Season 5 | Episode 2
In this episode of Bell Curve, we are joined by previous Bell Curve Host, Hasu. Serving as Strategic Advisor for Lido DAO Hasu shares his unique perspective on the current state of Liquid Staking Derivatives (LSDs), Lido Protocol's history & decentralization efforts, LSD winner-take-all market structure, and co-opetition & restaking risks.
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Timestamps:
(00:00) Intro: Pre-Interview
(02:00) Interview Start
(02:39) The State of Liquid Staking
(09:09) The History of Lido
(19:58) The Evolution of LSD Market Structure
(42:17) Checks & Balances for Lidool
(53:14) The Current State of Lido Protocol
(1:02:37) Lido: The Winner Taking All
(1:10:18) Restaking & Co-opetition 
(1:27:09) Recap: Post-Interview
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Use code BELLCURVE30 to get 30% off Permissionless 2023 in Austin: https://blockworks.co/event/permissionless-2023
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Resources:
Dune Dashboard on LSD Market Structure
https://dune.com/maverick_cap/lsd-tracking

Sasha - Cosmos Booklet for Governance Decisions
https://twitter.com/culturalobjects/status/1541934637907329029?s=20

Vitalik - "The Bitcoin Maximalist" April 1st Publish
https://vitalik.ca/general/2022/04/01/maximalist.html
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Disclaimer: Nothing said on Bell Curve is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and any views expressed by anyone on the show are solely our opinions, not financial advice. Mike, Jason, Michael, Vance and our guests may hold positions in the companies, funds, or projects discussed.

All right, everyone, welcome back to another episode of bell curve.

Before we jump in quick disclaimer, the views expressed by my co-hosts today are their personal views, and they do not represent the views of any organization with which the co-hosts are associated with.

is construed or relied upon as financial, technical, tax, legal, or other advice, you know the deal.

This is the first interview episode of season 5, the end game for liquid staking.

Hasu is a special guest on Bellcurve at this point.

It's a fun callback for those of you who watched the MEV season where Hasu was my co-host.

Today we're going to get him on the other side of the mic talking about 1 of his other favorite topics outside of MEV, which is liquid staking.

Hasu's been acting as a strategic advisor for Lido for a period of time, and not only has great sort of high-level framings on the space for liquid staking, but in this conversation, we got to get into some of the nitty gritty with him.

So in the kickoff episode of this season, Miles and I introduced some of the big themes that we want to get a sense of this season, which is how is the market structure for liquid staking going to develop?

What are Hasu's thoughts around the self-limiting debate, which is this idea that if a protocol like Lido gets a very dominant percentage of the market share, should it actually cap itself?

We also talked about the impact of restaking and how that intersects in this sort of co-op-editive, co-op-etition relationship in between protocols like Lido and protocols like Eigenlayer.

Now, not only did we get some great high-level frameworks for how we should think about this and also went deep into the history of Lido and how it developed from a first principle standpoint, we also got into some of the more nitty-gritty sort of tactical ways that these protocols actually develop and think about things.

In particular, I want you guys to pay attention to the section where we discuss the role of decentralization and how it actually acts as an offensive tool for protocols like Lido.

So this was a really, really great conversation.

I hope you guys enjoy it as much as Miles and I did.

All right, everyone, welcome back to another episode of Bell Curve.

It's a special guest, I think, of Bell Curve at this point.

Got him back on the other side of the mic.

We're going to be, last season we talked about MEV, which is a subject that I know is near and dear to your heart.

And then I think we're going to be going down the road here on another subject that's near and dear to your heart, which is liquid staking.

We're deep in the heart of a bear market.

And it seems like liquid staking is 1 of the few areas in crypto, which is really taking off.

As of today, I'm looking at the TVL of Lido, which has just eclipsed 14 billion.

That's more than Maker and Aave, the next 2 largest by TVL on Ethereum combined.

So I think we could just start at a high level for this talk and just what is behind the rapid growth and adoption of liquid staking?

And then maybe we can get into kind of a state of the union and how to carve out What are the major buckets of different types of providers?

So I think the reason that liquid staking protocols have risen to the top of the TVL leaderboard, if you will, I think it's in the past, lending markets used to occupy that position because it's a place where people park their assets in order to get some additional rewards on the assets from lending them, for example.

But we are seeing in the bear market not very much demand to borrow.

And so not very much interest that you can earn from putting your assets into lending markets, frankly.

And so That's why I think overall the TVL of lending markets has been on the decline.

We are seeing that in MakerDAO in particular.

So DAI outstanding has gone down from 10 billion to 4.something billion.

The TVL inside MakerDAO has declined even more.

So now a lot more of the die outs sending is backed by stable coins or other forms of stable collateral such as treasury bids that are held in off-chain trusts.

And on the other hand, we have seen the rise of proof of stake.

So obviously, Ethereum went from proof of work to proof of stake, and that allowed users to now secure the network by staking their ETH.

And we are seeing an increasing demand to participate in that.

So for 1, users can earn inflation rewards from Ethereum, but they can also earn MEV and transaction fees.

And in spite of the bear market, these rewards have actually been quite consistent, much more so than what you can get from lending your coins.

The other thing that I would point out is that withdrawals have now been enabled from the beacon chain.

So proof of stake in general has been de-risked quite a lot.

So my thesis has been for a while that we would see more and more ETH being staked as a result of that, because it's as close to, I don't want to say risk-free, because it's not risk-free, but it's as close as it gets basically to the kind of risk-free rate of crypto, which is just staking your ETH, which is kind of the most secure and most decentralized asset on the protocol layer in order to secure the network.

And if you run your own node and you do a good job, or if you delegate that to a staking pool or a staking protocol, then yeah, you generally have, that's a pretty good kind of, it's a low return, kind of low risk way of using that asset.

1 thing I'd be curious to get your perspective on, Hasu, is this sort of recursive leverage trade that people run using a liquid staking token like Steeth.

So the idea being that you stake your ETH, you get Steeth in return, you turn around to a borrow lending protocol like Aave, you borrow more ETH and you kind of rinse and repeat and in that way sort of lever yourself up.

I guess there's kind of a spectrum of healthy sort of capital efficiency and wanting to not, you know, take, lose too much opportunity cost by staking.

Maybe that's the really healthy way of doing it.

And then you've got this extremely recursive leverage trade that you can run being on the not so healthy way of doing it.

So I guess how much is part, like how much of the market is driven by that more degen sort of activity?

And where do you sort of fall on the spectrum of, you know, not to, you know, put some sort of value on trading, But is this a particularly good use of liquid staking versus maybe, you know, it's excess speculation kind of.

So the first thing that I would say is that this kind of looping is not no longer possible today because you can no longer borrow ETH on lending markets for cheaper than you can stake it for.

And that's what you would expect in an efficient market.

That used to be different in the past, in particular, before it was possible to withdraw actually ETH from the Bitnichain.

And so someone who was holding stake ETH, or some other liquid staking token, they were incurring basically like a risk on, you know, the price of that moving against their ETH in some form.

And they could get liquidated on their position, right?

If they if they were using the liquid staking token as a collateral to borrow ETH and then the liquid staking token falls in value, then obviously you can be liquidated.

And because people were like looping a lot of times, the leverage was very high.

And so there was definitely a concern of kind of these cascading liquidations there.

You were asking whether this is a useful feature of liquid staking tokens.

We can go into how liquid staking is different from other forms of staking in a moment, but the ability for users to get liquidity on their tokens and to use that liquidity for whatever they want is definitely a feature of the system.

And likewise, I think it's good for people who put their ETH into lending markets, because as a result of this, the rate that they could earn on their ETH was driven up to the staking rate basically of what they could have earned from staking as well.

And so you could say people who are not comfortable maybe staking their ETH, but only putting it in a lending market.

So they were participating just the same from the staking yield in that way, which it basically further democratized access to staking through lending markets.

So let's get into, I'd love to get your perspective on what is a state of the union of liquid staking providers look like?

And maybe we could actually, we talked quite a bit about Lido in the first episode, actually, but I realized that we never really gave quite an overview of the history of the protocol and how it functions today.

And I know you act as a strategic advisor to the protocol.

So maybe we could actually start with sort of Lido and get your sense of the overview of maybe wherever you want to start, either the history of the protocol or what you're sort of focused on today.

And then maybe we can go and sort of carve out the existing state of the market structure and then try to poke at guesses at how it's going to develop?

So smallnit, I'm an advisor to the DAO, which is the union of the token holders that basically vote on decisions for what the protocol should do.

So Lido, the protocol was conceived a few years ago, before the beacon chain was even live.

And Back then, there was only 1 form of staking, I would say, really known from other blockchains, which is you delegate your, either you stake yourself or you delegate your coins to a professional node operator.

Some blockchains had in protocol forms of delegation that kind of made it cheaper, more accessible and also more secure because the node operator didn't have custody of the coins.

In particular, they were going with this kind of isolated blockchain that would run in parallel, which was called the beacon chain, right?

And that kind of ran its own, you could call it an incentivized testnet for multiple years.

Before it eventually the, you know, the proof of work kind of consensus was then stripped out for this beacon chain consensus layer.

And I'd still say, This is 1 of the most impressive technical feats in the history of technology, the way that the engine of this plane was swapped in mid-flight.

I still like this analogy very much because it's so fitting.

I mean, Ethereum didn't miss any blocks as a result of this.

And it's an absolute technical marvel, you know, the way that this worked.

So when it was clear that Ethereum would move to proof of stake, then of course, it was obvious that users would want to stake and they would want to participate in securing the protocol.

And however, you had several problems in Ethereum.

1 was in order to run a value data, you needed 32 ETH.

It had already been lowered from, I don't know what the number was before, maybe in a tune of several hundred ETH.

That was when Ethereum was the cheapest, much cheaper than it is today.

But even at the time, you know, when the beacon chain came out, that that was maybe, you know, $60, 000 or something.

So it was a very substantial amount and not many people had.

So needing to stake in increments of 32ETH was 1 big problem.

The second big problem was that people had to lock up their stake on the beacon chain and the beacon chain was expected to run for at least 2 to 3 years, maybe longer, before withdrawals would eventually be enabled.

And as we saw that estimate turned out to be pretty accurate.

So I think it took around 3 years between launch of the beacon chain and withdrawals going live.

But it was also clear that people would want liquidity on their stake.

So either 2 outcomes, either people could not get liquidity and then the number of people who would be willing to stake would be much smaller.

Basically, only people who don't would be comfortable locking up the ETH for many years with an uncertain outcome, if they will ever get it back.

Or people can receive, we sometimes call it a voucher, you know, for that represents this, if that they stake on the beacon chain and then they can find another seller, sorry, they can find another buyer for that and they can sell it.

Yeah, and we now call it a liquid staking token.

And the third thing, the third problem was that that Ethereum did not have this native ability that we talked about to delegate to to a node operator.

So you could find Ethereum did have 1 feature, it had separate validator key and withdraw key.

So the party who could withdraw the tokens could be different from the party who was using the coins with their validator on the beacon chain.

Basically, you needed to find someone, you know, sign a legal contract, needed to do kind of your own sourcing and so on.

And there wasn't any way to, yeah, to just like, select someone from the list of not operators or say, I want to withdraw my tokens now.

And I think it became pretty clear that there would be a new form, like that a protocol that would solve all of these problems would be quite dominant over anything that existed at the time, right?

So when I look now where the kind of differentiate, differentiation lines, let's call them like that, are drawn, then you still have this, what we now call liquid staking versus non-liquid staking.

So liquid staking is just when you, when you receive a voucher that represents this ETH that is being staked by an auto trader.

And you can take it and you can use it somewhere.

You can trade out of it, you can use it in Aave and Meka and so on.

And the non-liquid ones are just if you give, for example, your money to an exchange and they stake it for you and they put rewards in your wallet every month.

I think Coinbase has a double digit market share using that model in staking right now, because it's very easy.

Then I think custodial versus non-custodial is a pretty big 1.

I think there's a pretty big overlap, I would say, between like liquid and non-custodial, non-liquid and custodial, because they fit very well.

And then finally, there's retail versus institutional.

So it's more about which customer segments are you speaking to, right?

So I think that Lido, the protocol, Initially, I think its value proposition, it spoke particularly to kind of Ethereum native users, right, who wanted to self custody because it was a non custodial protocol, who wanted to use their coins in DeFi because it was liquid, right?

Because institutions weren't in DeFi at the time.

So I think That's where Lido got its start.

But we have over time also seen other protocols come around that focus more on, for example, ease of use.

So like the whole custodial liquid staking, like its big benefit is that you just don't have to self custody.

So if I'm a user, most users in crypto never leave their centralized exchange account, right?

They never withdraw a coin to Ethereum still.

And so there's a huge number of users who you only reach if you have a custodial offering and you make it like 1 click from the existing exchange wallet.

So it was very natural, I think, for Coinbase, for Kraken, for Binance and these other platforms to roll out their own staking offerings in a custodial way.

And I think I still remember that there was actually a, I had a huge concern personally that these exchanges would capture most of the stake by the time that withdrawals would even go live.

Because it's like a custodial staking is so much simpler than non custodial staking for users.

But the main reason was kind of the liquidity.

Because if you're on an exchange, then you can very easily make staking liquid in the sense that you allow users to trade out of these staked validators.

And I really expected exchanges to go very heavy on liquid staking because they could make it, they could allow people to trade out of it, they could allow it to be used as collateral.

And it didn't really happen that way, which kind of made me very, very surprised.

So Binance had a staking relative coinbase for the longest time didn't, Kraken didn't.

I would still have to talk to an exchange executive and understand why they didn't do it.

But it would have been, I mean, I expected them to do it and I think it would have been the right play.

And had they done it, then I don't know where we would be today, frankly, because it would have been such a compelling offering.

I think that, yeah, it basically becomes a very big risk that eventually kind of

of Ethereum validators are run by like 2 to 3 large exchanges.

So I think into that concern, then LIDAR was born to present basically a counterweight, like a non-custodial staking protocol that has some of the same benefits, which is it's very easy to use and it's liquid so that people don't have to stake with exchanges.

And I think you kind of pointing out 3 different user personas here.

You know, the first being, you know, maybe an institutional user or somebody on an exchange that either wants the convenience of 1 click from an exchange, or they want, you know, the compliance regular requirements of, you know, an institution.

Then you have basically everybody in the middle that uses Lido.

And then on the other end of the spectrum, you might have self-stakers that mint Rocket Pool ETH, right?

And how do you view the growth of those, you know, I guess the first bucket and the third bucket relative to Lido's core users right now?

And then how do you think about extending support for those types of users, you know, from your seat in Lido?

I mean, I think, where is, do you know where exactly they are in terms of market share right now in terms of broad size, kind of the more institutional focused segment?

So, you know, CBE, which is interesting, because it is retail only, you know, has grown, I think, to roughly about 10% market share of liquid staking.

I believe Rocketbull is kind of around the same range.

And CB ETH, it's notable that they've done this in the face of 2.5x the fee rate that Lido charges.

So definitely tells you something about the users there and their preferences.

I'm just curious to know how you guys are thinking about positioning Lido also to capture some of that market.

Maybe this is users that were previously sticking with Kraken, right, traditionally, and now have withdrawn, or maybe they're users that were just waiting for withdrawals, right, to come off the sidelines.

And I'm curious to just hear how you think about the growth prospects of either side of the market.

Yeah, so I think and I, if I'm totally honest, I don't strongly understand who uses CBE.

Because as you were saying, it's so much more expensive, but you still have to self custody it if you want to use it.

So I don't know, like, do what are all the assets on chain?

I think you can you can rent it and then hold it in your Coinbase account.

Okay, so people just hold it as a stand in for like regular Coinbase staking.

So it's almost like they cannibalized the existing products in a way and just called it CB.

Because if all of the CVE for sell on chain, then I would actually argue that Lido is already kind of a super set of that functionality.

But if if you have to custody it, then I would have to say, I think the way to access this market would be by offering alternative custodial products.

A, by existing exchanges, listing StakeEth, so people can buy StakeEth and hold it on an exchange or a wallet.

And the second would be through more traditional, you know, asset management channels.

So if I can hold Staked Eve in my Fidelity account and my Vanguard account and so on, then that is probably a competitive channel kind of to these existing exchanges that speaks to a very similar, maybe even a little less sophisticated group of users.

But that is, again, bigger than the previous.

So yeah, that's what I would say about that.

In terms of Rocketpool, I think that solo stakers, so individuals who run their own nodes, and let's say who kind of run fewer than I don't know, 100 validators, I think that they are really important backbone of Ethereum decentralization.

And Rocketpool, to their credit has been around much longer than Lido as well.

So they were, they launched later than Lido.

Lido was the first protocol to market by I think a decent margin.

But the, you know, Rocket Pool as an idea and kind of the team behind it had been at work for a long time.

And I think the reason that they were launching later was because they were set on a very specific model where users can basically like solo notarizos can divide their stake and you know, they can put 50% of their own stake and they can borrow 50% of a of a user stake and then they can stake that together and they secure that in addition with an R Rocket Pool token bond or kind of a collateral I think is a better term, right?

And this has the benefit that it's actually trustless.

So there are some caveats that we don't have to go into.

But it is definitely more trustless than other protocols that exist today.

And so it's very important for Ethereum that the solo, it's almost like leveraging kind of this backbone in order to, you know, give them more stake, in a sense, right.

And this makes definitely Ethereum more decentralized.

And this is, you know, the same values that that LIDO has as well.

I think the 2 protocols have different, yeah, different priorities, if you will, right, because LIDO focused on this, or the Lido DAO focused on what they saw as a huge and possibly existential risk for Ethereum, which is, you know, a small number of exchanges capturing a majority of the Ethereum stake by the time the proof of stake would go live.

And I think that was a very real and very big risk.

Even though many people don't want to talk about it.

I was looking actually last year and we will get into this, I think it was last year, when there was the self-limiting debate about Lido and there was a lot of, Lido had a 1 month where there was very bad, like a series of very bad kind of consecutive press, where there was the 3 arrows, kind of for selling their, you know, stack of state Eve, and then Celsius.

And at the same time, there were kind of people on social media arguing Lido is getting too big, and they should think about self limiting, right.

And at that time, Lido had almost no new inflow of stake.

Also, because the stake ETH was trading at a discount.

And so somebody wanted to stake, they were just buying from the market instead of staking.

And you could see that over 90% of people who were staking, people who were still staking, but over 90% of it was going to Coinbase and Binance, you know, into the custodial pockets, you know, and it was a kind of, and these were entities that were not transparent at all, you know, about how much share they have in staking and what is their infrastructure like, where is it located, And, you know, they don't care about client diversity or, you know, decentralization and so on.

Anyway, I think the reason why I talked about why we got sidetracked to this, so Lido and Rocketpool, I think are ideologically very, very similar protocols that are starting from slightly different points.

And I think that they are moving towards the same point, which is in the case of Lido, there was recently a version 2 of LIDO that included the idea of a staking router, which is a more modular architecture for adding basically different staking modules that represent kind of different lists of node operators or different configurations of node operators.

And what this allows is for Lido to not just distribute the stake to a permissioned list of node operators, but for anyone to write new modules and send them to the DAO to consider.

And then the DAO approves, same way that MakerDAO or Aave, for example, approves a new form of collateral, then LidoDAO can approve a new staking module.

And that can and will include things like permissionless staking that has a collateral attached to it, for example.

Or staking that uses distributed validator technology.

Where, for example, professional node operators and individual node operators are working side by side, you know, and have this kind of consensus protocol overlay and are working together to make blocks on the beaten chain.

And so I think I would expect in the next year, LIDO to move from currently I think 35 node operators to hundreds, if not thousands of node operators as a result of this infrastructure.

And at the same time you're seeing Rocketpool has long kind of hit the scaling limit of their approach, which is if you need all of the notabitas to over collateralize any customer ETH that they take, both with their own ETH, but also with an additional and I think it used to be something and I don't want to say something wrong in the range of like 10% additional collateral in the form of the RPL token, then it is very expensive, you know, and it doesn't scale.

And so I think they hit the scaling limit.

And what they are doing now is they are trying to reduce this collateral.

And they are also whitelisting entities that is allowed to stake without a collateral.

And so, such as coinbase, by the way, which is interesting.

And so I think that over the next year or 2, I think you can expect these protocols to move more towards, you know, look more and more alike, in that sense.

So I think a rocket pool, it will have more permission not operators who are professional and to have a rep off chain reputation at stake and so on.

And that will allow them to meet more of the user demand.

And Lido at the same time, it will have more ways also to support permissionless staking.

And that is the group you were talking about, right?

The solo operator who's really passionate about running their own hardware and who just wants to get a form of leverage basically on that, or the user who wants to stake, but they want to stake specifically with a solo operator and not with a professional node operator.

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Is Liquid Staking Winner Take All? | Hasu