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Speaker A: Welcome to bankless, where we explore the frontier of Internet money and Internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan. Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Lido has over 30% ETh staked righ... |
Speaker B: The need for this episode has been crescendoing. I would say there has been a growing conflict with Lido, between Lido and other staking as a service organizations out there. And some of it is real and concerning. And these concerns have been elevated by some in the Ethereum leadership, some strong Ethereum ... |
Speaker A: Yeah, and as always, of course, we have a debrief episode where David, I can't wait to talk to you about this. There's so many ideas in my brain about this. I want to get your raw thoughts that's available to bankless premium subscribers on a premium RSS feed. You can click a link in the show notes to access... |
Speaker B: We were really excited to host this conversation with Hasu. Like Ryan said, he's been on the show a number of times before. I have a ton of respect for the man and the way that he thinks. So I think this is going to be a very enjoyable conversation for the broader Ethereum ecosystem and hopefully can start m... |
Speaker C: I'm very excited to be back. David Ryan, it's a pleasure. |
Speaker B: Yeah, I think this is a conversation that I think all of the crypto space, I think generally Lido gets a bad rap, and maybe some of it's justified, maybe some of it's not justified, but I'd like to actually explore the contours of that conversation and try to figure out what's reality and what's narrative an... |
Speaker C: Yeah, let's dive in. |
Speaker B: So maybe we can start with this. Hazu, do you think Lido has an unfair rap in crypto? Like, do you think the perception of lido perhaps doesn't, it doesn't deserve the perception that it receives? |
Speaker C: I think it's a nuanced question. I think that. So just to already kind of lay out what I guess the controversy is, the argument against Lido is that it's the biggest staking protocol, and because of its size, it can have a small but nonetheless possible impact on the validators of Ethereum to behave in certa... |
Speaker B: To explain some of the reasons why this debate is so big, is I think if you rerolled the dice of Ethereum, you would have this debate no matter what. Just like how you said Ethereum, I totally agree with you. It's the world's greatest asset. But the only thing that's better than ether is of course, staked et... |
Speaker C: 100%. And I really like how you said that. If you reroll the dice of Ethereum and you play through the history a million times, then I think in virtually every case you would have the same debate because you had ether. And then you go to proof of stake, you create the ability to have staked ether. And this a... |
Speaker A: I think presenting it as a market challenge is the right way to frame this. Too often I feel like in crypto, clearly, sometimes there are bad guys and there are good guys in crypto, but sometimes crypto becomes overly tribal and we attack people and individuals and entities. At times we should be attacking w... |
Speaker C: Why? |
Speaker A: Because the market wants to stake their ETH. If they are eth holders in order to receive the yield. And they want that eth to be as fungible and as usable as possible. So we have these liquid staking tokens that are staked in ETH that we want to use across other things. And so the problem with that is it cre... |
Speaker C: I'm so glad that you said this. I was ready to make the same in my head, I wanted to bring up the same thing because you already had this once, in the sense that there was the DAO, and I think it had between 15 and 20% of all eve deposited. Right. It was this insanely popular project, and then it had a secur... |
Speaker B: $10 million or 10 million east. |
Speaker C: I think. I think it was. I don't know. I think it was $10 million. I can't remember. |
Speaker A: It was close to one in the same back end. |
Speaker C: Some relatively. Some relatively small amount, like maybe it was 1% of ETH, maybe it was $10 million, I'm not sure anymore. But the point was then when the ICO boom happened, the first projects were basically following this guidance, and they sold out some within one or two blocks and within minutes, basical... |
Speaker A: Yeah, I think that's a great point, Hasu, and I want to tap into kind of two points you made. So one is, it seems like you can't enforce this on the social layer. Right, Vitalik or the community saying, hey, out of the goodness of your hearts, right. We'd request that you wouldn't pool more than 1% of ETH in... |
Speaker B: Moloch doesn't listen to that. |
Speaker A: Moloch does not listen to that, wrecks all of the plans. And of course, the market forces take hold. So that's one of the points you're making. The other point I think that is important to make here is that this pattern of too much eth being pooled in one place plays out and has played out in other cases. So... |
Speaker C: It's 30. It's 30% times 20%, because 20% is the number of all EtH that's currently being staked on the beacon chain. |
Speaker A: Okay, so it's 30% something percent. So about. About five or 6%. |
Speaker B: 8 million ether. |
Speaker A: Okay. |
Speaker B: 7.9. |
Speaker A: Okay, so 8 million ether. Right. And so if something bad were to happen to that set of smart contracts, like, what's the outcome of that? Let's say an exploiter, like a curse. Say there's an EVM style issue. We've seen that this week. There's some kind of exploit or drainage of the smart contract. Like worst... |
Speaker C: Yes, absolutely. So I think this particular risk that you outlined could not really happen because the eth cannot be withdrawn from Lido because it is staked on the beacon chain. And the beacon chain has a very long withdrawal delay. So at least there's time to deliberate what to do. So you could not have a ... |
Speaker B: I think the real crux of the issue here isn't that there's a honey pot of ether, but it is what happens when a staking organization has a certain amount of ether staked. Specifically, there are a couple of thresholds in the mechanics of the way that proof of stake works that gives an operator who has control... |
Speaker C: I don't have all the numbers in my head anymore. It has to do with. It has to do with basically preventing the chain from finalizing. Something about the attestation committee. I'd have to look it up. But I mean, the overall rule is very clear. All consensus protocols rely on honest behavior to a certain thr... |
Speaker B: I think that is perhaps the crux of this conversation and why we're having this conversation. It's about the relationship between Lido governance and the staked ether and its node operators. I want to really just quickly tie off the conversation about the thresholds and proof of stake, because these two thin... |
Speaker A: And that just means stop the blocks from finalizing, David. |
Speaker B: Right. The blocks still propagate, but they are nothing. They are not beholden by the weight of ethereum proof of stake. They can be reverted without ether being slashed. |
Speaker A: That's what you can do if you have over 33%. |
Speaker B: If one entity has over 33%, that is what they can do. And then if you have 66%, you basically are Ethereum. That is like a 51% attack for proof of work. But in proof of stake is 66%. So if one entity had 66% of all ether stake, they get to basically choose the outcome. |
Speaker A: You mean like reverse blocks or that sort of thing? Bit more. Are we getting over skis here? |
Speaker B: Yeah, if I start talking any more in this direction, I'm going to trigger some of the Ethereum devs. But this is the direction directionally correct. |
Speaker C: They can probably do some kind of reorganization. I would agree. What you cannot do still is make any kind of invalid state transition, because. |
Speaker B: That'S the correct way. |
Speaker A: Correct. Yeah. |
Speaker B: You cannot sign transactions on other people's behalf. You can just do a lot else though. And so these are the risks, right? And so this is the protocol risk. And so importantly, it's worth noting the philosophy that Ethereum has about governance, which is to not have it on chain at least. And so there is no... |
Speaker C: What would you say to this? I think if we want to be precise, then the concrete risk is that the Lido Dao makes some kind of governance decision, introduces some kind of policy that mandates that all of these independent, not operators who have their own completely independent motivations and stories and uti... |
Speaker B: Right. So inside of Lido, there are 29 node operators. And what you're saying that even if Lido governance voted to nuke Ethereum, you would still need to coordinate the 29 or maybe 27, almost the complete majority of all lido operators, you would need to coordinate them to even follow through on that? |
Speaker C: Yes, because it is really, really important to understand that all of these note operators, they run their own local infrastructure, they run all of the hardware. They run the validators. They decide what block to build, they decide what block to attest. They make all of these decisions. Lido has some polici... |
Speaker B: And then they pocket two ether. |
Speaker C: That would be stealing from users, right? So Lido has the responsibility to make sure that there's no way for the node operators to kind of break this like 95 five split of rewards. And they also wanted to basically look at what Ethereum wants. And so, you know, the Ethereum foundation and flashbots and the ... |
Speaker A: So I think that's an important point for listeners to understand. If really is lido is not one kind of entity. You can't look at Lido the same way you might look at all of Coinbase's stake or binance's stake. If lido gets this right. And what you're illustrating in this example is it is a loose confederation... |
Speaker C: And I mean, all of the decisions and the policies that are being made and the way that the protocol functions in Lido is completely transparent. And if as a staker, you don't like it, then you can leave. If, as a note operator, you don't like it, you can leave. But in binance, as a user, you have no idea wha... |
Speaker B: I think the relationship between a lido node operator and the lido Dao is really the crux of this issue, because we talk about, sure, it's an independent node operator is a part of the DAO, but it's also independent. And I think the question of how much voice does a node operator have independently versus th... |
Speaker C: Yes, you are completely right. If a node operator decides to leave, then they don't get to take the stake with them. The stake is with the Lido protocol. And the Lido protocol distributes stake to different node operators, and it also aggregates the kind of the bargaining power and so on of all of these diff... |
Speaker A: So just to clarify, does this mean effectively that I think there's like over $14 billion worth of St ETH as the lido staked eth token that's out there? Does this effectively mean that, that that pool of capital all has a vote here? Is that what that means? |
Speaker C: It cannot change the protocol. It can only prevent changes to the protocol. |
Speaker A: You get a veto vote. |
Speaker C: Exactly. |
Speaker A: And what's really cool here, I will say this is one cool feature of crypto. This is why crypto organizations can operate different than corporations that we're used to seeing in the real world. This is akin to Apple iPhone users, all of them having a vote like veto power, at least over some corporate kind of... |
Speaker C: Yeah. So it's something that has been in the works for, I think, nine months now. It's now in its fifth iteration. So it's progressing through the research stages. I would expect that it might go live before the year is over. So it's pretty mature already in its kind of research stage, but it's not live yet. |
Speaker B: So earlier, when we were defining the problem statement, one of the problem statements that people give towards Lido is that Ethereum is this no on chain governance protocol, and then if Lido has over 33% or any staking as a service system that has governance, has over 33% of each stake. Then all of a sudden... |
Speaker C: Yeah, I mean, if you compare it to the status quo, which is. I mean, they, they also have to monitor ado governance, but they have no way to stop it. It's a clear improvement because they still have to monitor. But they can stop it. Right. And only a small, very small quorum of them would have to watch. |
Speaker B: And do we know what those numbers are? 2%, 5%. |
Speaker C: So off the top of my head. So the reason I give two numbers is, I believe. So you want kind of. You want a number that is so low that it's relatively easy to trigger, but not so easy that it becomes possible to grieve the protocol and the other stakers. Yeah. So I believe the way that the fifth and latest it... |
Speaker B: Idea, and this conversation is all in vain of discussing about what happens if Lido governance is oppressive and an individual node operator disagrees and would like to exit. This conversation happens first. It is a line of defense that allows for the node operators to not have to take that responsibility on... |
Speaker C: Yeah. So in the future, if you wanted to leave, then you would basically have to exit, or the DAO. The protocol would programmatically exit these validators from the lido. |
Speaker B: DAO would programmatically exit a single lido node operator. So the DAO can exit a node operator. |
Speaker C: Not today. Not today. But it's on the future roadmap that the DAO can programmatically exit the node operators. And why is this important? Because otherwise, the flip side of this happens where a node operator can misbehave and just say, what are you going to do? In order to hold the node operators accountab... |
Speaker B: So just to really define the incentives here, the power that the Lido Dao has over a node operator is the income stream. The 5% of staking revenue that the node operator gets from all staked ether inside of its node. And so if someone is worried about the centralization effect of the Lido governance, really ... |
Speaker C: No, that's pretty much it. So it's getting access to more stake that is coming in and losing access to the stake that is already allocated to you. |
Speaker A: Okay, a quick question before we talk about entrance, because I'm curious how we get to the 5000 number that you're just talking about and when that's practical. But before we get there. Okay, quick, I guess a quick question on this. Is Lido forkable today? Like is it open source? Could people fork it? So I'... |
Speaker C: Is Lido forkable Lido classic? Barry Silbert's vision? So let me turn the question around. So if you, if you forked the USDC smart contract today, would it be forkable? |
Speaker A: No. |
Speaker C: Why not? |
Speaker A: Well, because you have dollars in a bank account. |
Speaker C: Okay. Yes. So Lido is the same. Yeah. So it has the eve, the on chain staked. If it only represents the staked that is also off chain from the perspective of the ethereum execution layer because it's on the beacon chain and it's in these, you know, hardware machines. Right. That are validating. |
Speaker A: Yeah, but you could you fork the code and then just two step fork the code, have a different Lido classic over here, and then encourage all of the stakers inside of Lido to exit withdrawal. And I guess there's a penalty, there's a cost because everyone has to withdraw. So there's some capital costs in doing ... |
Speaker B: Yeah, but then aren't you just competing with every other staking as a service Dao startup that is starting from square one? |
Speaker C: Yes, but, yeah, but Ryan is right. So yes, technically that would be possible. Yeah. So it would be possible to kind of write over validators, but it would have to happen voluntarily, right. From kind of the site that remains quote unquote in power. They'd have same as they could, you know, you could fork US... |
Speaker A: Well, I am not ready to launch Lido classic today, but maybe at some point, who knows? Let's ask about that question of we have 29 right now. And the concern about 29 node operators, even if it's not one entity, there's 29 is this confederation, is that it becomes kind of an OPEC like kind of a cabal. There'... |
Speaker B: So we can count to 29. |
Speaker A: Yeah, we can count to 29. It's, you know, 2029 is better than one. But you know what's better than 29? 5000. And you mentioned the number 5000. |
Speaker B: How can I can't count, if I. |
Speaker A: Can lido, make it permissionless to be a node operator inside of the Lido network? And. Or how do we get to 5000? |
Speaker C: Yeah, so I mean, first of all, I think instead of kind of creating an OPEC like situation or a cartel, so far, I would say Lido Dao has the policies that it makes is about breaking this kind of behavior and preventing it because that would extract money that otherwise would go to stakers. Right? So for examp... |
Speaker A: What is that bond denominated in? |
Speaker C: I don't know, it would depend. So I don't know that the module has been developed yet, so I have no insight into that, but I would assume that you do it in Eve. So when I look at Rocketpool, I always thought it's huge. Kudos to them, basically, I'm a huge fan. I think it's an incredible project and really go... |
Speaker A: So that would be the permissionless pool. So we get the permission pool, the permissionless pool. Was there another type of module? |
Speaker C: Yeah, so the third thing would be a blended version between the two, and there would be a module that has both professional node operators and for example, solo stakers in a permissionless way, but secured by distributed validator technology, or DVT. So what DVT is one validator is usually operated by one pa... |
Speaker B: Yeah. The thing I like about DVT, we've called it squad staking on this show before because it's a fun name and it's an alliteration. The simple way to put it, I'd say, is say you have one single central operator who's just extremely good at their job, and then you have four hobbyists. Well, you give all the... |
Speaker C: Yeah, I mean, it is a design principle in general, but in particular in lido, that we are trying to push complexity to the edges. So you want basically the core, which is the DAO and the protocol. You want this to be extremely simple and easy to understand, easy to audit, easy to secure. And if you have any ... |
Speaker B: So with ethereums like roll up centric roadmap, a lot of the EtH maxis are like, hey, all of those layer ones are going to just become a layer two on Ethereum. Would you say that all of these, there's a bunch of startup staking as a service systems that are out there, there's the long tail would you say that... |
Speaker C: Yes, I think that Lido is moving now to a platform model. The staking router is basically perfect for that because Lido has the most liquid staking token and it has all of these integrations. It is the most battle hardened, trusted staking protocol. What it has with this is basically the power of distributio... |
Speaker B: To happen on top of Lido, one of their main incentives as to why somebody would start a staking as a service DAO or organization a new LSD is because you get to issue the token. You get the LDL equivalent for that particular protocol. Right? The RPL equivalent for that particular protocol. Are you saying tha... |
Speaker C: Oh, so it depends what. So you said RPA, but do you mean I. |
Speaker B: No, I mean the actual. So going back to the comparison between like the ethereum layer twos, like why don't all just layer ones become a layer two is because it kind of neuters the power of the layer one token if they just become a layer two, or at least the perception of it. And so one of the incentives for... |
Speaker C: Yeah, you can absolutely have your own token. So imagine you have a module where you say I'm a node operator but I use eigen layer and for example I am a sequencer for this new layer two that's about to launch. So I have another income stream. So give me some eve, you know, I will do a good job and I will al... |
Speaker A: So I want to go back to something you were saying, you know, just, just now in this vision of Lido becoming a platform, like this is definitely the perception in the Ethereum community. Like Lido is going for it, right? They're not throttling themselves, they're not stopping at, you know, 10% staked or 20%. |
Speaker B: They're not self cap or a 30%. |
Speaker A: Staked or 40% staked. They are not stopping. They are going for a platform play. They are also saying, at least the case you're making is, hey, this is not as centralized as you think, even if we become a dominant, the dominant staking platform within Ethereum. Let me ask you, though, we kind of set this up ... |
Speaker C: Ryan, in order to answer that, I want to take kind of a step back. We've already kind of said in a few different ways. So, for example, really, the Ethereum community would like for there to be maybe ten different staking protocols, and they all share the stake equally. And we would also like for there to be... |
Speaker A: That's it? Just 6%? |
Speaker C: Yeah, yeah. And I mean, it was a high guess, so the number might be way lower than this. And so 94% professional note operators. So what happens as more users hold ether through their brokerage accounts, through exchanges, ether goes up in value. So people already get more freaked out about self custody as w... |
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