do require some extra changes to the evm in order for some of this stuff to work but our idea is that we make validators transferable so that they can change ownership now when I say transferable I'm not talking changing staking company the the validator will stay with the same staking company but you can transfer the ownership to somebody else and um at the moment the way validators work you have a validator key and that's the thing you have online to create your rewards and you have a withdrawal key the withdrawal key is just a regular ethereum in fact it can be ethereum one address or it can be a BLS address but when submerged once the um once you get past to the withdrawals so let me just go Um it gets to withdrawals this thing doesn't have to be just a withdrawal key it can actually be a smart contract and we've already got a smart contract that handles this sort of thing very well nfts so we could use an nft smart contract which issues a receipt to the to the validator and now the validator is transferable it can be moved around and it's also an energy that's actually valued something it's not you know it's not a jpeg underneath it has actually got 32 East under it so so this idea um once you've got once we create this smart contract then we've got a lot more flexibility and it's in one way it's not up to us to decide what the market does with this it's just quite interesting to put the great thing with D5 you put stuff out there and see what happens but you know I've got a couple of my own use cases where I think this would be particularly useful for example you've got a large institution wants to buy a thousand validators and somebody wants to sell a thousand validators now you can off-board it it takes at least 15 to 24 hours if there's no queue or and then somebody else on boards it's quite heavy on the network as well for ethereum to do that and also both sides are losing accrued interest so if you think if this is a bond you know you're losing money for for the 24 hours and if there's a cue it could be a lot longer so wouldn't it be more convenient if there was a marketplace where two people just bought the validators off each other this instant settlement uh the ethereum network handles it extremely well it's just a transfer um we've still got the same validators running and you know it just becomes a much easier way of large institutions to be able to buy and sell I mean clearly the marketplace has got to have liquidity to do this but you could imagine you're just about to get rid of a thousand validators you would go to the marketplace first if there's a liquidity you're going to get a better price or you're likely to get a better price than just unwinding it because you're going to lose a day's worth of interest and Rewards um some other stuff you could do with a receipt and I don't know if this is an advantage or disadvantage I'll let you decide but it could be used as collateral in defy so all them wonderful things and the great thing with this it comes with a revenue Stream So anybody's into Financial engineering could come up with many different views of ways that this could be used and it could be very interesting um and I think a marketplace where buyers and sellers can come together I think would be very interesting um and as I say it's for the network for the ethereum network it's also better not having these ether huge amounts of ether coming in and out of the system and and you know why wouldn't this why wouldn't this be the better way of transferring and providing liquidity to staking assets without you know without going through the uh the the on and off boarding Okay so what are the benefits I mean the biggest one is you still own the ether it is a receipt you still own it it's yours it's not pulled okay so it means decentralization because you know we we're you know people are not pulling this thing into library or into another pooling system so um and the other thing with this is something as a staking company we think about if you're a good staking company in Lido or you're a bad staking company nobody cares because all the rewards are just mixed with this we start to find out who are the better ones because the marketplace can monitor it the marketplace can can do uh can look at all the stats for all the different uh validators and clearly we think that's a good idea and uh it's something that also if you think of these things are starting to look very much like bonds credit spread could actually be these are like credit spreads so the the staking uh the staking companies become credit spreads and I think that would be quite an interesting Marketplace I think this is also the vanilla Vision we've got but I could imagine we could take a step further on a lot of this stuff and we could build insurance we could build fees we could be a lot more because now it's a smart contract so everything's up for grabs really so why hasn't this already been done the obvious question can't do it or we can't do it easily we can't do it easily the biggest problem is we've had the merge and so what's the problem with these two things and now talk to each other but they don't they don't we we did the minimum to get the merge over the line and so at the moment the evm can't talk to the beacon chain so we've got no way of being able to test the state and test you actually own that validator so there is actually an EIP which is is aiming for Shanghai which is the 4788 and what this does is produces an OP code for the evm which allows you to see the beacon route the state route and what does this able to do you can build a miracle proof and you can prove the validate is yours and then you build the nft so it just needs this little bit of glue and then we're away and hopefully this will get included into that uh Shanghai and we will be testing some ideas around this yeah so so really that's the main thing of this not being done is just we're waiting for the next the next thing for the you know this this EIP to come through hopefully in the next uh hopefully in in the next round of updates right potential issues there's always going to be some um you know it's the same thing as the advantages it can be used in defy you know and you know we we see we've seen the good and bad of that so let's just be wary of it um and we could have bugs it's a smart contract you know I've seen a few of them as well in the last few years I think with the bugs thing though this stuff is used in the standard technology we're using an nft contract we're not doing it we're not putting any innovation in new stuff we are gluing it together differently so clearly lots of audio around that but we're not going out and building some new smart contract we we're using technology that we've all been using for the two or three years right and that is the end of my talk as I say it was quite lightweight to give you a rationale of why we of why we're looking into this um if people want to get into the weeds please come and contact me we um you know we're looking for getting more staking companies involved this thing only really works if other staking companies it's a network effect you know it's if it's just a test and it's not going to work so so clearly we need other people involved to build the tools out to to make this you know if if the community thinks something like this is is an alternative and even if it takes a small percentage from people using Lido that's going to help the decentralization and I think I've thank you Steve we have four or five minutes more so maybe a question from sure yeah so here um thanks for the presentation so you mentioned that uh just taking a liquid stacking tokens are subject to attacks here we are also like receiving a receipt that receipt will include some yield right for staking rewards so yeah I think it's the same disadvantage here correct you mean from the tax point of view right so it could be I mean it does depend on jurisdiction because you could argue and you know we're I'm not know much about tax but you could argue that a receipt is different from a token transfer you know it's all you're doing it is like a receipt for goods I know the UK government doesn't do that so I know you're right in that fact but there is a lot of debate going on about it but really there has not been a transfer of assets so that would be the thing I would like tax authorities to look at to go look you've just got a receipt you still own these assets right but you're right in that it's uh it's messy it's a messy it's a messy field and that's for the collateral I mean that sounds messy right because well because collateralizing nfts I mean nfts are unpangible by definition yeah so uh yeah I mean I mean NFD as a collateral for a defy I mean it is already done so and I'm not suggesting this is a good idea it's already done we've seen there are many platforms already doing this and you know it's not it's not for us to try and decide where the market takes this stuff it's it's just a point that you can use it for collateral and I'm sure somebody will do that so right thanks yeah hi sorry question but um I'm gonna take the chance to embarrass myself so validators don't they run with Hardware um is that a thing so how how are you then going to kind of transfer the hardware right so I didn't go too much into that but it is a good question because there's a certain assumption I've made in in the presentation this would be done by staking companies okay so we as intestine we would still be running it so it's not transferring from the point of a staking company so if you're if you've got a validator you're still and it's with us you're staking with the test and you're just selling it to somebody else so an attestant is still doing its job so the the hardware and all that stuff doesn't stay I mean a validator is basically made up of two keys a validator key which is what a testing hold and then the withdrawal key which the client holds so you know all you're really doing is is changing the ownership but what we're not doing is changing the people that are doing the validating have you all thought about what this looks like with shared operators inside of the nft so it's not just one staking company but it's a collection of people running together um I've not really I've I personally not really thought about that we've kept it very very simple in a way of you know providing some liquidity to clients who would need it this where this has really come from and you know it's just a way of taking the pressure off the network that you know it seems silly to me we've got a lot of validators coming in a lot of validators leaving and really it's one big organization once wants to buy it and another big organization wants to buy so it seems a natural way to do this I mean there are also some other things that like you may you know one institution may have all their staking with one company and another institution has all their staking with another company and I can imagine for risk management they may actually swap some of their validators over to split the risk so you know I'm sort of making up use cases but this is the sort of thing that once you've got a Marketplace then then and it's liquid enough I think people would probably use that sort of facility uh so you mentioned Lido I'm curious if you think there are ways to synergize with existing like pulled staking uh derivative projects um or if like if you have any thoughts in that direction I mean definitely we talk a lot with light out I mean um we we write a a software stack called vouch if any of you are familiar with but vouch 22 of the Lido operators use vouch so that we there is constant communication and with these guys um whether they will get involved in certain things but certainly lied I don't want to be 40 of the network I can tell you that so it's in their interest to have um you know options that work to to spread the load so you know we talk to them about various different things so they will certainly be in the conversation uh could do again I think let the market decide all right because you know you could would it make sense to do many things with this stuff I think I think being able to transfer ownership is the big use case for for my thinking but you know there I can imagine there'd be lots of funky projects a product built off the back of it so yeah I was somebody involved as a thank you thank you so much