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A | Danny, I can guarantee there are going to be a lot of folks who are designers of the Lido protocol and participants in their community who listen to this podcast. I think many of them listen to our episode with Hasu as well. What would you say to them? What would you like to see Lido do? How can they fix this? Welcome ... |
B | Certainly not. And this is very different from the warring tribes that I think most people in the world of crypto Twitter are used to. Ethereum fundamentally is a place for multiple groups of people to come together and exist in the same space. And I think this is just an emphasis, a disagreement on a specific vision f... |
A | But first, before we get to this episode, we disclose bankless holds small investments in Lido and rocket pool. And both David and I have angel investments in some smaller staking startups. We, of course, are very bullish Ethereum and believe very much in the decentralization of this network. We are long term investors... |
C | Great, thanks for having me. |
A | All right, here's the question. Is Lido a threat to Ethereum? Danny. |
C | So we're nowhere here to talk about Lido. I'll talk about things in the abstract, but also about Lido. Yes. I mean, anything that stands to take over that much amount of stake, that much amount of mind share, that much amount of systemic nature of the protocol is a risk to the protocol. I mean, that's just plain and si... |
B | Usually things that exist in the app layer stay in the app layer, but there's a handful of protocols out there that Spanish Ethereum's app layer with its own protocol layer, lido being one of them. This is why Eigen layer and restaking has caught the attention of many EF folk as well. Some things go down into the proto... |
C | Yeah. So first of all, I'm very proud of the coining of the LSD term. |
B | I'm very, I agree with you. It's sad that we can't use it. |
C | You made that up. I understand the evolution. I believe I made that up. And I think that's my biggest contribution to Ethereum today. I understand the transition to t. Some of them maybe you could call derivatives, some of them are tokens in other ways. The blanket term is nice anyway. Yes. I don't think anything has d... |
A | Yeah, so I want to ask a question here. So I think you're making the case and we'll probably return to that theme that so much of what protects ethereum actually, and what keeps it decentralized and what keeps it corruption resistance is actually what we call on bank list kind of the layer zero, which is, which is the ... |
C | I agree. And it's interesting you bring up the government analogies here. Something that I've been thinking about a lot is the importance of disjoint and disentangled sets across the Ethereum stack and the Ethereum community. This is deep analogs to maybe the us system of government. You have different parts of governm... |
B | I think what I'm hearing from you, Danny, is an advocation for pluralism, which I would say is a pretty deep core principle of Ethereum. We enjoy having many different groups, many different tribes, many different apps, many different protocols exist cooperatively in the same space. I would say that's a pretty deep cor... |
C | Yeah, we see that. We've seen that as a core tenet of how client development is done, because that is a very core part of how the protocol is governed. And if you just had one client, say, bitcoin core, then bitcoin core becomes there is no difference between what they say and what the protocol is. Instead, we have the... |
A | Yeah. It's not just pluralism, it's also the idea of checks and balances, which is very important. Right. So you can't have power accrue to one particular group necessarily over another, and one group can kind of check another group. |
C | Yeah. And I think about this a lot in relation to staking recently, and I plan on writing a piece about it. But as I think about it, it's also something that I've thought and realized is very important in the app layer as well. Right. Like, if you only have one stable coin and it's a massive amount of the Ethereum econ... |
B | I think what we're also advocating for is some semblance of decentralization in the properties that makes up Ethereum. Right. If we have a diffuse set of LST tokens rather than one central one, well, then this is a check on the ability of corruption to be able to find a foothold in the Ethereum system. Because if one L... |
C | Yeah, I think Uniswap is actually done. It's probably one of the best instantiations of what I hoped was going to happen on top of Ethereum. Small modular components that do one thing and do one thing well and are not generally changeable, upgradable, even. The upgrade path for Uniswap has always been, we'll make somet... |
B | Yeah. I want to define the risks here of a dominant LST around Ethereum. I know that there are thresholds, one third, one half, two thirds of what someone can do if they have that much stake. I want to know if. Is that the risk that you are concerned about, or are there other risks? What are the risks that we can defin... |
C | Those thresholds are certainly very important. And in how it's worth thinking about these, I think that there are risks beyond just thinking about those. And they compound in the way the rest of the ecosystem kind of falls around them. But I guess traditionally, just what can happen at one third? At one third, essentia... |
B | Block chain in history, but a block tree, as you get to the present, right? |
C | So, if you look at any head of the chain of the tree, it defines a chain, right? And so, if we all agree on the same head, we agree on a chain, but potentially, the head could swap from a to b under certain economic or potential network latency conditions. And so, what's really nice about the purposetic protocol is on ... |
B | Don't you control every lever that Ethereum has? Like, you are ethereum. |
C | Yeah. Without social intervention, you're in God mode. Yeah. |
A | How much God modes. Like, could I just take money from David's ETH address? |
C | That's an important, yeah, that's an important nuance. So you don't get, you don't get God mode over cryptography. Right. So I can manipulate the chain, I can decide what's included in the chain. I can potentially reorganize the chain such that, like, what you thought was included is no longer included. But I can't act... |
B | Okay, so these were all of the theoretical risks, I would say the possible technical risks, but what about maybe the ones that you're more concerned about more specifically, like the actual practical risks? Risks. If I'm Lido and I want to attack Ethereum, what am I going to do? And what keeps you up at night? |
C | Yeah, the thing that keeps me up at night is certainly one third becomes this critical milestone of, wow, shit, we're going to let it happen, aren't we? 50% plus. Actually, some of these reorg multiblock mev all this stuff in a system like Lido or others, where you certainly have disjoint node operators, but you have t... |
A | So, Danny, just to make sure I'm understanding this, like, to summarize, under one third, we're kind of okay, but the closer we creep to one third, the worse it gets. But at one third, they can effectively. One entity, let's assume it's not Lido, because that brings in other discussions. I think we want to get in there... |
C | It's not, like, immediately obvious exactly how you reap the benefit from that. It's not, like, necessarily incentive compatible, unless you were delaying the outcome of an on chain lottery. And that helped something. You can think of scenarios in which that becomes profitable and potentially valuable to do, but it's n... |
A | And that's interesting, because we could very well tip over one third, and then people will look at that and nothing will have happened, right? So maybe all of the naysayers will be called chicken littles, because, hey, Danny, we're over a third, and nothing bad happened. See, we told you it'd be okay, but then you sta... |
C | And there's censorship in the way of are some boogeyman transactions making on the chain. There's also censorship in, like, the. Oh, you know what? If these two operators, which are bound in this same kind of payout set, if we actually just censor this block in between us, we're going to make way more mev. We'll do tha... |
A | Right? We get kind of like Robin Hood type, front running types of situations where maybe our corporate overlords reap the benefits first or something like this. And then at two thirds, it's just all bets are off. I mean, this is no longer ethereum and can't purvey any semblance of being a credible, neutral infrastruct... |
C | Yes. |
A | Okay, so I think I want to, throughout this conversation, since we've had a conversation with Hasu, and he was kind of saying, hey, these concerns are actually overplayed. I wanna inject some of his voices as sort of a counter to this throughout this episode, if I can, because I think some people who are maybe listenin... |
B | What would you say to being permissionless too? |
C | Yeah, Lido, something like lido becomes like a stratum for cardinalization. These entities within the context of Lido have a unified incentive. It's not like I make my money for my mev, you make your. And that kind of stuff. All of the money gets channeled in one place and we split it. And so, for one, within the conte... |
A | Okay, so there's some cartelized behavior. Let me ask you about maybe some other mitigators that someone like Hasu might bring up at this point. Because some people would say, okay, Lido has actually listened to the layer zero, right, and haven't done everything that the layer zero wanted, including kind of like caps, ... |
C | Because those are going to have to meet performance metrics. Like, there's no way that they're going to allow an operator set, a permissionless operator set that reach profitability goals. And so again, we have this. Like, if I have 100 permissionless operators that come in and they don't join in on cartelized behavior... |
B | Why is having a set of validators that's defined by profitability a bad thing? If we're talking about ETH stake. |
C | It could be a good thing, especially if you're below a third, especially even if you're below a half. But once you go above those thresholds and you have the ability for the operator set to do things that are what I might claim, and many would claim are malicious, but extra profitable, now, once the set of that validat... |
B | You saying that if everyone was under the threshold, the one third threshold, then optimizing for profitability is fine. But what that might lead to is that if the culture and the values of what our staking system is, is defined by profit maximization, once we have the powers of being pass a third past a 02:30 thirds, ... |
C | So even sub. Yes, that is, but even sub one third, if you move into a profit maximization regime where you're trying to use an objective profitability function, it incentivizes those 29 operators to convert because multi block MEV is more profitable than single block MeV. So even if you have 20% of the network and you'... |
A | Another thing I've heard from the community who are more proponents of Lido's strategy is this idea that we're talking about one single entity in three votes, this token weighted governance that I think you're most worried about. Danny. Well, we can find some ways to give some of this power back to Lido token holders. ... |
C | Some, some, yeah, I mean there are, there are gadgets that can and should be layered into any sort of, sort of LST system like this to make a safer. So maybe the boogeyman jurisdiction that knocks on three doors and says, you now censor XyZ transactions. Maybe if the stake these holders are actually proliferated across... |
A | This is a wild idea and certainly not something that's been proposed from anyone in the Lido community, to my knowledge. But what if Lido also gave just regular EtH holders some sort of veto power as well? Would that mitigate things? I'm not saying anybody on the lido side would be willing, but we're talking about a go... |
C | Yeah, and that goes back to the disjoint social sets, that would probably help. But if Lido wants essentially all eth to be steak teeth, and I wants all staked capital to be Lido stake capital, and wants all eth to be staked eth, now we no longer have disjoint sets, and we've kind of converged the incentives here in a ... |
A | Part of your concern is that they're unwilling to do any of that, right? |
C | Yeah, and part of my concern is that in a high mev regime in the current, you know, there's two things. There is lido all of staked ETH and is staked eth all of ethan. And I think both of those things we should attempt to hold as not true. So that we have these disjoint sets, that we have checks and balances. And so Li... |
B | So with this conversation, I'd like to ask how certain you are that this is a risk that the future will provide us. Like, are we on a crash course with this poor outcome? So do we need to actually divert from the track that we are on from the path that we are on? Or is this like, oh, this might happen one day, so we sh... |
C | It seems like the Lido mind share is quite cavalier and disingenuous about the risks and wants to gobble up all of state capital. Lido has, since I wrote that piece over a year ago, fluctuated at 30 to 32.5% or whatever, maybe even 33% close to that one third threshold. I saw a graph, I think that kind of with like som... |
A | And so some of those numbers for bankless listeners that Danny was quoting between 30 and 32, that's the percent of market share of all staked ETH that Lido has right now. So as you can see, pretty close to that one third 1% away and kind of hasn't quite gotten over that, but dangerously close to that 1%. Of course, ev... |
C | And I. I think you're right. Like, the. The way that, um, client teams are positioned is they can think much more about the health of the network independent of, you know, a profit motive. Like, yes, I think there's a reason that a lot of them do this beyond just, they want to build Ethereum. Like, you know, whether it... |
A | Right. |
B | This is the whole tragedy of the Commons Molochemdez trap issue. I think the classic example of a Moloch trap is there's ten fishermen around a lake, and if they all fish at 100% capacity, then they're collectively drained the lake, and then no one can fish anything. And so if they all self cap at 70% of their capacity... |
C | Yeah, it's hard to say exactly how things would play out depending on initial conditions. One, if myself and others had the foresight of the impact of some of these things, potentially some of the design of the system might be different, or there would be a lot more awareness around capital allocators from the get go. ... |
B | The hazel argument is that market forces just point towards the inevitable future of one dominant LST. And I kind of agree with that. Eventually, in the fullness of time, there will probably just be one LST because this is where market forces point towards. And so my kind of strategy is like, well, eventually there wil... |
C | Yeah, I think this comes down to layer zero. If we're willing to layer a centralized system on top of a decentralized system and make it as good as we can, then we probably shouldn't have built the beacon chain and we should just have a consortium where Vitalik and a handful of people picked a bunch of options operator... |
A | But it is your contention that having Lido at above 30% is better than having, say, a centralized exchange above 30% not to pick any one centralized exchange. So that is a better scenario. It's just not. Okay, agreed. Okay, Danny, so let's move the conversation into how we solve this, and there are maybe various mechan... |
C | In general, there's anti correlation incentives. If an entity is slashed, it scales with the amount with which they're slashed, up to, you know, if one third is slashed at the same time, they lose 100% of their capital. Similarly with offline. The more that is offline at the same time, the more that you stand to lose d... |
B | Draw drill into why this is a thing. This is because any group of people, like, all get slashed all at the same time. It's assumed that they are doing very similar homogenous things that would be considered the opposite of decentralization mechanism. |
C | Right, right. Well, and to make a network fault, to finalize two conflicting histories, you have to have a minimum of one third contradict themselves. And so when they contradict themselves by signing two different histories, that becomes a slashable offense. And so if one third does that within the same period of time... |
A | That is the longer term profit maximalization I guess angle. There's multiple forms of profit maximization. There's short term profit maximization, which is maybe the one month to two year, three year type timeframe. Then there's the ten year profit maximalization outlook. And I think your argument is that if you have ... |
C | No, certainly. And because ultimately, by allocating capital and kind of degrading Ethereum's consensus, we degrade the guarantees of Ethereum, we degrade the credible neutrality, we layer a governance layer on top that can be captured and increase the chances of the consensus not doing what it's supposed to do, not do... |
B | I want to get into the action steps for how we can actually preserve Ethereum decentralization when it comes to eth stake, because I know this is a very big moloch problem, but I want to do more than just screaming into the wind about like, hey, let's value decentralization more. There's a bunch of different players he... |
C | So solo stakers, in terms of the capital being allocated, probably aren't going to move the needle in terms of these key thresholds, but they're incredibly important to the resilience of Ethereum in the event that there's a disaster and lido, essentially the community soft forks Lido out or something like that, then wh... |
A | What sort of things can Ethereum protocol devs do to sort of stop this? Right? Because I can hear, once the devs do something. Well, I can kind of hear the voice of Hasu a little bit, and he's basically saying, okay, you guys are being starry eyed dreamers again. Capital will consolidate. There will be network effects ... |
C | Yeah, as much as we possibly can. |
A | Okay, so how do we do that? Are there any solutions there? Can we enshrine, could we? I read a recent Vitalik post about what to Enshrine, what not to enshrine, and he put together the tantalizing question of what it would be like to actually enshrine lsts inside of the protocol. Do you think that's an answer? Tell us ... |
C | Right. So, certainly could go down the path of figuring out how to enshrine lcs. Essentially. Like, I want to stake, I want it liquid, and I want it fungible with others. That is a hard, it's kind of a hard economic problem and like, how things become entangled there. What do you do if things aren't necessarily profita... |
A | Yeah, yeah. I guess my take on this high level hearing about this from the solution side is there's really three things that really can be done and two of these are short to medium term, and then one is the long term longer term. And the two short to medium term are education and awareness. And pushing back on the laye... |
C | That real quick, importantly, the system is imperfect. The system will probably be always imperfect, but the system can be better. And we need to make sure that we have the education now so that we don't reach enter into irrecoverable, unhealthy equilibriums that even when we have the better tech, the better research, ... |
A | Yeah, definitely. The price of freedom is ever present vigilance. So is the price of decentralization. We don't get a lot of shots at this, certainly. So the layer zero is important. So are competitors, by the way, which this is kind of a general call to competitors to enter and start building market share and provide ... |
C | I don't. I don't have the answer. I know that there are answers and we must get there, and that that's going to be like a huge component of the conversation and the design landscape. Overdose. The next couple of years. I will say that the, you know, there's going to be the combination of attempting to make the incentiv... |
B | There's a couple of perspectives I want to bring to the table brought to me by Hazu. He threw a number of questions at me, and I'll read out two of them. One of them is, when the institutions come, where do you think that money is going to go? Not where you hope it will go, but realistically, where do you think it will... |
A | And they're also saying, and also, guys, we're improving, we're making better. |
C | Yeah, yeah, great. |
B | Respond to the vibe. |
C | I said earlier in the podcast, it's a good thing that Lido exists. It's a good thing that there's competition between Lido, centralized exchanges and other things. And Lido, under certain thresholds is a boon to the network. That's a good thing. It is a very good product. It's proven itself to be well developed, pretty... |
B | Danny, you're a pretty calm, collected guy, I'd say. I think. I'm pretty sure you do yoga, so I don't really see you like getting stressed. But if you had to illustrate the magnitude of the alarm bells or like the color of the siren or just how severe we should be really considering this problem to be, can you illumina... |
C | So layer zero is very strong today. And we can rely on layer zero for a lot of things today. Layer zero lets us exceed one third today. Its pretty fucking disappointing if it exceeds 50% failed. |
A | Okay, so we're at maybe yellow. You know, there's, there's, there's red, orange, yellow, blue and green. Right? We're not, we're not. I'm not feeling green from this conversation. I'm not feeling blue from this conversation. No, I'm feeling. I'm feeling yellow. And you're, you're maybe saying we're right. |
B | Next door to orange. |
C | No, we're orange. |
A | We're orange. |
C | But again, yeah, like if redd, like, I feel like red is red. Isn't is red an alert or like, it's. Like it's a disaster. Red is red alert. |
A | We are under attack right now. |
B | Yeah, we are under attack. We need everyone. All hands on deck. Moment. |
C | Yeah, I don't know. I mean, it's hard. It's hard to. Depends on how you frame attack. I know that some like to. Like to say that it is an attack attacks don't come in all of the forms that we always think of them. Economic attacks are like probably the most real attacks in crypto. So maybe it is. |
A | Danny. I can guarantee there are going to be a lot of folks who are designers of the Lido protocol and participants in their community who listen to this podcast. I think many of them listen to our episode with Hasu as well. What would you say to them? What would you like to see Lido do? How can they fix this. |
C | Self limiting. While we're in this interim of trying to better understand and make sure that the protocol is safe on many guide time horizon is probably a good thing. I do think that Vitalik had a very interesting kind of offhanded proposal like a year ago. That's like maybe it should be a social norm that fees on this... |
A | What's in it for them, Danny, to do this, to become better? Ethereum aligned. Is there a carrot? Is there a stick? |
C | Yeah, the carrot is Ethereum becoming the backbone of global coordination and finance and you not wrecking it between now and then? |
A | How about the stick? |
C | The stick is you destroy the credible neutrality of Ethereum and you're going to. |
A | Destroy your product, Clay, as we end this. Danny, one question I have for you, as we zoom out and look at this system, this beautiful thing called Ethereum that we've created, and congrats on having such a vital part of doing this. I know it's not you. And you'll be first to kind of deflect some of this gratitude to a... |
C | I think so. I think so. If you talk to the robust incentives group rig like this is priority number one. This is what they're thinking about. This is what they're researching. This is what they want to be working on design from now until it's fixed. And that's very valuable. It's very important. And I was actually talk... |
B | Danny, if we need to continue this conversation, who do you think we should talk to and what would we talk about? |
C | There's definitely a bunch of emergent LSD protocols that it's probably worth giving some visibility to. What's the difference? What are they doing? Why are they doing it? I don't necessarily need to make a bunch of ad spots for them, but I think there's probably legitimate, technical, interesting conversations to have... |
A | The bitcoiners will say we should have stuck with proof of work. Danny, what do you think of that? Any truth to that? |
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