191 - Danny Ryan's Case Against Lido

Danny Ryan is a coordinator at the Ethereum Foundation. He’s been on Bankless many times before. Usually, we’re talking about the Ethereum roadmap and what’s coming next. This time we’re talking about something different…a risk to Ethereum that Danny sees. A little over a year ago, Danny wrote a blog post titled “The Risk of LSDs”... discussing the various risk vectors that a dominant LSD presents to Ethereum…even naming Lido specifically in the process. ------ ✨ DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-danny-ryan ------ A lot of people have decided that liquid staking with Lido is the place to do it. At the time of recording Lido has over 30% of all staked Ether. Does this present a systemic risk to Ethereum? We did an episode called, “In Defense of Lido” with researcher Hasu who argued that Lido does not pose a systemic risk to Ethereum. In fact, Lido’s dominance is better than many other alternatives. We left that conversation half-finished when we published it in August 2023. In today’s episode, we cover part two of that debate with Ethereum researcher and guest Danny Ryan who argues the opposite. Lido is a systemic risk to Ethereum and what to do about it. We believe our role as podcasters for issues like this is to voice both sides of the argument in long-form conversations and healthy debate. It is exactly the kind of thing you don’t get on Twitter. That’s why we’ve given voice to both sides of this issue. We think there are good actors who care about this ecosystem at Lido and in the broader Ethereum community and we’re sure this episode won’t be the last word on this subject. ----- 🏹 Airdrop Hunter is HERE, join your first HUNT today https://bankless.cc/JoinYourFirstHUNT ------ 📣 a16z Startup School | Apply Before Oct. 20th https://bankless.cc/a16z-startup-school ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE ⁠https://k.xyz/bankless-pod-q2 ⁠ https://k.xyz/bankless-pod-q2%C2%A0%20%E2%81%A0 🦊METAMASK PORTFOLIO | MANAGE YOUR WEB3 EVERYTHING ⁠https://bankless.cc/MetaMask https://feeds.flightcast.com/%E2%81%A0https:/bankless.cc/MetaMask ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku 🦄UNISWAP | ON-CHAIN MARKETPLACE ⁠https://bankless.cc/uniswap 🔗 CELO | CEL2 COMING SOON https://bankless.cc/Celo ------ TIMESTAMPS 0:00 Intro 7:41 Is Lido a Threat to Ethereum 8:57 Blog Post Thinking Change? 19:30 Uniswap 21:20 Theoretical Main Risks 25:45 God Mode 27:20 Practical Main Risks 34:00 Hasu Counter-Arguments 38:25 Permissionless Validator Set Mitigation 42:30 Veto Power Mitigation Argument 46:55 How Likely is the Lido Risk? 51:26 Client Team Positioning 55:00 How Special is the Lido Case? 57:45 One LST Inevitability 1:02:30 Solutions 1:06:55 Profit Maximization 1:09:00 Action Steps For Ethereum Decentralization 1:11:53 Can Ethereum Devs Do Something? 1:20:10 Hasu Questions Answered by Danny 1:22:45 Magnitude of the Lido Threat 1:24:20 How Can Lido Fix This? 1:25:59 Stick & Carrot for Lido 1:26:27 Silverlining of Lido Threat 1:29:05 Next Conversations 1:32:16 Closing & Disclaimers ----- RESOURCES Danny Ryan https://twitter.com/dannyryan Danny Ryan Blog Post https://notes.ethereum.org/@djrtwo/risks-of-lsd Hasu’s Bankless Interview https://youtu.be/IfuUdIblfrY ----- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ryan Sean Adams?

  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 listened 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?

• 0:25Ryan Sean Adams?

  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 and I'm here with David Hoffman and we're here to help you become more bankless. Where should you stake your Ether? A lot of people have decided that liquid staking with Lido is actually the best place to do it. And at the time of recording, the staking protocol Lido has over 30% of all staked Ether on Ethereum. The question today, does this present a systemic risk to Ethereum? So we did an episode called "In Defense of Lido" with crypto researcher Hasu, who argued that no, Lido does not pose systemic risk to Ethereum.

• 1:07Ryan Sean Adams?

  In fact, he argued, Lido's dominance is better than many other alternatives that are out there. And we left that conversation half finished when we published it in August. So here's part two of that debate, this time with Ethereum researcher and guest Danny Ryan, who argues the opposite, that Lido is a systemic risk to Ethereum, and he has some ideas on what to do about it. Now, before we get into this episode, a special note, both Dave and I believe our role as podcasters for issues like this that are somewhat contentious is to voice both sides of the argument in the form of long-form conversations and healthy debate. And this is the type of thing you don't often get on social media. You certainly don't see this type of conversation on Twitter. And that's why we've given voice to both sides of this issue.

• 1:49Ryan Sean Adams?

  We think there are good actors who care about this ecosystem on the Lido side and in the broader Ethereum community. And I'm sure this episode absolutely won't be the last word on the subject, right, David?

• 1:59David Hoffman?

  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 for Ethereum or what Ethereum is. I think the the Lido cohort or a little bit more of the people who are willing to succumb to the market and fall in line with the market and work with market forces. And then there's the other side of the the starry eyed dreamer side of things, which wants to preserve our values to the best of our ability and think that we can attempt to overcome market forces. At least that's how I interpret it, interpret this dynamic.

• 2:41David Hoffman?

  So some big questions that we ask in this episode to parse out these two perspectives is Lido a threat to Ethereum? That is, of course, the big question. Are LSTs liquid staking tokens making Ethereum centralized? Is this about Lido specifically or about LSTs generally? Is a single dominant staking service provider inevitable, or can we maintain a plurality? What is the risk level to Ethereum? Yellow, orange, red? Like, how can we measure these things? And how do we solve this problem? Are there things that we can grind in the protocol to solve this problem? Where is the role of other LST protocols? And lastly, why Danny is still optimistic about the future of Ethereum?

• 3:19Ryan Sean Adams?

  But first, before we get to this episode, we disclose, Bankless holds small investments in Lido and Rocketpool. 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. We're not journalists. We don't do paid content. There's always a link to our disclosures in the show notes. All right, guys, we're getting right to the conversation with Danny Ryan. But before we do, we want to thank the sponsors that made this episode possible, including our recommended crypto exchange for 2023. That's Kraken. Go create an account.

• 3:51David Hoffman?

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• 4:33David Hoffman?

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• 5:17David Hoffman?

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• 6:02David Hoffman?

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• 6:24Ryan Sean Adams?

  Bankless Nation, we are very excited to introduce you once again to Danny Ryan. He's a coordinator at the Ethereum Foundation. He's been on Bankless many times before and usually we're talking about the Ethereum roadmap. We're like, "Hey Danny, when are we shipping that thing? How's it going?" Or it's like, "Congratulations Danny, you just shipped that thing. How do you feel?" But this time, we are talking about something different. We're talking about a risk to Ethereum that Danny sees. So, a little over a year ago, Danny wrote a post called "The Risk of LSDs." We'll call them in today's episode, LSTs. LSD stands for Liquid Staking Derivative. We've kind of gone through a name change, a rebrand in crypto, calling these Liquid Staking Tokens, so LSTs.

• 7:07Ryan Sean Adams?

  And it discussed the various risk factors that a dominant LST presents to Ethereum. And Danny even named LIDO specifically in the process of going through that blog post. And I think this is a response to an episode that we recorded all the way back in August with Hasu on the question of, "Is LIDO a threat to Ethereum?" And Hasu's answer was, "No, not really. It's kind of an overstated threat." And I think Danny is taking the other side of that argument here today. Danny, welcome to Bankless. How are you doing?

• 7:39Speaker 02

  Great, thanks for having me.

• 7:41Ryan Sean Adams?

  All right, here's the question. Is LIDO a threat to Ethereum, Danny?

• 7:47Speaker 02

  So, I know we're 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 kind of systemic nature of the protocol is a risk to the protocol. I mean, that's just plain and simple. LIDO is that thing today. It's an instantiation of something that's aiming to gobble up, you know, all of stake deeds in quite a cavalier nature in which they're...

• 8:20Speaker 02

  I don't know, a bit flippant about the risks at play here. So yes, Lido is a systemic risk to Ethereum.

• 8:28David Hoffman?

  Usually, things that exist in the app layer stay in the app layer, but there's a handful of protocols out there that span Ethereum's app layer with its own protocol layer, Lido being one of them. This is why Eigenlayer and restaking has caught the attention of many EF folk as well. Some things go down into the protocol. Some things in the app layer go into the protocol. And this is kind of why Lido is a topic of concern is when we talk about ETH stake, we're talking about the nature of the Ethereum protocol. Danny, you wrote that piece, "The Risk of LSDs," about a year ago. Has your thinking evolved since then? Or is there any kind of adaptation or evolution in your thought

• 9:08David Hoffman?

  about the way that something like a Lido or Lido itself has anything changed?

• 9:15Speaker 02

  Yeah, so first of all, I'm very proud of the coining of the LSD term. I'm very sad.

• 9:22David Hoffman?

  I also, I agree with you. It's sad that we can't use it. You made that up, Danny?

• 9:26Speaker 02

  I understand the evolution. I believe I made that up. And I think that's my biggest contribution to Ethereum today. But I understand the transition to T. You know, some of them, maybe you could call derivative. Some of them are tokens in other ways. The blanket term is nice. Anyway, yes. I mean, I don't think anything has deeply changed. My views have really become more nuanced as I understand that and other things as they've played out. I'll say this, you know, Lido, as it attempts to surpass a third, as it's to surpass a half and wants to gobble up pretty much all of ETH in existence, at least as some in the Lido community want to see,

• 10:08Speaker 02

  it's a risk to Ethereum's credible neutrality at a minimum. And at a maximum, creates like systemic risks due to technical risks, regulatory risks, governance risks, all sorts of things. Systemic risks to the protocol. Things that could cause quite huge disasters. Things that, as an Ethereum community, as Ethereum protocol, probably could recover from. But it's best not to go there. I...

• 10:36Speaker 02

  Don Krad had a tweet the other day. And I think he said, he said, he captured some things better than I have been able to. And I'm just going to read it because I think it's very, very worth reading. In relation to, you know, the protocol failing and, and this thing being, you know, just the way incentives work, he says, "The centralization does not work like this. No economic incentives will automatically guarantee our values, such as immutability or censorship resistance. The values of the Ethereum community do this. Our technology, as well as the incentives built into our systems, are a tool for this purpose. If you believe that crypto values are simply individual profit maximization, you have missed the plot or in the wrong place. Ethereum survived and thrived because people have values, and it will die if people forget about them.

• 11:21Speaker 02

  Yes, we do try to build our systems to be robust, as possible to get the incentives aligned with our values as much as we can, but perfect alignment is ultimately impossible for the simple reason that centralized systems are more efficient than decentralized ones." And implicit, implicit in there is that this system, Volito's system, has many components of centralization. And at the limit, you know, can be a more efficient system layered on top of the decentralized system that it is today. And really only people, their values, their understanding of risks, not just of tomorrow, but in the, you know, in the many year time horizon, in their capital allocation can, can protect us from, you know,

• 12:03Speaker 02

  a system that is inherently decentralized to become centralized. I mean, you see this in, not only in Ethereum staking with LSTs, you see this in mining systems where you have many like mining pools sitting right on these like key thresholds, you know, sometimes surpassing it, all of a sudden you have like two mining pools in Bitcoin that are 55%. You know, it's really only like the people that allocate their mining power in those systems protecting the decentralization of the system. Because yes, like if you have 100% pool in a mining system, you're going to make more money. Potentially, if you don't think about the second order impacts of what's going on here.

• 12:41Speaker 02

  Yeah.

• 12:42Ryan Sean Adams?

  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 resistant, is actually what we call on Bankless, kind of the layer zero, which is the social layer. And one point I'd make for everyone out there who says, "Well, that's kind of weak." Actually, that's how all coordination, human coordination, systems are protected. If you look at kind of law, let's say, right, the underpinnings of society, how is that enforced? Yes, there's courts, court system, but ultimately, if you look at kind of constitutional law,

• 13:24Ryan Sean Adams?

  I mean, it's up to the people and the social norms of the day to hold politicians and lawmakers accountable for the protections that we find within our constitution. And if the people forget that in the US at the layer zero, we won't get things like a peaceful transition of power from one president to the next. So at the end of the day, the layer zero is all that secures everything, all of the structures that we rely on for legal governance as well. I think you're making that case. I want to get in your... Yeah, go ahead, Danny.

• 13:54Speaker 02

  I agree. It's interesting you bring up like kind of the government analogies here. Like, something that I've been thinking about a lot is like the importance of disjoint and disentangled sets across kind of the Ethereum stack and the Ethereum community. And this has deep analogs to like maybe like the US system of government. You have like different parts of government, you have checks and balances. And actually, like when they erode, say, when the executive branch is actually kind of taking over like legislation in certain ways, it fucks up the incentives and it fucks up the system of checks and balances. And...

• 14:30Speaker 02

  I do believe that Ethereum is healthier when you have disentangled and disjointed sets. And I'll make that, I'll make it more concrete. So like, maybe you have the user base of Ethereum, which right now is kind of equivalent to the Ethereum community, but you could imagine the user base being massive. And then they have like maybe a core Ethereum community who like is more into like the values and things like that. And in the, in, in the future, we hope that there's probably like far more users than there are Ethereum community. The Ethereum community is probably roughly equivalent to like ETH holders, right? Maybe you have a disjointed set there eventually, but, but maybe not. Like that, that probably stays pretty tight. But then you have ETH holders and you have ETH stake capital, right? And the, the ratio between those two and keeping it like disjointed set, or at least a superset of ETH

• 15:15Speaker 02

  holders in relation to ETH capital, all of a sudden keeps the ETH holders as a more check on the ETH stake capital. If you have those converge and you have, you know, a hundred percent of all ETH is staked. Now you don't have this like disjointed set of ETH holders that are actually keeping their eye on, you know, is the validator set healthy? Is the consensus doing what it needs to do? Because all of a sudden you've like kind of cartelized thinking. You don't have like a rational, independent actor. Similarly, if you take ETH stake capital, you take any of the like subsets that are protocols or pools or any of the other things, you know, if you converge that, the staked capital all of a sudden becomes one thing underneath it, then you've, you no longer have like the disentangled

• 15:57Speaker 02

  set, you no longer have that like natural kind of competition and check on power. And so what Lido aims to do is essentially like take ETH stake capital and unify it with what the Lido protocol is. And now you, you no longer have like a disentanglement of that. That argument, so that's an argument for having many pools, many protocols, many individual stakers. Also, there's an argument there that the

• 16:21Speaker 02

  Incentive structure of staking shouldn't converge such that, you know, eighty plus percent of all staked ETH is staked. In the event that it is, then again, you have that like unified set across the the social layer zero, instead of like a disjoint set that has like their eye on checks and balances. And so I, you know, not only should we be thinking about like, how do we prevent and how do we, from from both a technical and social standpoint of Lido and other protocol capturing all staked capital, but we probably don't want staking to capture all of ETH. And so thinking about the the kind of incentives at play, the relationship of MEV, MEV capture, MEV burn and and stuff into incentivizing the amount

• 17:04Speaker 02

  of stake that is is staked is something we should be thinking about, too.

• 17:09David Hoffman?

  I think what I'm hearing from you, Danny, is an advocacy 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 core of what.

• 17:28Speaker 02

  Yeah, we see that. Like, we've seen that, like, as a core tenet of like how client development is done, you know, because that is that is a like very core part of how the protocol is governed. And if you just had one client, like, say, like Bitcoin Core, then Bitcoin Core becomes, you know, there is no difference between what they say and what the protocol is. And so instead, we have like these disjoint sets. We get to kind of checks and balances naturally in the social structures.

• 17:53Ryan Sean Adams?

  Yeah, it's not just pluralism. It's also the idea of checks and balances, which is 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, you know, check another group.

• 18:06Speaker 02

  Yeah. And I, you know, 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 if you only have one stable coin, and it's a massive amount of the Ethereum economy, it becomes like a major systemic risk, right? So like, if it's all USDC, that's probably a big problem. Even if it's all USD. You know, that powers the Ethereum economy, the stablecoin economy is probably a problem. You know, instead, we want like all sorts of like Euro coins, we want Asian coins, we want all sorts of stuff so that we have like this like natural and maybe not anti fragility,

• 18:48Speaker 02

  but at least resilience in the system so that it's not systemically placed upon like one single protocol, whatever their governance is, whatever their smart contract risk, etc.

• 18:56David Hoffman?

  And 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 LST gets corrupted, well, that's fine, there's like seven others that we could also engage with. But I think, Danny, I want to open up the conversation of to like, well, not all of these systems are as corruptible. Like Uniswap has 80 to 85% of Dex volume trading on Ethereum, I would call that a monopoly. But how like corruptible is Uniswap?

• 19:39David Hoffman?

  I would say not, not all that corruptible and there's not really any kind of downstream consequences. So the actual technical details of like what is at risk is relevant to the discussion of what we are trying to create checks and balances around.

• 19:53Speaker 02

  Yeah, I think Uniswap is actually like a done, it's probably one of the best instantiations of what I hoped was going to happen on top of Ethereum. You know, like small modular components that do one thing and do one thing well and are not generally changeable, upgradable. I mean, even the upgrade path for Uniswap has always been, we'll make something better and people will use it if it's better rather than like we're going to go in and mess with it. I would say the way that they've done things has been very, the way that it brings risks in being a monopoly to Ethereum are far reduced. But still, there is super amount of risk there. You know, if you find a Uniswap bug tomorrow, like, we're fucked.

• 20:39Speaker 02

  Fortunately, that is, it's isolated in the app layer and you started at the beginning and how like Lido and other things like that become entangled with the consensus layer, become much, much riskier in terms of the impact to Ethereum. And so maybe your implication there is Lido and other things can do things over time to make themselves less systemically risky and they should, absolutely. But I think that the entanglement with the the consensus layer and the kind of the inherent incentives around security and things there don't really allow for what I think to be, you know, safe monopolies that can dominate 50 plus percent of state capital.

• 21:22David Hoffman?

  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? Like what are the risks that we can define here?

• 21:40Speaker 02

  Those thresholds are certainly very important and in how it's worth thinking about these, I think that there are risks beyond just like 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, essentially, an entity can hold the chain's finality at hostage, right? So any, any single actor, any single protocol that exceeds that, you know, if they want to halt finality, whether it be for some sort of ransom or whether it be because there's some thing that they're trying to prevent to get economic validity so they can have some other type of gain for some time period, they can do that.

• 22:26Speaker 02

  At 50%, you can now begin to manipulate the fork choice. So the fork choice is, you know, we think about a blockchain, you know, a sequence of transactions and we get to kind of the final state of what's going on at the head of the chain. But really like what a blockchain is, is a block tree. So it can have potentially many paths and forks and the fork choice is like, given a block tree, what is the actual canonical chain that we all agree on? And so with

• 22:54David Hoffman?

  blockchain in history, but a block tree as you get to the present, right?

• 22:58Speaker 02

  So if you look at any head of the chain of 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, you know, or potential network latency conditions. And so what was really nice about the purpose stake protocol is on some timeframes, approximately like 12 minutes, we get finalized chunks of the chain where we'll never revert. And so it doesn't really matter if there were branches before then. But beyond that, there is chance for what we call reorgs, or if you have a high enough economic actor, potential manipulation of of the view.

• 23:41Speaker 02

  And practically, what that means is a transaction that got into the chain is no longer in the chain. Maybe something's reverted, something's changed. Essentially, like my view of reality could change. So instead of me sending you coins, you know, the chain could be reorged and I'm now sending Ryan coins.

• 24:00Speaker 02

  Point being is if I exceed those 50% thresholds, I can now manipulate that. So we could make it such that a couple of blocks come in. People think that with high confidence, those will eventually be finalized. But then they're reorged and they're changed. And with a 50% attacker, they can kind of manipulate at least within like the kind of the 10 minute time horizon. What is going on? Another thing that they can do is censor. So that 50% attacker could take a small amount of the stake or, or, you know, even 20% and say, you know what? I don't want to include your blocks, you know? Maybe they're doing that because they're maximizing MEV, you know?

• 24:44Speaker 02

  The incentives might be such that it's actually the profitable thing to do is to not include those 20% of blocks. Or maybe a

• 24:53Speaker 02

  Some jurisdiction has said, don't include blocks of this certain type. And now they only have to knock on one protocol or one organization's door. Because at that 50% threshold, you can essentially censor. If you censor more than a third, then you're not going to finalize. So if you don't have that two thirds threshold, but you can do quite a bit of damage at that point. Which leads into two thirds. At two thirds, you can, you can halt finality if you feel like it. You can reorg on that 10 minute time horizon. You can censor with impunity and, and you can finalize even if you're censoring. So, you know, I can, I can now, if I only had like 50% and I wanted to censor like 49%.

• 25:38Speaker 02

  It's going to be painful because people are going to lose money because of the non-finality stretch. But at two thirds, now I can kind of do it with impunity.

• 25:47David Hoffman?

  At two thirds, basically, don't you control every lever that Ethereum has? Like you are Ethereum.

• 25:53Speaker 02

  Yeah, without social intervention, you're in God mode.

• 25:57David Hoffman?

  Yep.

• 25:57Ryan Sean Adams?

  How, how, how, how much God modes? Like, could I just take money from David's ETH address?

• 26:03Speaker 02

  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 actually forge a signature. I cannot forge a signature that David never signed. Unless of course I hack into his computer and steal his shit.

• 26:30David Hoffman?

  But that's a different attack vector.

• 26:33Speaker 02

  That's another one that maybe should keep us up at night. Cryptography, storing your keys is hard, but. So that's an important nuance, especially in the sense when you have a strong running node culture and stuff. If you have, say, a chain where you're essentially just listening to the consensus set. And they tell you what the result of executing the blockchain is. And no one's executing the blockchain on their own. There's not like a strong culture of users. There's not like, you know, a ton of independent providers and things like that. Then you can actually just like make arbitrary state changes. So that's, that's an important thing is that many people actually run the, the protocol independent Ethereum. And not just like home hobbyists, but like, there's tons of services and analytics and exchanges and all sorts of stuff.

• 27:17Speaker 02

  That essentially become like policemen of, of preventing invalid state transitions.

• 27:23David Hoffman?

  Okay, so these were all of the theoretical risks, I would say, the possible technical risks. But what about the, maybe the ones that you're more concerned about more specifically, like the actual practical risks? Like if I, if I'm Lido and I want to attack Ethereum, what am I going to do? And what are you, what keeps you up at night?

• 27:41Speaker 02

  Yeah. The thing that keeps me up at night is certainly like one third becomes kind of this critical milestone of like, wow. Shit, like we're gonna let it happen, aren't we? 50% plus, actually, some of these like reorg, multi-block MEV, all this kind of stuff. Like in a, in a system like Lido or others where you certainly have disjoint node operators, but you have kind of this like unified economic incentive. Then I think it becomes actually very much a reality that these, they could flip a switch and they're starting to do some of these like malicious short-term reorg censorship, etc. To get to optimize essentially their gains. And whether that's dictated by, say, the DAO, which is a governance vote,

• 28:26Speaker 02

  which I think people have shown is, you know, heavily weighted towards a few, a few whales, if not VCs, saying you must do so as a node operator set. Or if it's just, you know, the node operator set's supposed to be optimizing their returns, right? And if it, at above 50%, all of a sudden optimizing your return becomes potentially doing malicious things. And then if you're part of the node operator subset that is optimizing their returns, all of a sudden they're making, they're making more money than the node operator subset that isn't. Then all of a sudden, you know, potentially you're kicking out operators that aren't as good. You know, and good becomes malicious at that point. So I certainly like, above that 50%, above that two-thirds threshold,

• 29:09Speaker 02

  like I do think that the economic incentives, because you essentially have created like a stratum for a cartel at that point, would push them to do, in many potential ways displayed out, things that I think people would consider as malicious against the security of the chain. Another thing is...

• 29:28Speaker 02

  You just begin to have fewer doors to knock on, right? In this like global decentralized, like unstoppable system, you now have like a coordination layer over a validator set that becomes very small, right? And it becomes very targetable and attackable. And I think people cite the Lido governance vote on self-limiting to one-third. I think this was kicked off maybe after I wrote that piece and some other discussion about a year ago. And it was rejected. I think people, when they look at that, they go, oh, I mean, it was three votes that did this. And all of a sudden, if I'm a regulator, I got three doors to knock on if I want censorship or I want other things like that.

• 30:13Speaker 02

  And like, sure, there's probably multi-jurisdiction going on there that maybe potentially helps. There's also a lot of USVCs that are entangled in it. So like I, it's really like these technical concerns with like a very reduced set that you need to knock on the door. Instead of like coercing the global set of Ethereum, you know, you're now coercing a handful of DAO governance token holders. And so it's really that kind of like where the social component of Lido or something like it becomes entangled with the consensus. Like it just makes it super way more fragile.

• 30:55Ryan Sean Adams?

  So Danny, just to make sure I'm understanding this, like to summarize,

• 31:01Ryan Sean Adams?

  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. But one entity, maybe a Lido-like entity, could delay finality. And for you, that's a, oh shit, we're going to let this happen, right? It's kind of a failure of our immune system to kind of stop this. Probably unlikely that they would do that, though, because...

• 31:29Speaker 02

  Because it's just not, it's not like... Immediately obvious exactly how you reap the benefit from that. It's not like necessarily like incentive compatible unless like you were delaying the outcome of an on-chain lottery and that helped something, you know, like you can think of scenarios in which like that becomes profitable and potentially valuable to do, but it's not like the most obvious place to attack.

• 31:53Ryan Sean Adams?

  And that's, that's interesting because we could very well tip over, you know, one third and then people will look at that and nothing will have happened, right? So maybe all of the, 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 start to get really worried when we go over 50% and because that, that brings a whole new set of powers to the entity that controls 50%. The ability to censor and maybe the ability to like, like reorg. So that's like, to me, that's like skimming off the top. So that introduces this, this kind of corruption type of vector where whoever has that control can kind of

• 32:33Ryan Sean Adams?

  cheat users, skim off the top a little bit. And then essentially Ethereum no longer becomes a censorship resistant protocol, potentially, right? If you have, again, three doors to knock on. So that 50% threshold is, is pretty critical because, because that's what happens after that. That's what could potentially happen after that. Is that right?

• 32:53Speaker 02

  And, and you know, there's censorship in the way of like, you know, are

• 32:59Speaker 02

  some boogeyman transactions making it on the chain? There's also censorship in like the, "Oh, you know what? If the, if these two operators which are like bound in this same kind of payout set, if we actually just censor this, this block in between us, we're going to make way more MEV. We'll do that, you know, so maybe it's less, it, it, it can be these like, "Yeah, knock on the door, jurisdiction says like you must censor these types of transactions." But it could also be like, you know, "We'll do that because that was profitable." "No, we'll do that because that was profitable." And that, that, that begins to kind of break down the integrity of the chain.

• 33:33Ryan Sean Adams?

  Right, right. We get kind of like Robin Hood type, front-running types of situations, where maybe our corporate overlords read the benefits first, or something like this. And then, at two-thirds, it's just all bets are off. I mean, Ethereum can't purvey any semblance of being a credible, neutral infrastructure, right? It's very deeply controlled at that point.

• 33:55Speaker 02

  That is what I believe, yes.

• 33:57Ryan Sean Adams?

  Okay, so 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 want to inject some of his voice as sort of a counter to this throughout this episode, if I can, because I think some people who are maybe listening to this, or on Team Lido, are sort of sympathetic to those arguments, might say, "Okay, guys, you just set up a straw man, and now you're beating it up, okay? Like, good job. Another bankless podcast."

• 34:31Ryan Sean Adams?

  So I want to try to steel man this, as we go. And so, one thing, I can hear the voice of Hasu saying, is, "But Danny, we're not talking about one entity here, and we're not actually talking about three votes, okay? What we're talking about is a network of 29 independent node operators that have their own utility functions." That's exactly what he would say, "utility functions," by the way, "which means they have their own incentives, and their own different skin in the game." And so, if the Lido governance apparatus actually did something, then this confederation of node operators would defect. They would no longer be part of the Lido network, and they would go do something else. So, that is a check-in balance on this. So, the idea

• 35:15Ryan Sean Adams?

  that, "No, this is not actually one entity that has one-third, or 50%, or two-thirds." This is actually 29 independent entities here. What would you say to that?

• 35:26David Hoffman?

  With aspirations to being permissionless, too.

• 35:28Speaker 02

  Yeah. So, something like Lido becomes like a shroud for cardization. Like, these entities, within the context of Lido, have a unified incentive, right? Like, it's not like, "I make my money from my MEV, and that kind of stuff." It's, all of the money gets channeled to one place, and we split it. And so, for one, within the context of operating as a Lido operator, you do have unified incentives. Yes. You might live in Taiwan and this other entity is in Australia. And so like we have, and I'm a security company. So I have like second order things about this and this and that. So like, yes, we do have outside of the Lido context, disentangled incentives.

• 36:13Speaker 02

  But Lido, if Lido is either, Lido either decides who those operators are explicitly through governance vote, which it does today, or it does in a permissionless way. And if it does in a permissionless way, it must be around profit maximization. That's the only way that you can decide if an operator is good or bad in a permissionless way is do you make enough money in relation to how much other people are money, how much money other people are making. And so in the former, we have a governance vote. So we had the three person problem. In the latter, we have the problem where once a subset of that operator set defects and starts doing things like reorders and stuff, they become much more profitable than

• 36:57Speaker 02

  the others in the set. So from a, from a strictly objective standpoint, we now have a striation between people that are making more money and less money. And an objective thing is going to have to kick them out. So, and there's probably blurry things in between where you have like semi governance or you have semi objective optimization. But in either of them, you have, you fail to have kind of like the ability to totally not have the kind of cartelized behavior. And so, yes, these operators could leave, but it doesn't necessarily change the amount of capital that's allocated to Lido. Right?

• 37:36Speaker 02

  So if, if five operators leave, five, you know, five of 29% of the capital doesn't leave Lido. Similarly, right now, you have this kind of interesting behavior where like the operator set could, because, well, that doesn't actually make sense. You can't forcefully exit operators. You can't forcefully exit state today, but Lido has kind of this like committee that holds pre-signed exits. So they, they can't essentially do that. So we don't need to go down that path. But I.

• 38:11Speaker 02

  In many ways in which this plays out, I don't see how you can eliminate

• 38:18Speaker 02

  the tendency towards cartelized behavior.

• 38:21Ryan Sean Adams?

  Okay, so there's some cartelized behavior. Let me ask you about maybe some other mitigators that someone like Hsu 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 caps, but they have done some, are implementing some decentralization mechanisms. One of them is a more permissionless validator set. Now, my understanding is that's not live today, but a bit more like a rocket pool where it's not gate-kept to these 29 different node operators. Anybody can join. Does that mitigate this in any way to you, Danny? Or, you know...

• 39:03Speaker 02

  No, 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 can't 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, assuming that a certain amount of the operators that has defected and now are doing things like reorgs and malicious MEB capture. If the 100 permissionless operators don't do so, then they're not going to hit the numbers and they're going to be seen as not good enough for the set and they're going to be kicked out. Unless they don't care about profitability, but in a permissionless operator set, I don't see how you can't not care about profitability.

• 39:50Speaker 02

  So, I mean, if they're willing to say, like, "Yeah, you can run Lido validators as long as you're bonded and you don't have to make any money, or like, meet Lido standards of..."

• 40:02Speaker 02

  APR, then sure, but I don't think that that's a reality that they're attempting to construct.

• 40:08David Hoffman?

  Why is having a set of validators that's defined by profitability a bad thing if we're talking about ETH stake?

• 40:18Speaker 02

  So it can 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, any, once, once a subset, once the set of that, that validator set defects and starts doing, you know, multi-block MEV malicious reorders, things like that, then they're going to look more profitable than the set that we might call honest, is honest. So now you have a disparity if you're using an objective profitability function

• 40:59Speaker 02

  between essentially the cartel, the people that have aligned not only their incentives, but their actions in relation to their incentives and the rest of the set.

• 41:08David Hoffman?

  Are 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 our, the culture and the values of what our staking system is, is defined by profit maximization. Once we have the powers of being past a third, past a half, past two thirds, well, then what turns in what was a competition in the marketplace turns into, well, now that I'm, I've been a profit maxi, I've always been a profit maxi. I was a profit maxi when I had only 20%, but now I have 60%. And so now I will be a profit maxi by extracting other means that includes the powers that I have as a result of being a large. That's what you mean?

• 41:48Speaker 02

  So even sub, yes, that is, but even sub one-third, the, if you move into a profit maximization regime where that you're trying to use an objective profitability function, it incentivizes those 29 operators to converge, right? Because multi-block MEV is more profitable than single-block MEV. So even, even if you have 20% of the network and you're split amongst 20 operators, you know, the, the incentive still becomes to essentially try to be one operator. Right? And, and that's necessarily what happens in the current regime. It's not necessarily what happens tomorrow, but it's certainly like the, the tendency towards the incentives of unifying the, the profits there.

• 42:28Ryan Sean Adams?

  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 kind of three votes, right? 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. And sorry, I don't mean the staked ETH itself. And basically, the way this was described is staked ETH users would have the ability to vote just to veto things, essentially, in Lido governance. So they wouldn't have necessarily the power to push proposals through,

• 43:12Ryan Sean Adams?

  but they would have the power to stop really bad proposals, and this veto power would be injected. Does that help mitigate the situation in any way?

• 43:22Speaker 02

  Some, some. Yeah. I mean, there are gadgets that can and should be layered into any sort of LSC system like this to make them safer. You know, so maybe the boogeyman jurisdiction that knocks on three doors and says, you now censor, you know, XYZ transactions. Maybe if the stake ETH holders are actually like proliferated across the world, they reject such a veto, and they reject such a thing. And so you do, I do agree that layers and protections. But I don't agree that the, especially in the kind of these economic, more economic attacks with malicious MEV reorgs, et cetera. I don't really believe

• 44:02Speaker 02

  that stake ETH holders incentives are disjoint enough from Lido's incentives. Like, they're kind of just unified in the sense. And I think that relying on stake ETH holders to be a fallback on that when like, they're optimizing their APR presumably, is not like, I don't really see that that follows.

• 44:23Ryan Sean Adams?

  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, you know, a good acting protocol and what they might do to mitigate and restore the balance of power.

• 44:47Speaker 02

  Yeah, and that goes back to like kind of the disjoint social sets. That would probably help. But if Lido wants essentially all ETH to be staked ETH and wants all staked capital to be Lido staked capital and wants all ETH to be staked ETH, now we don't have, we no longer have disjoint sets and we've kind of converged the incentives here in a way that's probably degenerate to actually protecting.

• 45:12Ryan Sean Adams?

  And part of your concern is that they're unwilling to do any of that, right?

• 45:16Speaker 02

  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 ETH? And I think both of those things we should attempt to hold as not true, so that we have these disjoint sets, so we have checks and balances. And so, Lido's really like, you know, they or the capital allocators towards it are going to decide if they become over these critical thresholds inside of staked ETH. But I do think that there's work, actually, for better for worse, there's work to do on the protocol to ensure that not all ETH becomes staked ETH, not the Lido stake token becomes staked capital in the system.

• 45:58Speaker 02

  Because, again, it's important to have these disjoint sets. And that, that's a complex problem. You know, there's some potentially re-architecting of incentives, which is not something that we like to do. There's probably the notion that the system really needs to become MEV-aware and capture that to avoid certain centralization concerns if the staked capital is limited. And there's a lot of complexities there. We have a lot of work to do. But I do agree with your notion that ETH holders, the ETH community and at large the Ethereum user base, can and should be a check on balances.

• 46:39Speaker 02

  And whether that's integrated into the lighter protocol to help make sure their protocol is a subset of staked ETH is safer, great, but also keeping those set disjoint so that Layer 0 continues to operate in a safe and healthy way is very important.

• 46:54David Hoffman?

  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 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 is like, oh, this this might happen one day, so we should be cautious, but otherwise, we're fine. Like, where are we on this thought experiment to crash course with reality spectrum?

• 47:26Speaker 02

  It seems like the the Lido mindshare is quite cavalier and disingenuous about the risks and wants to gobble up all of stake capital.

• 47:35Speaker 02

  Lido has, since I wrote that piece over a year ago, fluctuated at, you know, 30 to 32 and 1/2 percent or whatever, maybe even 33 percent, close to that 1/3 threshold. I saw a graph. I think that kind of was like some of the the collapse of shit last year with three arrows and stuff like it coincided with me writing my piece and like the Lido stake went down. I don't think it had anything to do with my piece. But since it's really kind of fluctuated, if you I saw a really good graph the other day, I can't remember it came from, actually came from Masari, someone forwarded it to me of Lido's share. And it's really, it stayed in that below 1/3 and it's kind of bounced

• 48:16Speaker 02

  off of it. And I wonder if that's kind of the immune system of the ecosystem coming into play, or if it's just happenstance because of other capital allocators. I don't know. It'd be interesting for somebody to do it to do a dig there. But this is real. This is real. You know, like, there's a reason that people, you know, the East Staker community say like, no one above 22 percent, you know, and a and a social, you know, obviously, like, the protocol can't, the protocol doesn't know anything about this. The protocol can't like, say, you're the same entity as that. And and anyone can, you know, replicate themselves and re-stake in a different different environment. So the the protocol doesn't know anything about it. But the they want the social handshake and the social norms to be, you know, more

• 49:02Speaker 02

  in that 22 percent threshold, so that we're not constantly worried about it, right? If we're if Lido's, sure, Lido like, can't do these bad things if they're at 32 percent. But we're constantly on alarm, right? And it's constantly like, this is a huge, this is a huge constant threat until capital becomes reallocated. And so like, it becomes...

• 49:23Speaker 02

  Very valuable for us to not always have to be yelling about this thing. In the event that, you know, say Lido goes sub 28, sub 25.

• 49:32Speaker 02

  We become in a much more comfortable regime. And, you know, this is, this is a bit different than say like client, the choice of, of, of say the consensus layer client. We used to have Prism at like 70, 75% of the network. And, you know, the, the social, the social structures came through, you know, the layer zero came through and reallocated that because it was, it was a major like risk to the network. You know, we have all of these like incredible client teams. And instead of it being on plus two thirds on one client, now it's, you know, we can, we, there's still, there's still room to fix, but we're, you know, we're like 44%, 38%, 20 something percent.

• 50:14Speaker 02

  So we don't at least have like these critical, critical thresholds being hit with the consensus layer client teams. So point being is like, we've seen these social, the, you know, the, the layer zero step up and, and fix things before. This is a bit more complicated because it has a lot of like financial monetary incentives entangled. And so this like seeing, seeing meaningful movement here probably doesn't just mean like I reallocate my capital to some like protocol that I see as benevolent, I reallocate my capital to like another protocol that's very profitable, you know, and, and a good product. And because Lido is profitable, Lido is a good product, Lido is easy to use. Like there's a reason people like this thing. And so like, we need, we need better alternatives.

• 50:58Speaker 02

  You know, it's, it's not just a simple like, I'm going to be altruistic and take like a, I don't know, 10% hit on, on my APR or something like I need to have reasonable alternatives. And so it's, it's, it is exciting to see emergent protocols that are attempting to, to chip away at this. But we really need good, good protocols and good products out there so that people can, you know, make what is A good decision for the protocol is also a good financial decision for themselves.

• 51:26Ryan Sean Adams?

  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 1/3 threshold. 1% away and kind of hasn't quite gotten over that, but dangerously close to that 1%. And of course, every percent up gets you closer to 50% as well. I mean, I guess one side comment, and I'm sure we'll get into this a little bit later about the mitigators, is it strikes me that the difference between client teams and something like Lido is almost the difference between like public sector and private sector. I mean, the client teams didn't really have much of a profit motive,

• 52:10Ryan Sean Adams?

  or at least not the same type of profit motive. I very much saw the Prisms of the world and the other client teams as basically like public goods types of products without this large corporate profit motive. But Lido very much has that. Almost in kind of the traditional economy, it operates more like a corporation that's going to eat up as much as possible. And that's certainly the... One thing Hasu said that I think all listeners should pay attention to is, Lido and Hasu and advocates are not making the case that they should stop at any number. They're not making the case that they should stop at 30% or 40% or 50%. They're actually saying, no, we want to get to like as high as possible, maybe 70% even.

• 52:54Ryan Sean Adams?

  And actually, it wouldn't be so bad if we did. So that's kind of what's coming from many of the other side of this argument, I would say.

• 53:04Speaker 02

  Right. And I think you're right. Like the way that client teams are positioned is they can think much more about the health of the network, independent of 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 be it bolsters up their security business, or maybe they want to get into the staking business. It's kind of like these second order things for why they might be making a client. Whereas, you know, Lido is essentially looking for profit. That said, they should be thinking about the second order impacts of what's going on here. You know, in the event that Lido becomes 70% of the network...

• 53:45Speaker 02

  You know, enables the ability to do malicious reorgs in MEV, you know, creates a more fragile Ethereum. They've, in my view, they're going to devalue the system. They're, they're the thing that they rely upon Ethereum, the thing that they're building upon to reap those profits. They're going to wreck and, and in doing so, they're going to destroy themselves. And so in, in that event, I will say again, like the nice thing about bringing the crypto economic asset in protocol with staking rather than extra protocol in mining is that layers here can coordinate and can, can fix and patch in the event of disaster.

• 54:31Speaker 02

  But it's a mess. You don't want to go there and, and in such a mess.

• 54:39Speaker 02

  I'm not glad it wants to go there either. If they take a second to think about it, I'm sure they've thought about it.

• 54:44David Hoffman?

  Right. This is the whole kind of tragedy of the commons Moloch trap issue. I think the, the classic example of like a Moloch trap is there's 10 fishermen around a lake. And if they all fish at 100% capacity, then they're collectively drain the lake and then no one can fish anything. And so if they all self cap at 70% of their capacity to fish the lake, then they can all have this lake and fish forever. But then if they all agree to self cap, well, it increases the incentive for just one fisherman to defect. And they get to fish at 100% while everyone else self caps. And so the, my question, Danny, to you is we focus on Lido so much in this conversation and broadly in this conversation, just because they are the ones just 1% away from crossing that, that big threshold.

• 55:26David Hoffman?

  But to what degree is this a Lido conversation or is this just a natural market forces? Like if we strip out Lido, reroll the dice of Ethereum and play it forward again, it would just be another LST protocol. Right? Like how special is Lido here versus just fighting Moloch?

• 55:43Speaker 02

  Yeah, it's hard to say exactly how things would play out depending on initial conditions. One, like if people, if you know, myself and others had the foresight of of kind 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 from the get go. I think capital allocators are learning. I actually was talking to some people that know people on like traditional Wall Street that are that are like very aware of the one third threshold. I was like, really? Yeah. And like, and conscious about how they're thinking about capital in relation to it. And so, you know, Lido, Lido was the first mover, and Lido was very good, and very good product that came out

• 56:27Speaker 02

  the gate. And so like, when I say, I don't know exactly how this would play out, say, if we had five Lidos at the beginning, I don't know for certain if, you know, we'd have this like singular entity that was, you know, sitting at this one third threshold. I think that they would, they would make a claim that it was the natural outcome. But I, I, I, I believe that there could have been a much more healthy competition, competition distribution out at the outset. And so, I do think that, having this conversation, I do think that like, being aware of the risks, and I do think that layer zero, stepping up and understanding, you know, the, the risks today, and the second order long tail risks of capital allocation in such a regime, is going, would be valuable in any regime,

• 57:10Speaker 02

  regardless of Lido, or, or maybe it was, you know, Coinbase could easily be the boogeyman here. And I know that Lido says, if we weren't here, Coinbase would be a third of all capital, and, and, you know, it'd be much worse. And that's probably true. Lido is good, at certain thresholds. Like, these protocols are good. Like, it's, it's important to have many different protocols, many different allocations, across jurisdictions, across, across smart contract risks, such that Ethereum is more resilient, you know? And so, hat off to you. I'm glad you exist, Lido. Just fucking tone it down.

• 57:45David Hoffman?

  The Hozu argument is that market forces just point towards the inevitable future of one dominant LST. And I kind of agree with that. Like, 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 will be one. And so it's about having the graceful path to get there, rather than not allowing that future to exist at all. How do you feel about that?

• 58:17Speaker 02

  Um, yeah, I think this comes down to layer zero. Like, if that's, if that's the, if we're willing to kind of layer a centralized system on top of a decentralized system, and make it as good as we can, then, you know, we probably shouldn't have built the beacon chain, and we should have just had like a consortium where like Vitalik and a handful of people picked a bunch of operators, honestly. But, you know, I think that the Ethereum community has pretty intense values of decentralization. And I think that, I think that capital allocators can potentially think about tail risks. We think about them a lot. You should think about them, too. And that we can have a healthy ecosystem. I also think that there can be much more competition in what LSTs provide, right?

• 59:01Speaker 02

  Like, Wido has certain structures on how they handle like entries and exits and the queue and relation to profitability and whether they rebase or not, and what jurisdictions they're involved in, and which operators they're using, and what other strategies they're using. Like, there's all sorts of like, potential competition points here, and potential differentiation points that we just like, quite simply haven't seen, because we had this mega first mover, and we had kind of a, kind of like a

• 59:29Speaker 02

  lax response to it in terms of, in terms of like, the competition here. Like, two years ago, or year and a half ago, you know, I wish some startup-minded folks were like, "Oh..." Let's compete. And I guess we had some of that and we're seeing them come online, but we just haven't, we haven't seen enough of it.

• 59:48Ryan Sean Adams?

  Danny, but it is your contention that having Lido at like 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.

• 1:00:03Speaker 02

  Okay. Agreed.

• 1:00:04David Hoffman?

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• 1:00:48David Hoffman?

  Cello is the mobile-first, EVM-compatible, carbon-negative blockchain built for the real world. And now, something big is happening. Introducing the Cello Layer 2. It's a game-changing proposal that's going to bring Cello's rapidly growing ecosystem home to Ethereum. Vitalik has shared his excitement for the Cello Layer 2 on the Cello forum, so has Ben Jones from Optimism. But why? The Cello Layer 2 will bring huge advantages like a decentralized sequencer, off-chain data availability, and one-block finality. What does all that mean? Rock-solid security, a trustless bridge to Ethereum, and more real-world use cases for Ethereum without compromise. And real-world adoption is happening. Active addresses on Cello have grown over 500% in the last six months. With the Cello Layer 2, gas fees will stay low and you can even pay for gas using ERC20 tokens. But Cello is a community-governed

• 1:01:33David Hoffman?

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• 1:02:17David Hoffman?

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• 1:02:36Ryan Sean Adams?

  Okay Danny, so let's move the conversation into how we solve this, right? And there may be various mechanisms we can use. I know, you know, part of your post, maybe part of this episode is an appeal to the layer zero, and certainly we could talk about that a little bit. And maybe there are some in-protocol designs that we could talk about as well. One question I have for you, though, is the selfish profit Maximization kind of mechanism that we might be able to use. So if an individual is staking with Lido, what are the risks

• 1:03:16Ryan Sean Adams?

  versus not staking with Lido? My understanding of the protocol is if there are a group of validators that are all staking together, the risks have like increased as a result of that. You know, if, you know, all of the validators together go offline, there's kind of a penalty that maybe you can describe that gets really amplified. That slashing risk, maybe that's a reason. What are the selfish mechanisms to not stake with any provider that has the bulk of all ETH inside of it?

• 1:03:49Speaker 02

  So in general, there's anti-correlation incentives. So if an entity is slashed and scales with the amount with which they're slashed up to, 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 during that period, especially in a period of non-phenality. I will say that a lot of-

• 1:04:14David Hoffman?

  And just to drill into why this is a thing. This is because any group of people that all get slashed all at the same time, it's assumed that they are doing very similar homogeneous things that would be considered the opposite of decentralization. That's the mechanism, right?

• 1:04:28Speaker 02

  Right. Well, 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, the protocol assumes that it was an attempt to create a network fault, to create two conflicting finalized histories, and they're punished to the maximal extent. If 1% of the network does it at the same time, it's not assumed to be an attack, and

• 1:05:08Speaker 02

  you're scaled, 1% times 3, you lose 3% of capital in doing so. That said, I will point out, the disjoint node operator set does protect against a lot of these dis-correlation incentives. In the event that one operator does something silly, and they're not actually attacking the network, and double signs, you're not necessarily going to lose a ton of capital. Because it ends up being 1/30 of Lido capital that would do so. That said, if there's actually a coordinated attack, and you're above certain key thresholds,

• 1:05:51Speaker 02

  and Lido goes mega malicious, and so do these operators, that would be potentially highly slashable. That's-

• 1:06:00Speaker 02

  Due to the intense nature of the kind of finality incentives, that's probably not like the biggest risk on your capital and being with Lido. I'd say the biggest risk on your capital and being in Lido is, one, you're accepting smart contract risk. So you're accepting like this additional layer of coordination risk on top of the Ethereum protocol. Additionally, you're accepting governance risk. So it's just a handful of entities that could potentially steal, rug all of the capital. That said, you can mitigate that with governance things over time. Hopefully. And ultimately, for better or worse, it's second order impacts. In the event that you're staking with,

• 1:06:44Speaker 02

  you're a major capital allocator and you're going to push the needle of Lido over a third, you're now beginning to devalue the system of Ethereum that you're relying upon.

• 1:06:54Ryan Sean Adams?

  That is the longer term profit Maximization, I guess, angle, right? And this, I mean, there's multiple forms of profit Maximization. There's like short term profit Maximization, which is like maybe the one month to two year, three year type timeframe. And then there's like the 10 year profit Maximization outlook. And I think your argument is that if you have one operator or one entity that controls a large majority of the stake, the value of ETH will simply be lower over a 10 year time horizon. Because the reason Ether is what it is today

• 1:07:35Ryan Sean Adams?

  is because the network has some perceived decentralization and credible neutrality. That is why applications buy block space. And if that, to the extent that erodes, that essentially erodes the value of ETH. So if you are a 10 plus year horizon profit maximizer, right, then you should care about the systemic risks here. And you should essentially delegate to, or not delegate, but stake with a solo stake or stake with someone who has lower market share. Would you also make that case? Or did I kind of overdo that profit Maximization?

• 1:08:11Speaker 02

  Certainly. And because... Ultimately, like by allocating capital and kind of degrading Ethereum's consensus, we degrade the guarantees of Ethereum. You know, we degrade the credible neutrality. We layer like a governance layer on top that can be captured and increase the chances of, you know, the consensus not doing what it's supposed to do, not doing what it's designed to do. You know, every crypto economic consensus, every consensus mechanism classically too,

• 1:08:43Speaker 02

  it breaks at certain key thresholds. Like it loses its guarantees beyond, you know, XYZ happening. And so pushing a consensus beyond its limits means that you can break it, means that it can be broken.

• 1:08:59David Hoffman?

  I want to get into the action steps for how we can actually preserve Ethereum decentralization when it comes to ETH stake. Cause I know this is a very big Moloch problem, but I want, I want to do more than just like screaming into the wind about like, hey, let's value decentralization more. There's a bunch of different players here that are relevant. There are individual stakers who choose to use LSTs to stake their ETH. There are Lido competitors here like Rocketpool or other LST startups. There's also solo stakers, people who stake at home and they have their own staking machine. Who's got the biggest role to play here and what action steps would you have for each one of these?

• 1:09:42Speaker 02

  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, right? In the event that there's a disaster and, you know, Lido essentially, you know, the community soft forks Lido out or something like that, then who's carrying the network on their backs, right? Who's, who is still building blocks? How does the consensus continue to move forward? Solo stakers first and foremost, they're like the primary resilience of Ethereum, even if they're a small percentage of the network. Beyond that, capital allocators, like there are people allocating massive amounts of capital towards Ethereum, Ethereum products and other things like that.

• 1:10:24Speaker 02

  And I think them being aware of the systemic risks of allocating towards, you know, a protocol like Lido at those key thresholds is very, very important. And it was again, like I, I got wind of some more traditional kind of Wall Street folks, like being intimately aware of the one third threshold. And that's actually like. Kind of promising. It's kind of interesting. I wouldn't have expected that.

• 1:10:48Speaker 02

  You know, it's innovators building out new products and innovative products and being aggressive, you know, like trying to eat Lido's lunch, like where I I I've seen very few instances of this, you know, like incentives, direct incentives to leave Lido and do something else. I think Diva is like the only thing, the only protocol that I've seen do that. And I think they launched that like a week and a half ago. I don't know the actual details of not endorsing Diva. I'm just saying someone finally is doing it. I've been yelling into the wind about that for a while.

• 1:11:18Speaker 02

  And ultimately, and I think there's, there's a lot of like education to do for the Ethereum community, ETH holders, ETH stake, ETH stakers, et cetera, to like, understand the risks here, which, you know, it's valuable for me to be on this podcast and talk about so. And for better or for worse, we're not done. The beacon chain needs some work and there's going to be, there needs to be some pretty, pretty deep, kind of like economic research and other things going on to make proposals to ensure that Ethereum is sustainable on not only like 5, 10, but 100 year time horizon.

• 1:11:52Ryan Sean Adams?

  What sort of things can Ethereum protocol devs do to sort of stop this, right? Because I can hear-

• 1:12:00David Hoffman?

  Yeah, once the devs do something-

• 1:12:02Ryan Sean Adams?

  Well, I can, I can kind of hear the voice of Hasu a little bit, right? And he's basically saying, okay, you guys are being star, star AI dreamers again, right? Capital will consolidate. There will be network effects around LSTs. You guys can talk about it on the layer zero. Maybe that'll work for a while, but the values get diffused over time. And will our kids care about this as much as we do, Danny? Or, you know, this is a multi-generation network that we're trying to create. So ultimately, don't we have to bake our values into the actual protocol design itself in order to enshrine them for multiple generations and not be so reliant on the layer zero to enforce these? Of course, to a certain extent, the layers are always has to enforce these, but can we-

• 1:12:47Speaker 02

  Yeah, as much as we possibly can.

• 1:12:48Ryan Sean Adams?

  Okay, so how do we do that? Are there any solutions there? Can, can we enshrine, could we? I read a recent Vitalik post about, you know, what to enshrine, what not to enshrine. And he, you put, put together the tantalizing question of what it would, what it would be like to actually enshrine LSTs inside of the protocol. Do you think that's an answer? Tell us what levers we have on the protocol design side.

• 1:13:11Speaker 02

  Right, so certainly could go down the path of figuring out how to enshrine LSEs. 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 profitable over here, but these are profitable and we're attempting to make them fungible? There are some like proto designs there, you know, Donkrod posted, Donkrod had a post somewhat recently, I think Vitalik linked out to it. About like, you know, just exploration of what that might look like. Additionally, and I think it's very critical that not all ETH becomes staked.

• 1:13:55Speaker 02

  Because again, like the disentanglement of various sets helps the layer zero be resilient. And so like, in the event that only 30% of ETH is incentivized to be staked and there's 70% of ETH that is not. Then even in a regime in which, say, we have some sort of like malicious actor that tries to gobble up all of ETH staked. And starts to do malicious things, we have checks and balances that are incentive compatible, right? And so, so like targeted economic stake rate, I think is very important. There are disparities between staking at home and staking with a large provider because of the, the

• 1:14:38Speaker 02

  kind of like the chunkiness, here are the word people like to use, of MEV, you know, essentially like a lot of the MEV comes in very few blocks. And so if you're a large provider, you get to kind of like average that out quite a bit. Whereas if you're a small provider, you end up being much lower than the average, a smaller staker. And so like the, the protocol becoming MEV aware through things like, essentially like you become MEV aware. And then you either like distribute it evenly or you, you burn it. So that's a kind of the MEV burn protocols. I think those are very important. I think those are very hard. I think that Justin is very optimistic about the designs that exist today. I think there are a handful of people that are still banging their heads against it because they want to see, to make sure that these are actually incentive compatible in the long run.

• 1:15:24Speaker 02

  And probably just some more fundamental research on

• 1:15:30Speaker 02

  What's going on in Lido? What's going on in LSCs? What are the actual incentives here? And I think something that was kind of interesting is, I can't remember the exact figure, but I think it's like, maybe only 30, maybe 40% of stake ETH, the Lido stake ETH token, is actually used in DeFi and like essentially redeployed and used in that because it's liquid, which implies like 60 plus percent is maybe there for another reason. Why are they there? You know, and it's probably much more around like ease of use, you know, it was like simple, like you can buy it on a market, you know, there's all like, there's, you know, and capturing actually some of those other things and figuring out, you know,

• 1:16:13Speaker 02

  if it's actually ease of use, then staking or, or, you know, joining pools that aren't lighter, like that only then becomes as easy as possible. That needs to become as simple as possible. And so there's probably some gains to do around making staking not so scary and making it easier, or maybe reducing the 32e threshold and all sorts of other things like that. So there's a lot of work to do.

• 1:16:39Ryan Sean Adams?

  Yeah, yeah, I guess my, my take on this high, high level here, hearing about this from the solution side is there's really three things that, that really can be done. And, you know, two of these are short to medium term, and then one is the longer term. And the two short to medium term are education, right, and awareness and pushing back on, on the layer zero. Part of your message today is, is basically that.

• 1:17:00Speaker 02

  And real quick, importantly, the system's 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 like irrecoverable unhealthy equilibriums that like even when we have the, the better tech, the better research and the better refinements of the protocol, you know, can't get ourselves back out of, right? So it's like, it's very critical. We have a very strong layers here right now to like, hold our values super true as we right the ship.

• 1:17:30Ryan Sean Adams?

  Yeah, definitely. I mean, the price of freedom is ever-present vigilance, right? And so is the price of decentralization. So we don't get a lot of shots at this, certainly. So the layers here is important. So are competitors, by the way, which this is kind of a general call to competitors to, you know, enter and start building market share and provide better UX and try to leapfrog Lido and, you know, others in some way to distribute that. But really, I think the long-term solution here, Danny, at least to me, has to come to some kind of protocol-level design, right? Because it seems like the forces that you're resisting are the same forces that the public

• 1:18:11Ryan Sean Adams?

  sector has had to resist in other forms of human coordination, right? So antitrust legislation and, you know, governments resisting too big to fail and that kind of thing. They've had to intervene with the private markets and do something, essentially. Like, can the devs do something? Like, can the public sector do something?

• 1:18:29Speaker 02

  Right.

• 1:18:29Ryan Sean Adams?

  And the extent that we're able to embed this in our social protocols, like our legal system, we're able to kind of push back against this cartelization and this kind of Moloch trap. So it seems to me that's got to be the long-term solution. That's something, we do something to tweak the protocol. And I'm not sure exactly what that is, but is that your inclination, too? Is that what you ultimately think? Or do you think it's just too thorny a problem to actually solve in the protocol? And this all has to take the, like, does, do you just-

• 1:18:59Speaker 02

  No, I-

• 1:19:00Ryan Sean Adams?

  LSTs in the protocol, does that solve it? You know, can we just-

• 1:19:04Speaker 02

  I'm not 100% sure. I don't have the answer. I know that there are answers, and I know we must get there. And that's going to be like a huge component of the conversation in the design landscape over the next couple of years. I will say that the, you know, there's going to be the combination of attempting to make the incentives of staking such that they do not converge towards a single LST. And there's also the design direction of ensuring that all of stake, all of ETH does not become staked ETH, such that if it is inevitable, that-

• 1:19:40Speaker 02

  A single entity takes all of staked ETH, that there's still an immune system. You know, there's still, i- i- if 70% of ETH is not staked ETH, then we now have 70% of capital that is against the staked capital doing malicious things, right? And so like, that still relies on layer zero, but ensures that there's, there's more incentive compatibility across that layer zero rather than just ideology. And so, so it's, it's, it's, it's a combination of many of these things that I think have to come to fruition.

• 1:20:11David Hoffman?

  There's a couple of perspectives I want to bring to the table, brought to me by, 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 go? And another question is, would you admit that Lido has decentralized the network so far? You can choose to respond to either one of those, but I kind of think the gist is, and the gist I've gotten from Lido is, Lido is like, hey, we're the lesser of two evils. Like, it could have been worse. It could have been Binance.

• 1:20:45Ryan Sean Adams?

  And they're also saying, and also, guys, we're improving. We're making this a bit better.

• 1:20:49Speaker 02

  Yeah, yeah. Great.

• 1:20:51David Hoffman?

  Respond, respond to the vibe.

• 1:20:52Speaker 02

  I, I said, 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, you know, and other things. And Lido, under certain thresholds, is a boon to the network. That's, that's, that's a good thing. Like, it, it can be, it is a very good product. It's proven itself to be well-developed, pretty secure. You know, I don't like, I don't like the governance of it. I don't like token distribution on top of it. But i- i- in, in certain healthy doses, certain doses is healthy. So where is, where is capital going to go from institutional capital?

• 1:21:30Speaker 02

  We shall see. You know, some of it's going to go to Coinbase, some is going to go to consortium, LST, some of it's going to go to Lido, some of it's going to go to institutions attempting to, you know, start their own, like, sort of like staking ETF or whatever. And you know what? There's going to be a proliferation of many of these things. And it's best to have a proliferation of many of these things.

• 1:21:54Speaker 02

  Ideally, it's not all coming from the US too, right? Like, when people say institution, they're like, you know, you think, you're essentially thinking about like, TradFi, Wall Street, but you know, hopefully this is multi-jurisdictional capital because this is a multi-jurisdictional, you know, machine that is very valuable for the entire world. So I'm sure I know, I know like the, the honest answer is supposed to be, well, it's going to go to like Coinbase and they'll manage the capital. And then all of a sudden we have like another threat on our hands. But I don't think it's so obvious that it's just going to go all into one place. And if there are new vehicles that are well-rounded and have different risk profiles from Lido

• 1:22:35Speaker 02

  and take some of that share, even if some of them are centralized players, everything is, everything in its own orb is centralized to some extent. That's a good thing. So we shall see. And if we have another boogeyman in a few years that we have to talk about and fight, that'll be it.

• 1:22:53David Hoffman?

  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 illuminate that subject?

• 1:23:13Speaker 02

  If, so Layer Zero is very strong today and we can rely on Layer Zero for a lot of things today. Layer Zero lets us succeed one-third today. It's pretty fucking disappointing. If it exceeds 50%, we failed.

• 1:23:30Ryan Sean Adams?

  Okay, so we're at, 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. I'm feeling, I'm feeling yellow and you're, you're maybe saying-

• 1:23:44David Hoffman?

  And we're right next door to orange.

• 1:23:47Speaker 02

  No, we're, we're orange.

• 1:23:49Ryan Sean Adams?

  We're orange.

• 1:23:53Speaker 02

  But again, yeah, like if red is like, I feel like red is, red is, is red an alert or like it's, like it's a disaster?

• 1:24:00Ryan Sean Adams?

  Red is, red is like- We are under attack right now.

• 1:24:03David Hoffman?

  Yeah, we are under attack. We need to, everyone, all hands on deck moment.

• 1:24:06Speaker 02

  Yeah, I don't know. I mean, it's hard, it's hard, it 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 the forms that we always think of them. Economic attacks are like probably the most real attacks in in crypto. So maybe it is.

• 1:24:24Ryan Sean Adams?

  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 listened 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?

• 1:24:46Speaker 02

  Self limiting while we're in this interim of like trying to better understand and make sure that the protocol is safe on many decade time horizon is probably a good thing. I do think that Vitalik had a very interesting kind of offhanded proposal like a year ago. It's like maybe it should be a social norm that fees on this type of protocol just go up until they're absurd as you approach key thing, key thresholds like one third. So they become naturally kind of rate limiting or or fucking super profitable because they're that good, I guess. But the

• 1:25:21Speaker 02

  so both of those, I think, are really interesting design directions. I do think that being Ethereum aligned while Ethereum is very valuable, very important, becoming the backbone of many good things, but is also still has work to do. I think being being aligned is is making sure that, you know, your protocols stay in under in key thresholds, under key thresholds. And so I I think that's that's kind of the big thing. Other than that, like to designers of lighter protocol, like you'll do a good job. You all you all have a good product like I respect.

• 1:25:59Ryan Sean Adams?

  What's in it for them, Danny, to kind of to do this to become better Ethereum aligned? Is there is there a carrot? Is there a is there a stick?

• 1:26:08Speaker 02

  Yeah, I mean, the carrot is, you know, Ethereum becoming the backbone of like global coordination and finance and you not wrecking it between now and then.

• 1:26:18Ryan Sean Adams?

  How about the stick?

• 1:26:20Speaker 02

  The stick is, you know, you destroy the credible neutrality of Ethereum and you're going to hurt, you're going to destroy your product.

• 1:26:28Ryan Sean Adams?

  As we end this, Danny, one question I have for you is we kind of zoom out and look at the system, this beautiful thing called Ethereum that we've created and, you know, 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 all of the other core dev teams. So thank them as well on our behalf. We've really created a, you know, a fantastic computer here, a piece of human coordination. It's very exciting to see and we're all obviously vested in seeing that experiment play out and be as incredible as it could be. Do you actually see any virtues that this centralization vector is coming to light now? One thing I've

• 1:27:10Ryan Sean Adams?

  always observed in Ethereum is we don't fix things until we actually identify the problem. And then once we see the problem, whether it's like, our damn gas fees are too high, we gotta like go fix that. Then it takes some time, but Ethereum kind of steers the ship and goes and fixes it. I'm wondering if this is kind of a silver lining here. This problem is becoming more well-known. And once it does get well-known, well, ETH researchers, protocol designers, you know, everybody who's focused on making Ethereum better is going to turn their gaze on it and for it to become the next, you know, Moloch-slaying event that we have. So is that, is that a silver lining here? Are you seeing some of that?

• 1:27:55Speaker 02

  I think so. I think so. Like 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.

• 1:28:09Speaker 02

  I was actually talking to kind of like a macro finance econ guy who spends a lot of time looking at Ethereum the other day and he's like, you know what, it's probably good that Lido came and did this now. And it's like, you know, I have issues with what we might call Ethereum alignment with respect to Lido, but they're competent, they understand Ethereum, and they're not, they don't do like outwardly malicious things against, except for this thing that I claim in terms of key thresholds. But he's like, you know, if it's not them, it's going to be some TradFi ETF thing that's going to attempt to gobble up all of this stuff. And so the fact that we got to, we get to address this problem

• 1:28:52Speaker 02

  today, and in with respect to something a bit more native, crypto native, is probably better than if we had to address this problem only when we realized it, when, you know, TradFi showed up.

• 1:29:06David Hoffman?

  Danny, if we need to continue this conversation, who do you think we should talk to and what would, what would we talk about?

• 1:29:13Speaker 02

  There's definitely a bunch of emergent LSD protocols that it's probably worth giving some visibility to, you know, what's the difference? What are they doing? Why are they doing it? You know, so I don't necessarily need to make a bunch of ad spots for them, but I think there's probably like legitimate, technical, interesting conversations to have with some of them. Barnabé is a beast. Barnabé, if with anybody on his team, they are thinking deeply, deeply about these problems. And, you know, Ethconomics coming up at DevConnect, I think there's going to be a lot of like really cool, a lot of really interesting conversation and research around this. And so like capturing some of that, you know, I'm talking much more about these kind of high level things, how the pieces fit together,

• 1:29:54Speaker 02

  how, you know, the risks play out. But they're getting deep, deep on the details of understanding the economics and the potential design paths here. So Barnabé, anybody at the Rig team, I think would be quite, quite good. And I think there's going to have quite a canon of research and literature to talk about now, between now and the end of the year.

• 1:30:14Ryan Sean Adams?

  The Bitcoiners will say we should have stuck with proof of work, Danny. What do you think of that? Any truth to that?

• 1:30:20Speaker 02

  Um, no.

• 1:30:26Speaker 02

  For one, I think the energy consumption as we kind of like modernize the world hopefully is kind of becomes unconscionable, like it's just not how we should be designing protocols. Additionally, like proof of work has incentive issues with respect to pooling and other things. You know, DocRed claims if you let it play out enough in an MEV environment, if people are going to tokenize mining hardware and you know, contracts and things like that.

• 1:30:55Speaker 02

  And you know, if you look at mining distributions in mining pools, they don't look good, right? There's a little bit of like more liquidity in terms of capital allocation, like it can switch pools, but the incentives definitely exist, especially in like these high MEV environments to pool and to create structures that are maybe akin to LSTs. You know, when you don't have a fee, when you don't have like a appreciable fee regime, like in you know, in Bitcoin in most contexts, I think they have like BRC 20 or something now, then like a lot of these problems just don't show up, right? Like Ethereum is awesome because it's actually used. And so we actually see emergent problems very quickly. In my piece, I wrote, you know,

• 1:31:38Speaker 02

  like, these may seem like tail risks that are hard to take seriously, you know, might never happen, but like Ethereum is like, you see the tail risk play out all the fucking time. Like you see, like, you think you understand the world and then like it blows up because people actually use the system. And so like, I don't think it has an incredible amount to do with staking versus mining in terms of the particular problems of each are going to be different, but there are going to be distinct problems that emerge in either regime if you have like a very utilized and desirable system like we do.

• 1:32:17Ryan Sean Adams?

  Well, Danny, thank you for engaging in the conversation today. This has been supremely useful. We appreciate you.

• 1:32:23Speaker 02

  Thanks for having me. It's a lot of fun.

• 1:32:25Ryan Sean Adams?

  Action items for you, Bankless Nation. You've got to hear the other side of this argument. If you want to go do that, we have an episode called "In Defense of Lido", with the guest, Hasu, who takes the opposite perspective of Danny Ryan, our guest today. So you can hear both sides of that argument. And of course, we'll be following up on this episode with more episodes like it in the weeks and months to come. But now, Dave and I are off. We're actually going to record our debrief episode. And that's where we unpack the conversation we just had with Danny. If you're a Bankless citizen, you already have access to that in the Bankless Premium podcast feed. That is ad-free and includes bonus episodes like the debrief. If you're not a citizen, you can become one. There's a link in the show notes to unlock that. Got to end with this. Crypto is risky. You

• 1:33:09Ryan Sean Adams?

  could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.