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    Bell Curve

    The Intersection of Restaking and Liquid Staking | Sreeram Kannan

    Tue Jul 25 2023
    Decentralized TrustLiquid StakingRestakingEthereumEigenlayer

    Description

    The episode explores the intersection of liquid staking and restaking in crypto, focusing on Eigenlayer as a marketplace for decentralized trust. Ethereum is seen as the natural source of decentralized trust, and Eigenlayer aims to enable innovators to build on top of a common framework. The discussion covers the supply and demand sides of Eigenlayer, the importance of decentralization, and the challenges of balancing open innovation and safety. The episode also delves into the design of Eigenlayer, the future of liquid staking, and the competition in the market.

    Insights

    Eigenlayer's Role in Decentralized Trust

    Eigenlayer serves as a coordination mechanism for stakers, node operators, and innovators to create useful services. It aims to provide economic, technical, and social trust in a marketplace for decentralized trust.

    The Trade-Off Between Open Innovation and Safety

    There is a trade-off between open innovation and safety in the crypto space. Technology and governance can help navigate this trade-off, with mechanisms like slashing veto committees and reputation-based governance.

    Liquid Staking and Restaking in Ethereum

    Restaking is an exciting evolution that could become part of Ethereum's core protocol. It offers opportunities for lightweight and heavyweight services, with potential alliances between liquid-staking protocols and Eigenlayer.

    Building a Marketplace for Decentralized Trust

    Eigenlayer aims to create a marketplace for decentralized trust with three key elements: economic trust, technical trust, and social trust. It focuses on trust protocols and distributed system design, differentiating itself from liquid-staking protocols.

    Challenges and Opportunities in Decentralized Trust

    The challenges include data availability, balancing profitability and decentralization, and competition among liquid-staking protocols. However, there are opportunities for third-party players to unlock restaked capital and provide lending services based on individual risk profiles.

    Chapters

    1. Introduction
    2. Ethereum as a Source of Decentralized Trust
    3. Two-Sided Marketplace of Eigenlayer
    4. Coordination Mechanism for Decentralized Trust
    5. Decentralized Trust in Ethereum
    6. Incentivizing Decentralization and Restaking
    7. Exploring Restaking and AVS's
    8. Designing Eigenlayer for Decentralized Trust
    9. Balancing Open Innovation and Safety
    10. Breaking the Trade-Off in Consensus Protocols
    11. Building a Marketplace for Decentralized Trust
    12. Complexity and Validator Set in Ethereum
    13. Conclusion and Call to Action
    14. Restaking and Middleware Operators
    15. Competition and Future of Liquid Staking
    Summary
    Transcript

    Introduction

    00:00 - 06:55

    • Today's episode of Bell Curve features Shree Ram Kanan, the founder of Eigenlayer.
    • The discussion focuses on the intersection of liquid staking and restaking in crypto.
    • Eigenlayer is described as a social coordination mechanism or marketplace between Ethereum stakers and middleware protocols.
    • The conversation covers both the supply and demand sides of this market.
    • The later part of the conversation explores the dynamics between protocols like Lido and Eigen in relation to liquid staking and restaking.
    • Miles and Shree Ram express excitement about discussing Eigenlayer and its potential concerns.
    • Eigenlayer is a marketplace for raw decentralized trust, which includes stake amount and decentralization as key components.
    • The goal is to enable innovators to build on top of a common framework for decentralized trust, with Ethereum being the closest option due to its wide availability of node validators, stake, and ethos of permissionless innovation.
    • Eigenlayer allows stakeholders in Ethereum who have put 32 ETH to validate Ethereum blocks correctly.

    Ethereum as a Source of Decentralized Trust

    06:28 - 13:45

    • Ethereum is seen as the natural source of decentralized trust for building an interesting economy or marketplace.
    • Stakeholders in Ethereum can put their ETH and make a promise to validate Ethereum blocks correctly, with the risk of losing their stake if they fail to do so.
    • Eigenlayer is a system of smart contracts on top of Ethereum that allows Ethereum stakers to opt into serving other systems by running their software.
    • Actively Validated Services (AVS) are protocols that can be built on top of Eigenlayer, with specific conditions and payment terms.
    • The goal is to work with the raw aspect of decentralized trust and allow people to build arbitrary protocols on top.
    • The vision is to create a crypto world where specialized utility services can be easily integrated, similar to how SaaS solutions are used in web application development.
    • Eigenlayer aims to make the crypto market more programmable by providing various services such as trusted execution environment, secure multiparty computation, data storage, oracles, bridges, etc.

    Two-Sided Marketplace of Eigenlayer

    13:27 - 20:52

    • Eigenlayer can be conceptualized as a two-sided marketplace between Stakers and actively validated services (AVS's).
    • The supply side of Eigenlayer involves choices such as which assets are being restaked (ETH, LSTs, LP positions), who runs the hardware for AVS's (Ethereum validators or specialized operators), and different flavors of staking models.
    • The supply side can be divided into Stickers and Operators, with delegation being an important aspect.
    • The downstream token represents all the actions taken in this relationship.
    • Protocols should minimize subjective decisions, allowing services building on top to make those decisions.
    • Eigenlayer aims to become part of the Ethereum staking layer and allows various tokens to be restaked.
    • Service creators have the freedom to specify their preferences for tokens on the platform.

    Coordination Mechanism for Decentralized Trust

    20:25 - 28:08

    • Eigenlayer serves as a coordination mechanism for stakers, node operators, and innovators to create useful services.
    • The supply side of Eigenlayer will eventually include various tokens like ETH, Superflow tokens, optimism token, Starquare, Polygon, etc.
    • Eigenlayer provides a common adjudication system with multiple economic contributors for security.
    • Ethereum is seen as the underwriting trust and adjudication layer for Eigenlayer.
    • The protocol is designed to be flexible and shaped by customer demand on the supply side.
    • Mesh Security in Cosmos chains is similar to Eigenlayer but requires adjudication across different systems.
    • Eigenlayer could exist without interactions with Ethereum validators but aims to get as close as possible to them.
    • Eigenlayer is building a marketplace for decentralized trust with three elements: economic trust, technical trust, and social trust.

    Decentralized Trust in Ethereum

    27:52 - 35:06

    • Decentralized trust in Ethereum has two aspects: economics and decentralization.
    • Economic trust is based on the amount of money promised to ensure correctness.
    • Protocols can live off economic trust, where a promise with a large sum of money is made to validate correctness.
    • Decentralization-based trust focuses on protecting against faults and collusion.
    • Services like secret sharing rely on decentralization rather than economics for trust.
    • Shared security is better when multiple systems share it, making attacks more difficult.
    • Sharing the decentralized validator set in Ethereum improves security and encourages further decentralization.

    Incentivizing Decentralization and Restaking

    34:48 - 42:00

    • Sharing the decentralized validator set in Ethereum can lead to increased decentralization.
    • There is currently no mechanism in the crypto space to value and pay for decentralization.
    • Building services on top of Ethereum that value and pay for decentralization can enhance overall decentralization.
    • A marketplace can provide incentives for a more decentralized form of trust.
    • Considerations for onboarding to a shared sequencer network include asset selection, prioritizing decentralization, and deciding between permissionless or permissioned onboarding.
    • Restakers being the same as Ethereum stakers enables credible commitments on ordering rules using Eigenlayer.
    • Credible commitments on ordering rules open up possibilities for building applications like threshold encryption.

    Exploring Restaking and AVS's

    48:25 - 55:57

    • Restaking in the MAV space is an exciting evolution and can be a significant use case when a large fraction of proposals participate.
    • In the future, restaking could become a part of Ethereum's core protocol.
    • There will be two types of services: lightweight ones that require decentralization and heavyweight ones that rely on economics.
    • Oracle feeds are lightweight and trust-sensitive, while bridges are heavy weight and don't necessarily need decentralization.
    • The market will stratify into decentralized lightweight services and centralized heavyweight services.
    • Trust itself is modular, with aspects that need decentralization and aspects that can work on centralization.
    • Eigenlayer governance plays a role in facilitating restaking growth and development in a safe way.
    • Early choices made by LIDO were necessary to mitigate risks and gain market share.

    Designing Eigenlayer for Decentralized Trust

    55:34 - 1:03:05

    • LIDO's early days involved making choices to mitigate risks and maintain market share
    • Sequencing is important in rolling out different flavors and bringing in specialized operators
    • The Veto Council plays a role in onboarding LSTs and allowing AVSs to have a slashing veto
    • Eigenlayer had to design a complex system to allow native stakers to participate equally
    • Restaking could overload the validator set, so data availability scales were implemented
    • Data availability scales linearly with more nodes, ensuring horizontal scaling of shared security
    • EigenDA is being built as a solution to the problem of overloading the validator set
    • The goal is to have thousands of roll-ups and horizontally scaled applications on Eigenlayer
    • Governance decisions and sequencing are ongoing challenges that require community input

    Balancing Open Innovation and Safety

    1:09:20 - 1:16:29

    • Permissionless innovation enables open innovation and shared security.
    • There is a trade-off between open innovation and security.
    • The goal is to avoid open innovation creating an externality on security.
    • The trade-off between open innovation and safety is not unique to crypto.
    • Technology can break the trade-off between open innovation and safety.
    • Governance can help navigate the trade-off between open innovation and safety.
    • The slashing veto committee plays a role in balancing open innovation and security in Ethereum's protocol design.
    • The composition of the slashing veto committee is subjective but aims to minimize subjectivity overall.
    • Eventually, there could be a marketplace of slashing veto committees for intersubjective decision-making.
    • Having both a permissioned layer controlled by the slashing veto committee and a permissionless layer allows for transparency in risk profiles.
    • Stating the tension between open innovation and safety empowers people to find interesting solutions.

    Breaking the Trade-Off in Consensus Protocols

    1:16:01 - 1:23:34

    • Consensus protocols have a trade-off between open innovation and safety
    • The slashing condition in consensus protocols is signing two blocks with the same block number
    • The anti-slasher keeps the keys required to sign on consensus protocols in a separate container and checks for double signing
    • The combination of a slashing contract and the anti-slasher breaks the trade-off between open innovation and safety
    • The anti-slasher can be put into a trusted execution environment to solve the principal agent problem in delegation
    • Cubist is working on implementing the protocol specification for this solution
    • There is a trade-off between open innovation and safety in various types of protocols, not just consensus protocols
    • Liquid staking tokens like Lido or Rocket Pool can have a strategic alliance with Eigenlayer
    • Eigenlayer's neutral stance allows for multiple liquid staking protocols to coexist
    • It is uncertain whether liquid staking will dominate the market or if there will be one dominant protocol

    Building a Marketplace for Decentralized Trust

    1:23:06 - 1:30:21

    • Three aspects of the marketplace being created: economics, decentralization, and exact alignment
    • Decentralization is important for having a highly decentralized set of nodes in the system
    • Eigenlayer is building a proof of decentralization or proof of location with nodes around the world
    • Measurement oracle is needed for optimization and growth, and it should be decentralized
    • Eigenlayer aims to dissolve into the Ethereum protocol, while liquid staking protocols cannot
    • Liquid-staking protocols may integrate Eigenlayer services or create liquid derivatives
    • Eigenlayer's goal is to promote open innovation and enable others to build on top of Ethereum
    • Eigenlayer focuses on trust protocols and distributed system design, different from liquid-staking protocols' focus on node operator management
    • The stake rate in Ethereum may increase over time with liquid staking and Eigenlayer's restaking capabilities

    Complexity and Validator Set in Ethereum

    1:29:54 - 1:36:59

    • Ethereum and Cosmos have different approaches to complexity and validator set
    • Eigenlayer is a blending of Ethereum and Cosmos ideas
    • In the future, native staking rewards from Ethereum may be low, leading to liquid staking or restaking
    • Validators could provide additional services that Ethereum didn't bring into the protocol before
    • The market value of decentralization will determine if people are willing to pay for decentralized trust
    • Decentralization premium is important for certain services like Shamir Secret Sharing and Panambra in the Cosmos ecosystem
    • The cost of decentralization needs to be negligible for widespread adoption
    • Decentralization technology should break the trade-off between cost basis and latency basis

    Conclusion and Call to Action

    1:36:33 - 1:43:20

    • There is a mechanism being considered for LDO or the eigenlayer token where large institutional stakers can direct their stake to a curated set of validators.
    • Eigenlayer is opting for a reputation-based approach rather than token governance.
    • Different governance approaches have their own trade-offs, such as reputation-based governance not being permissionless.
    • Training wheels, like social slashing, are being implemented in various projects to prevent undesirable outcomes.
    • The debate around validator sets in Ethereum and Cosmos is ongoing, with Ethereum swinging back towards enshrining certain functions.
    • Ethereum's shift towards a more modular roadmap has led to the realization that critical functions are being done by more centralized systems or entities higher up in the stack.

    Restaking and Middleware Operators

    1:43:00 - 1:49:43

    • On the demand side, there is expected to be plenty of supply side people wanting to earn additional yield by running or validating.
    • Data availability and the load it puts on Ethereum nodes is a concern, which is why eigenDA is being used as a solution.
    • EigenDA aims to solve the networking load on Ethereum validators and make it more economical for middleware operators to opt in.
    • There will likely be strong demand for AVS (Availability Solutions).
    • The challenge lies in how many validators can run additional hardware or compute profitably.
    • Validators are hesitant about replicated security due to the high costs and lack of skin in the game for voters.
    • Multiple data availability solutions are being developed to address this problem, including Celestia, Polygon of Ayle, EigenDA, and Espresso's shared sequencer.
    • Eigenlayer is an opt-in system that allows validators to choose whether or not they want to run additional services like restaking.
    • As liquid staking becomes more popular, the stake rate for Ethereum will increase, potentially reducing staking yield and requiring validators to opt into restaking services for profitability.
    • The balance between profitable validation without restaking and offsetting costs with additional revenue from restaking needs to be determined.
    • There will be overlap between middleware operators and validators in protocols like LIDO and Eigenlayer.

    Competition and Future of Liquid Staking

    1:55:42 - 2:01:42

    • Liquid-staking protocols could potentially add a module for restaking or create a fork of a hike and layer to attract more market share and capital through higher yields.
    • Eigenlayer and LIDO are currently complementary but could become competitive in the future.
    • Eigenlayer's strategy is to go directly into the Ethereum protocol itself to secure its position, rather than competing directly with LIDO.
    • Restake can be seen as another utility for stetholar or RBL holders, similar to Aave or Curve.
    • It is uncertain whether liquid-staking protocols will build competitors in the near term, but it is possible.
    • The big question is how comfortable people will be with Stieth being a claim on multiple chains if many Ethereum validators opt in to receive rewards from other chains.
    • There may be a scenario where LIDO becomes more of an index than a one-to-one pegged asset, especially if an enormous percentage of ETH validators opt into additional rewards.
    • There could be concerns about demand if native tokens are paid out as rewards to Ethereum stakers, as they may dump them on the market.
    • Third-party players like ION Protocol may emerge to unlock restaked capital and provide lending services based on individual risk profiles.
    • A big market could develop on top of liquid-staking protocols, potentially leading to consolidation among players.
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