Season 5 | Episode 6
In this episode of Bell Curve, Mike and Myles are joined by Aidan, co-founder of Stride labs, and Felix, the Godfather of Liquid Staking. Today they explore the nuances of Liquid Staking across the Cosmos & Ethereum ecosystems. They also dig into the relationship of liquid staking & professional validators, the liquid staking module user flow with NFTs, and solving the principle agent problem.
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Timestamps:
(00:00) Intro: Pre-Interview
(02:02) “Permissionless Ad”
(02:57) Interview Start: Felix & Aidan
(04:04) The Godfather of Liquid Staking
(08:15) Liquid Staking: A Force for Decentralization
(12:27) LSTs Thriving in Eth First
(16:44) Liquid Staking & Professional Validators
(25:01) Decentralizing Eth Validator Set
(37:45) Ossifying Ethereum Protocol
(42:03) Minting Liquid Staking Tokens
(51:50) Staking Module Risk Parameters
(57:53) Principle Agent Mitigation
(1:04:37) Liquid Staking Module User Flow
(1:15:39) Recap: Post-Interview
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Follow Felix: https://twitter.com/FelixLts
Follow Aidan: https://twitter.com/aidan0x
Follow Myles: https://twitter.com/MylesOneil
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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:
Felix Liquid Staking Blog Post
https://medium.com/chorus-one/delegation-vouchers-cfb511a29aac

Stride Labs
https://www.stride.zone/

Jon Charbonneau "Endgame: Proof of Governance"
https://dba.mirror.xyz/UTPfxWe65dYrUu_RJX-5VkAJypFRyw3AZh6m0dRXYZk
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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.

Nothing in the episode is construed or relied upon as financial, technical, tax, legal, or other advice.

Welcome back to another episode of bell curve miles.

Today, we're going to be getting the Cosmos perspective.

We're going to be talking to Aiden Salzman of Stride and Felix Lutsch.

Felix, as we will refer to him throughout this episode, is sort of the godfather of liquid staking as the author of the original delegation vouchers paper that you and I have referred to several times throughout this season from

Yeah, we get kind of a history lesson of really the origins of liquid staking from Felix, who's had a great perspective because of course, one's been very active in both Cosmos and Lido on the Ethereum side.

And then Aiden, who is really building on the cutting edge of liquid staking protocols today and can kind of provide a preview of what other liquid staking protocols might be thinking about in a few months or years down the road when some of these ideas inevitably translate over to other ecosystems.

And guys, when you're listening to this, what I want you to listen for, and we'll talk about in the recap a little bit, is this tension in between flattening out the governance of liquid staking protocols and allowing users to decide when the risk there is that maybe you get sort of an adverse outcome in terms of what your validator set ends up looking like, or liquid staking protocols actually being a permanent stakeholder and having an opinion, which could lead to decentralization of the validator set.

So I want you to listen for that tension.

We're going to talk about it during the actual podcast and then recap.

I also want you to listen for the parts about fungibility of the protocol that comes in right at the end, but that I think is an extremely important part of the episode as well.

Hey everyone, we've got a great episode here, but before we do, I just wanted to give a quick shout out to Permissionless.

This is the biggest and best conference in all of DeFi.

It's the 1 that we do with Bankless, who's a great partner for us.

Last year we had almost 7, 000 people there in West Palm Beach.

We are moving this year to Austin, Texas, from September 11th through the 13th.

And if you're a listener of Bellcurve, any of these last 5 seasons, this conference is basically custom made for you.

We're going to be talking about liquid staking, the theme of this season.

We've got a bunch of great panels on MEV.

If you listen to the AppChain Thesis, we've got a bunch of Cosmos folks out there in full force.

We're talking about the converging architecture of Solana, the roll-up space in ETH and Cosmos.

And to reward you for being such great listeners to Bellcurve, you get a special 30% off code.

Click the link in the show notes and then head over to the Permissionless site and make sure that you get your ticket today.

Welcome back to another episode of bell curve today.

Myles and I are joined by Felix Lutsch and Aiden Salzman.

going to be an exciting episode where we're going to dive into some of the big questions that we've been asking about liquid staking from the perspective of what's going on in the Cosmos ecosystem.

And as per usual, as Miles and I note in this show, oftentimes some of the big questions that are being asked in Ethereum, the Cosmos ecosystems tends to be 6 to 12 months ahead.

So hopefully we're actually gonna get some answers and some early attempts at experimentation for solving some of the big things we've been talking about this season.

But before we get into that, we've referenced several times this season that the first person to post something publicly about liquid staking was in fact, Felix Lutsch.

So I don't want to call you the godfather, Felix, of liquid staking, but 1 might, 1 might describe that title to you.

So can you kind of take us back to that blog post that you wrote and what you were thinking when you sort of outlined delegation vouchers and kind of the history of liquid staking and then any surprises in terms of how it's evolved up to this point.

So this post, I think is at some point in 2019, right?

So we've been kind of circling around liquid staking since like 4 years now.

And it really, I think got like a lot of traction this year, obviously with LIDAR already last 2 years, but I think now with you guys like covering it, there's a lot more eyes on it.

And a lot of people like interested a lot more you know protocols being built around liquid staking at that time when we wrote the post it was more that proof of stake was basically just emerging and there was the the sort of delegation model in cosmos so you had this concept of okay you have the validators and then you have the token holders that like sort of just delegate their votes to validators.

And this sort of principle existed in Cosmos already, but also in other networks like Tezos.

And given we were like 1 of the first staking providers, we were kind of looking at, you know, how was like the similarities between these models or how can it, can it be evolved?

And at the same time, while we were writing this, actually, there was basically the DeFi summer in Ethereum starting to go on.

And being in Berlin, I was in full node with Brian, CEO, of course, and we were like kind of observing some of the initial DeFi protocols and their designs.

So like 1 notable 1 is like compound, which has this idea of the C tokens, where essentially you deposit your tokens and you receive this C token return that kind of represents your position in the compound protocol.

And we realized, oh, this is very similar to what you could do in proof of stake with validator delegations essentially.

And we foresaw that there would be like a sort of merging between DeFi and liquid staking at some point since sort of like, I guess what we were thinking is that staking is kind of the base layer of these networks and it's kind of like a financial activity and then people will want to like catch their risk or manage their risk in various ways and to do that you will require like some sort of more flexibility than what the core protocols often offer.

And as like sort of through that brainstorming, we were part of this hackathon in HackAdam, actually in Berlin, like a very cool, 1 of the earliest Cosmos hackathons, and worked together with Sunny and Dev from back then Sika, now Osmosis, obviously, on this concept of delegation vouchers.

So basically just taking it 1 step further from just having the delegation structure in the code, but actually turning it into like a token that when you delegate, you receive like validator specific liquid staking token, let's say, and that you could then always like convert back according to this mechanism that's here on the screen right now for those that watch the YouTube video.

And yeah, that's really where it started.

And then I sort of realized, oh, wow, there is like such a big design space there in this world.

And we saw like slowly like projects emerge, like some of them, including like Stakedow, Julian's idea for Tezos.

There was also Stater and some other projects that are all covered in the liquid staking report that I later wrote.

So I was kind of realizing, oh, we need, like, this is a big topic.

We should be making like a working group to kind of talk about this and figure out what the right way is to implement liquid staking or where it's going and what the risks are.

And that ultimately turned into liquid staking report that is then later, I think probably like a year later, I released.

And so there I go into like sort of the benefits of liquid staking, but why it's needed sort of like the comparison to staking with centralized exchanges and the powers of centralized exchanges and why liquid staking is sort of a potentially force for decentralization.

Potentially force for decentralization, but also the risks in terms of like what happens when you sort of over financialize maybe the staking positions and sort of what are the problems that can emerge there.

I'm sure we'll go into a lot of these in the episode.

Yeah, And I want to bookmark and return to this idea of liquid staking as a force for decentralization.

We're going to spend some time later in the episode talking about that.

But can you just kind of walk us through, Felix, at the time, what was the response initially to this idea?

Because now we've all sort of taken it as this given liquid staking is 1 of the few things, especially over in Ethereum, that is really working and chugging along, you know, sort of despite market conditions.

But, you know, I imagine there was some pushback.

And Dave has some very particular thoughts about liquid staking, I would say.

So what was some of the initial feedback?

And then 1 question, Miles and I were just, we're looking at this initial diagram that you drew, between the user of the validator pool and the validator, And actually we noticed that there was a conversion ratio of 2 atoms per 1 voucher.

So we were wondering if initially the idea for liquid staking was that you would, for instance, in the steve metaphor, you deposit 2 ETH, you get 1 steve back.

And if you had actually thought that through, just a small, small question there, we've been wondering.

So what we were, why this number is more just like illustrative, but like, it was clear that sort of, because you earned the rewards, we sort of were thinking in delegations vouchers of this model that's not rebasing.

So basically like the conversion ratio of 1 liquid delegation voucher would increase like in terms of the pure atom.

So that's what this kind of represents like in case of like, let's say this delegation voucher system was running for a while, then it might be that at some point, you know, 1 voucher represents like 2 Adam.

So this was just for illustrative purposes there.

I think at that time, specifically, most of the people in Proof of Stake, I would say were like protocol developers or very like deep engineering people, folks in general.

And so their thinking is like, I would say like pretty extremely long-term around the health of the protocol and like sort of attack scenarios of 33% or 66% attacks and then how they could come about or how an attacker might abuse the proof of stake system.

So I think there is some pushback there that, you know, liquid staking might introduce this sort of kind of too powerful thing that like all the stake aggregates in this in the liquids in 1 specific liquid staking protocol.

Specifically Quickstake and Protocol, and that this then sort of has power over the protocol, which is certainly, I think, like probably the biggest pushback.

And then, yeah, many would probably also just say, hey, it's not really needed, no 1 really needs this or something like this.

But I think in terms of like, why, what's dangerous, this was probably the main point.

And I think the thing is that protocol, I think at that time, many were thinking, oh, we can sort of restrict this in the protocol and like sort of design the protocol in a way to make it very hard to do this potentially.

But given we have like smart contract capabilities, we have centralized exchanges, we have so much infrastructure and the market generally, I guess, is my opinion and sort of is proven over time that like kind of strives for this capital efficiency, there will be ways that can kind of circumvent these restrictions and those will be very successful.

So I think, like my personal opinion, and I guess we might also get back to this, is that in the end the protocol, if it's like successful enough, will have to deal with these issues and might be better off sort of enshrining it, as you say, or putting it native into the protocol, these liquid staking kind of systems to avoid having capture by some external party too much.

And yeah, I'm sure that's like probably like 1 of the core topics we're going to talk about.

And I think we can definitely get into a little bit of that later, especially with the liquid staking module coming, which is essentially a version of what you just described.

But maybe just to stay back in the 2019, 2020 era, when you wrote this paper, Ethereum was still proof of work.

I think, you know, the beacon chain was on its way, but it was not yet live.

And so I guess to ask directly, why do you think, you know, this concept took off on Ethereum when it originated in Cosmos and, you know, liquid staking is now alive and thriving in Cosmos, thanks to folks like Aiden here, but it is taking a while.

So yeah, I would just love to, as somebody that was deeply involved in both the Cosmos side as well as 1 of the early validators of Lido, I think you have a great perspective to kind of look back and do a retrospect here.

Yeah, what also almost like surprised me, I think we were like, I guess in Cosmos, the main or many of the people in Cosmos are validators or like sort of have a deep understanding of proof of stake and like infrastructure versus on the Ethereum where the actual like community was more DeFi, maybe an NFTs and all these applications or smart contract developers.

And I think we were in a way Cosmos was thinking early about this concept because many of the folks were like on that layer, but then sort of the adoption from the applications is missing in Cosmos.

And I think like liquid staking relies a lot on having that to be useful.

And also that the difference being on Ethereum that you actually don't have a delegation model.

So it's very hard to stake your ETH if you're just half ETH and you're like a normal person, you don't want to run the infrastructure.

There's very few ways to actually engage.

And like essentially Lido or like Liquid Staking brought this model to Ethereum in the first place.

And then obviously also the other point being that given the merge hasn't happened, so like this kind of gradual rollout of staking, of proof-of-stake in Ethereum, meant that there's a long period where you, if you stake normally, like you couldn't actually get liquidity on your staked assets.

And Lido was able to provide some liquidity for people that might want to withdraw through the curve pool and incentivizing that heavily to maintain the pack between STETH and ETH for the first year until the merge and sort of that I think is a very big value proposition that just wasn't there in Cosmos And maybe still is less there.

Also, like now in Ethereum, it's less there, but I guess now, Lido already has like such a market share.

There's not, there's other fact or like other forces at play.

I think that keep it very interesting in Ethereum.

Also like again, the, the just greater amount of liquidity and more DeFi activity going on that sort of pushes liquid staking a bit more.

Right, so it kind of sounds like the perfect storm where you have a combination of higher barriers to entry to actually participate in validating.

You have this lack of liquidity even beyond a 21 day unbonding period.

And then you actually have higher amounts of utility through an early DeFi ecosystem where you could replicate some of the benefits of what you'd be able to do on a centralized exchange, whereas that in Cosmos just took a little bit longer to develop.

I think maybe also to add, like literally from the experience as a node operator trying to get started on Ethereum.

You know, we were lucky enough to like be connected with a lot of folks early and sort of participating in that.

But in the terms of like offering a staking as a service for Ethereum outside of these protocols, it's actually quite a hard task.

You need to build a lot of infrastructure, like API or some sort of product that allows people to stake even just 32 ETH with you, which is a very cumbersome activity.

And it's basically like an entire team that needs to build something like this.

And this is also something that, why there aren't that many staking products on, if you're even from node operators, right?

You need basically a team of like 20 plus to be able to support such a product.

And In Cosmos, it's very different, right?

You can be 1 dude in the basement and you can receive delegation.

So that's a much more sort of easy, lower barrier to entry like you mentioned.

And maybe just shifting gears a little bit towards, I think we want to get your perspective on just the relationship between liquid staking protocols and professional validators.

Because I think it's very interesting that it seems like Lido was developed by P2P.

Of course, 1 was very early in getting involved there, and you were very involved in the development of Quicksilver on the Cosmos side.

And it seems like from the seat of a validator, You can look at liquid staking protocols as, at the time, probably an existential threat, but also 1 of the best distribution channels that you could imagine.

It's just they take care of all the BD for you and you have plenty of ways to use these liquid staking tokens and you can just kind of get into the set and receive deposits.

But of course that's a much lower share than if you were to receive 100% of those deposits like you would in traditional staking.

And so, you know, I'll actually pose this to both of you guys, but, you know, how do you guys view the relationship between validators and LST protocols, today?

And, and what was it like back then when some of these were, you know, just getting started?

I'll start and maybe Aidan can add his view from the other side.

I think my, yeah, our perspective, I think what's interesting is, right, there is this sort of conflict, like you said, when you're on the node operator side, where you sort of understand deeply the staking mechanism, and I guess that led many to sort of get involved in liquid staking in some way, also developing protocols there.

But then once they are there, you have this sort of conflict that, okay, now I have to basically, or spread my stake across these different providers, like in most of the cases, right?

And that sort of makes it less attractive.

You would rather have someone like stake directly with you.

I do think that though, given this, this depends also on the size of the noterbrator.

For many, I think liquid staking is actually, or like it's 1 of the best distribution methods and also like force for decentralization where before that you basically have the foundations which basically bootstrap the validators often.

So there is a foundation of a certain protocol.

They have maybe like 10, 20% of the tokens and they will like pick the node operators that provide value to the ecosystem and sort of distribute the stake across them.

I think that was like the first entity which many like smaller operators that don't have like big marketing budgets or BD rely on that sort of existed.

And then liquid staking protocols is sort of an extension of that where now it's also, it's very focused on this specific staking use case.

The foundation generally has like a lot of other kind of things to do and it's also like not profit oriented.

So the liquid staking protocol is more like, I guess, a product that has its users or like the yield and the safety of the protocol more in mind.

And it's actually, I think doing often a better job than the foundation at like sort of picking the best operators.

And so from the perspective of the network, I think that's very, that's actually desirable.

And then as a node operator, yeah, again, for many, it's actually a very, very nice.

Yeah, way to get some very nice way to get some stake.

And I think many like desire to be in 1 of these sets.

And, but then the very big ones, they have like sort of this problem that, oh, now I actually would rather have people stake directly with me.

And there are a few ways where how this can be achieved.

Like for example, stakewise v3 is an interesting model that allows a little bit to the node operators to retain this ability by having these vaults that you basically stake directly with an operator, but you can still get a liquid staking asset by essentially collateralizing these validator specific positions.

And that's, I think, an interesting model that works for large node operators and still kind of gives their clients the ability to still like opt into liquid staking if they would want to.

So again, I think, yeah, again, general the liquid staking design space is quite large and overall I would say, yeah, very interesting for validators, but.

Yeah, Yeah, I think it's a really interesting question.

Maybe 1 of the most interesting on the relationship between liquid staking protocols and validators.

So when I think about liquid staking, my assumption is, I'm obviously very biased as a founder of a liquid staking protocol, but my assumption is that liquid staking will go to like 80 to

So I think Felix and Miles, you both brought up some really good points around why it took longer for liquid staking to take off in Cosmos.

So there's this cold start problem with DeFi, ETH was very liquid, you could use it.

So DeFi was bootstrapped and then Steeth demand was there because DeFi existed.

Like you said, it's also easier to stake in Cosmos.

So if you're a bit more crypto native, maybe you just go and delegate your stake to a validator.

Whereas on Ethereum, it's pretty challenging to run a node.

And there are also some technical reasons why it took a bit longer on Cosmos.

So the Cosmos hub didn't have smart contracts.

But there were actually places in Cosmos that liquid staking did take off.

So in the Terra ecosystem, which was a Cosmos SDK chain, I think B.Luna launched.

It was a Lido LST and it launched sometime in 2020 or

But my assumption is that in spite of all of these these challenges in Cosmos, having liquidity and yield is such an attractive value proposition for end users that liquid staking probably will go to 80% to

So therefore, it is a pretty important question for validators.

But when I think about how validators and liquid staking protocols interact, Liquid staking protocols, I think, are just larger entities that validators can attract stake from.

So they can go and attract stake from little fish like you or I, or they could go after a big whale, or they could go after a liquid staking protocol.

And there are different strategies for validators to attract stake from each of these entities.

So although liquid staking protocols might take a cut of the yield, they can also, in some cases, attract so much more stake from a liquid staking protocol that I think it outweighs that.

But for large validators in particular, I think it's a bit of an interesting question because in delegated proof of stake, especially, stake is skewed to the top of the set.

So I think In a previous podcast, you and Hasu were discussing this, where validators can only really differentiate on a couple of dimensions.

So being at the top of the set is a really strong indicator that the validator is good.

And most users don't go and stake to the bottom of the set.

of stake is distributed across the top 10 validators and most delegated proof of stake chains.

So in that sense, liquid staking protocols might take some stake away from the top validators and redistribute it across the set.

But if liquid staking protocols are well designed, then I think they can be distribution channels for good validators.

So it might be a little bit of a reframing from taking away stake from the largest validators to distributing stake across validators that are really good, because some validators at the top of the set are really good, But there are also really good validators at the bottom of the set.

And then defining this question of what is good and rating validators on a scale is a real challenge.

And I'm sure we'll get into this more later.

But I would reframe it slightly as a redistribution to validators that the liquid staking protocol has defined as good.

There's all kinds of attributes you can think about.

I actually do want to push into that a little bit right now, Aiden, actually, because I feel like this is a very important conversation that's happening again over in Ethereum land with Lido and the staking router.

And that's what we're trying to move towards here, right, which is a more decentralized validator set.

That's what everyone sort of wants to see.

So can we actually get into that idea of, you know, how the presence of a liquid staking provider, like a stride might actually counteract some of those sort of natural market forces that concentrates stake in the very top sort of echelon of validators?

Yeah, so I start from the assumption that on most blockchain networks,

roughly of network power accrues to maybe the top 10 entities.

And I think this is roughly true for most proof of stake and proof of work chains.

If you look at Bitcoin, there's large mining pools.

If you look at proof of stake chains, specifically delegated proof of stake chains, most stake is accrues to the top 10 entities.

And maybe there's like a little bit of uncertainty here.

Maybe a chain can really push on decentralization and they can get this stake distributed across 15 entities.

Or maybe they care a little bit less, and it's only distributed across 5.

But for the most part, stake does follow this sort of power law distribution to the top of the set.

And I think this is where liquid staking protocols can really help decentralize the network.

So I think it's a big reframing as LSPs as a decentralizing force.

Typically, when we've talked about liquid staking protocols, we focus on all of the risks of liquid staking protocols and there are some centralization risks.

So for example, if a liquid staking protocol is hacked, that would be really bad for the network.

This particular argument has never really resonated with me given lots of things can be hacked in networks, for example, the core staking logic in a chain can also be hacked.

But there are definitely some centralizing forces and risks.

But if you look just empirically at how liquid staking protocols or good liquid staking protocols distribute their stake across sets, the distribution is typically more decentralized.

And then there's a question of how you actually define decentralization.

But the SIG is more distributed across a broader set of validators that hopefully are differentiated on things like clients, geographical diversity, jurisdictions, all of these things.

I think actually John Carbono had this presentation at Modular Summit where he was looking at Lido's stake distribution versus Ethereum's.

And like any normal observer can look at this and tell which 1 is more distributed.

So I think there's a lot of potential for liquid staking protocols to distribute stake much more broadly across sets.

I think that's really important because I think the assumption or at least the narrative last year and is starting to change is all about the self-limiting debate, right?

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What Ethereum Can Learn from Cosmos' Liquid Staking Module | Aidan & Felix