Behind the Scenes of Restaking | Brandon Curtis & Myles O'Neil

Santi Siri

There's kind of two types of capital out there that's touching the restaking market. There's the mercenary farming capital. There's not thinking about an additional maybe three to 5% on my native staking yield. It's the capital that's looking for basically points, farming and air drops. And then there's the capital that is the non farming bags, the long term holdings that does genuinely find some additional ETH denominated yield on their ETH holdings really interesting and something that they'd be willing to hold and, you know, deposit for years.

Right. And so I think it's kind of unclear right now just how much of current TVL is in that long term sort of, or like long term capital versus mercenary capital. Everybody's kind of gunning for that long term capital because they know that, you know, the mercenary capital is kind of a vanity metric right now. Everyone, if you have been listening to empire, you know that Santi and I are fed up with unaffordable fees and frustrating transaction speeds that make the on chain experience basically unusual usable. So the arbitrum team reached out and they showed us the platform.

Jason Yanowitz

They showed us what you can do on arbitrum. Whatever you're doing, you can experience frictionless transactions at lightning speed on arbitrum. So head over to portal Arbitrum IO. And check it out. This episode is brought to you by Mon ed, which has not only the highest performance evm l one architecture ever built, but also the wildest and craziest community in crypto.

Monad's internal devnet is live and public. Testnet comes out soon, so make sure you join the Monad community today at discord gg Monad. M o n a D Monad hey, everyone, Sante and I have been talking about Solana a lot recently, and we're excited to have a Solana sponsor of Empire, Marinade. Marinade is a staking protocol on Solana and the only stake pool that delivers auto rebalancing, Mev rewards, and automatic downside protection with their new protected staking rewards. Optimize your sole stake with Marinade by hitting the link in the show notes.

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All right, everyone. Been waiting for this app for a long time. Santa and I have been talking about doing a restaking pod for a while. We needed to make sure we lined up the two best people in the world to talk about this. So we got them.

And we even got you a third. So, Santi, we've put them to rest for today. We've got seven in his place. Ryan west, otherwise known as Westy, from the blockworks research team. We have miles O'Neill from reverie.

You might have seen him on Bell curve before. We've got Brandon Curtis, co founder of Rio. Uh, guys, welcome to the show. It's great to be here. Uh, yeah, I'm betraying Mike by going over to the other side of the, uh, the blockworks office here.

Santi Siri

But, um, yeah, really, really happy to be here. And a big fan of empire. Yeah, big fan of empire. And excited to get into some of the dynamics that we see at play here in, uh, restaking. Cool.

Jason Yanowitz

So, Brandon, I'm going to pick on you for this first question, and I'm not exaggerating when I say there's no one else in the world I would rather get this answer from. My question to you is there's all these things that we're talking about. There's shared security, staking, restaking, AVss LRT's Eigen layer, competitors, supply side of the market, demand side. Walk me through basically the workflow or the supply chain or whatever you want to call it, the flow of how one ETH moves through the system from basically just like, spot ETH all the way through this, like, restaking supply chain. Yeah, sounds good.

Brandon Curtis

Um, and I think this will get to some of the core issues that we want to talk about later. So it's a great place to start. Uh, so if you're a user, uh, and you're interested in getting additional yield on your ETH, restaking provides a mechanism to do that. There's different ways of conceptualizing it. One of the ways that I like to use is this idea that normally when you have a token that you can stake, that token basically acts as the work token that you can use to validate just one network.

With restaking, you're basically opening that up and allowing that single asset to serve as the work token to validate a whole bunch of different networks. Potentially, if you're a user and you have some ETH and you're interested in engaging in this on eigenlayer, the flow looks something like this. You'll go and you'll need to deposit into an operator. You'll have to choose a particular operator, and that operator is actually opting into a set of these avss, these actively validated services that that ETH will be restaked to, that they'll be validating. You'll have to go and choose that operator.

That operator is actually choosing those abss. You'll deposit it to them, they'll go ahead and basically point that ETH at these other services that are going to be validated. Then you are a little bit along for the ride. You don't have a choice necessarily, which of these services you're opting into. That happens at the operator level.

If you see that an operator is adding an AV's that you're not interested in, or you don't like the risk profile of it, then the recourse you have is to unstake and go and restake with a different operator.

A lot of users are not really familiar with the operator ecosystem. If you're coming from other delegated proof of stake networks like the cosmos ecosystem, you might be more used to making these kinds of decisions. We have to weigh and measure these different operators, decide who you trust. But for ethereum, normally you don't really engage with that, and so that'll be definitely an increase in the complexity from the end user perspective. What is the.

I'm going to focus on the definitions. For a second, even though for a lot of the listeners they might be commonplace, but for some folks they're not. And I just want to hammer it home so that it'll tee up this conversation a little better.

Jason Yanowitz

What is the difference between staking and restaking?

Brandon Curtis

So with staking, you're basically depositing your assets into a system that allows for the validation of some network. So the operator of the node on that network is doing some work to validate and order transactions and build blocks. There are a set of rules that the network will apply that need to be followed in order for you to be rewarded for that work that ends up being done. In the case of restaking, it's a similar flow. When you opt into validating another AV's, you're basically opting into another set of rules for the work that needs to be done.

An AV's is not necessarily another blockchain. Many of these are services that are not blockchain based. They're just signing transactions and doing other things that are updating oracles and doing other sorts of things that are conditional on different inputs, but they're not necessarily ordering transactions or building blocks. There's a set of rules that are applied instead of at the network level. They're actually applied in a set of restaking smart contracts that specify the conditions under which you'll be rewarded for the work that you're doing or penalized if you break those rules.

Jason Yanowitz

And we've seen the liquid restaking protocols, so eigen layer basically obviously took the industry by storm last year. Everyone was talking about it. Now you've seen the launch in the last couple of months of these liquid restaking protocols. Rio being one of them, others being swell, puffer, Renzo, Etherfi. Everyone has slightly different strategies.

Where do LRT's insert themselves into this ecosystem? And what is the value prop of an LRT? Yeah, so LRTs actually insert themselves right at the beginning of this process. So instead of the end user with this ETH that they want to get additional yield on actually going and choosing the operator themselves, they are depositing into an LRT that takes over these other functions and takes over these other responsibilities. A liquid restaking token protocol will have a set of operators that they're working with, and they'll usually have some process for selecting operators that they think will do a good job validating these networks.

Brandon Curtis

Then the liquid restaking network as well will have some process for selecting the AVss that will actually be validated by the restaking process. So all the user does is they deposit their ETH, they'll receive a liquid token. This liquid restaking token, which has a lot of analogies to just liquid staking tokens on Ethereum. So everyone's probably familiar with staked ETH from Lido. The only difference is that instead of just validating one network, just ethereum, that ETH is actually validating Ethereum, but then it's also being used to validate these other networks.

And so the user doesn't have to make any decisions directly about what operators they want to engage with or what AbS's they want to participate in. Validating the LRT takes care of that for them and manages those risks. So all of that is unfamiliar territory for most ETH users. That you mentioned is maybe slightly more familiar for cosmos users. That gets all abstracted away by the LRT.

Santi Siri

The flow feels like you're depositing to Steve, but actually it's abstracting way more complexity under the hood than you would, I guess, like just depositing to a normal liquid staking protocol, right? It's saying, okay, you don't have to worry about which operators your stake is touching. You don't have to worry about the AVss that it's restaked to. You know, we're going to do a good job of picking AVss where, you know, you're ETH is not going to be slashed because of some crazy reason. Right.

We're not going to onboard operators that might go down. Right. We're only onboarding high quality operators. And so from the user's perspective, that's a pretty good deal. And I think that's why we see 8 billion out of the 12.8 billion deposited into Eigen layer as coming through these lrts.

Jason Yanowitz

Nice miles give us almost like the State of the union. So we've got lrts, got Eigen and restaking. We've got these abs's like, where are we at today? We're recording this mid April. Like, what is the size of the market and where are we at today?

Santi Siri

Yeah, sure. So Brandon did a good job kind of setting the scene on, really, the technical side. And I can try to set the scene on. We'll call it like the state of the marketplace. Right.

And maybe going back to something Brandon said, we call them work tokens, right? So these are base layer l one assets that you deposit and you earn additional, you know, yield from staking. Right. There's always been a really strong desire in the market to earn additional yield on these major l one work tokens without having to take on financial leverage or do things where your assets could disappear just because of some sort of market event. And I think we were talking about it before the podcast started.

This was actually kind of the early promise of the lightning network, right, where you could take your bitcoin and earn some yield on it, and without that forming, you had things like celsius pop up. But there's still a strong desire to say, if I could earn, say, 10% on my ETH instead of just 5% without having to actually take on a bunch of financial leverage risk, then it's a very strong value prop. And so $13 billion of deposits are direct evidence to that. I think that's even beyond what anybody expected at this point. And so you have, and of course, the, you know, the primary, or I guess the preferred way to access, you know, this additional yield is through LRT's.

As we've seen, the majority of funds kind of flow through them. Right. So that's the supply side of the market is saying, yes, we love additional yield on our base layer asset that we already hold without having to worry about getting liquidated in the, in a downturn or something like that. And then on the demand side of the market is also resonating very strongly. I think there are lots of reasons why you want your own layer one network or your own independent network that's not built as a smart contract on Ethereum or as a roll up where you're dealing with those constraints.

At the same time, we've seen it's very difficult to bootstrap these external networks from scratch. And so you have to go out and you have to get a bunch of people to buy your token. You have to get them to lock it up. The price of the token is going to be super volatile, so you're going to have to pay them a lot of money in order to keep it locked up. Right.

To offset that sort of volatility risk and the slashing risk, of course. And so what does Eigen layer offer? It offers this pool of $13 billion that is looking for opportunities to restake to. And so, okay, great, now I have access to all of this security. And by the way, I need operators to operate my network instead of me having to go out and like, you know, get all these infrastructure providers to learn about my network and then get them to buy some tokens to, you know, or maybe have to give them tokens to incentivize them to come.

All the operators are also sitting in one place, right? And so it's like a one stop shop where I come in, I get security I need, I get operators I need. And by the way, there's a lot of mind share that is focused on Eigen layer right now. And so if I choose to be, let's say, an AV's instead of some, the next standalone cosmos chain, not only am I getting like a shortcut to like actually standing up my network of operators and getting capital bootstrapped to it, I'm now getting the eyeballs of this 12 million, $12 billion of deposits, looking and learning about my project and maybe becoming interested in becoming a user or buying my token, et cetera, et cetera. So the three ways I look at it are the value prop is bootstrapping networks.

And I'd say even decentralizing. Maybe I'm not a blockchain itself. Maybe I'm a shared service to roll ups. This is an easy way to decentralize those. Then there's this binance launch pool almost component of this where you're just, you have a lot of capital here and you allow them, give them a way to signal interest in your project.

And I think that growth component is not nothing here. We have 50 avss in development, and I think that's a lot. Right. We have, the Cosmos hub only has two consumer chains. We never had that many Polkadot parachains.

50 is already, I think, the biggest shared security platform to date. At the same time, $13 billion is enormous oversupply, I would say, of deposits for how much 50 avss are cumulatively, like, realistically going to spend on security. Right? And so you think about just like, rounding off to say, 10 billion even to double the native staking yield to go from, say, 5% to 10% staking yield. We're going to need these avss to spend $500 million, you know, cumulatively on security.

At the very least, that assumes that every single dollar is restaking to every single AV's, which. Which may not be the case. Likely not the case, right. And so despite, you know, I want to make it clear, like, this is the most successful even so far shared security platform we've seen to date. It's still a lot of deposits chasing after maybe not enough yield to go around to satisfy everybody's expectations of the yield here.

If you came into Eigen layer and you found out you're only going to make 50 bps of additional yield for the next year, and we're in this ripping bull market, like, you're probably going to take your assets somewhere else for yield. And so, like, that is the kind of the state of the marketplace where you have all of these, you know, all of the supply side going after, I would say, like, you know, what they view as the highest quality AVss and trying to find ways to make sure that only they are getting that yield. Right. So I don't think all $13 billion of deposits are going to get same yield. They're going after AVss and trying to almost, you know, if possible, block out, right, additional deposits from coming in because that dilutes their own yield.

And this is all just like very, very normal, unexpected things that happen. So the pricing power is with, like, these early avss that, you know, everybody is kind of looking at and trying to get a piece of that yield. Um, now, you know, I think their early Avss are getting sweetheart deals. Um, we can talk about that a little bit, you know, later. Yeah, let's go there.

Jason Yanowitz

Let's get in. So what I want to do here is, like, you guys are. I want to do a little inside baseball, basically. Um, I want to give folks a little bit of a look behind the scenes of what's happening. And a lot of this is happening off chain, so maybe people aren't even aware that it's happening.

There are a couple of interesting dynamics that have evolved as the restaking space has evolved. And one of them is this dynamic between the AVss and the lrTs. What's happening? I don't know if this is a question for Brandon or for miles, but what is happening here? Yeah, I can set it up.

Santi Siri

And so earlier I talked about why the value prop of LRT's is so strong to depositors. Right. Depositors, like, come in, they put their. Give their assets to an LRT, and then they don't have to worry. Right.

But LRTs are actually very attractive as well to Avss. What I mean by this is, you know, if I'm an AV's, I'm coming into Eigen layer and. Right. I want capital, I want high quality operators. And then I ideally don't really want to have to worry about it.

Things like, for a while, right. And I have two choices. I can either go one by one to, you know, get operators to opt in and come up with bespoke, like one to one sort of agreements with all of them. Right. This takes a long time.

And then I'm going to have to, like, manage that set on an ongoing basis with, say, like 20 counterparties. Right. It's kind of complicated. Or especially if there's an option where I can say, oh, wow, look at these huge operator blocks. You know, blocks of capitals and operators.

I'll just go to them, and then I have maybe two or three counterparties instead of 20 to 25 because they're actually managing the relationship with the operators on my behalf. So I'm an AV's again. I've come into eigen layer. I'm launching. I say I want, let's say, $500 million of security restake to my AV's.

I want ten to 20 operators. Well, great. I'll just go to two to three lrts and say, hey, you give me 100, you give me 200, and you give me 200, and I'm going to pick five operators from you, three from you, and five from the other ones, and then I'm done. That is the easiest way to bootstrap in AV's right now in this marketplace. And so that's what we're seeing.

We're seeing the early Avs is looking at this thing and being like, okay, let's go talk to these lrts and come up with these agreements, right? So maybe I'll pause there. Does that make sense as to, like, why we're seeing AV's LRT agreements? Yep. Okay, great.

And then maybe just to double click into, like, what these agreements actually are, and then I can turn it over to Brandon to maybe talk about, like, what are some issues we see with them and how they will likely evolve over time. So I think, again, what are, like, the fields of information on these agreements? It is, I want an amount committed to me, no more, no less. Right. Because if you commit way more than the agreed upon amount, that dilutes the yield for everybody else.

If I. If you commit less, then I don't get, like, the security that I want. Right. They want basically some minimum duration of, hey, if you bring in, if you give me 500 million, I don't want that 500 million to, you know, that's got to stay for at least six months, right. So I don't have to worry for at least six months or maybe it's a year, right.

They are interested in having control over which other AVss that capital is allowed to be restaked to. And so let's say I get, you know, my 500 million. I know I have it locked in for twelve months, but if I have no control over that, let's say, you know, one of those or a couple operators opt into really risky, you know, poorly run AVss, and all of a sudden, like, 100 million of my 500 million is slashed, it's gone. And that's because, you know, the operator made a bad choice. And so, especially early on, they're being a little bit wary to say, okay, before you opt into another AV's, like, we have final say.

And I think, you know, don't worry, we'll be a good counterparty. We'll let you opt in if, assuming they're good avss. But that is something that is being talked about on these agreements right now. And then, yeah, I think on the other side, they'll commit to like, a percent of total supply that they're going to pay you with. So let's say that's, you know, like 1% of total supply that we will, you know, compensate you guys with.

And there's lots of different forms this could take. Maybe it's an airdrop, you know, to your depositors. Maybe it's, you know, just some lump sum, right? Like paid at the end of this duration period that you can then figure out how you want to distribute it to your depositors or not. But those are generally, like, the fields that we're seeing.

So maybe we can talk about like what makes sense in there, what's here to stay, what maybe doesn't make sense. I'll just add one more thing to the state of the market that miles went over, and that's that at the moment, at least in eigen layer, the slashing element of all this. So the penalties for operator misbehavior in validating these AVss that's not live yet. There's definitely an additional trust element at the moment that needs to exist between the AVss and the set of operators that they're working with. And so it makes it even more attractive to go to LRT's that are managing these relationships with top operators.

Brandon Curtis

So you don't have to worry about some rogue operator going off and wrecking the quality of service of whatever your abs is providing. Because right now there's no way to really penalize them directly. So just to maybe like sum this up for a second. So there's. So there's avss.

Jason Yanowitz

So there's these folks that are launching things and that they usually need. They want like a. Maybe a set of permission operators and they want a bunch of capital. Best way to do that is to go to the LRT's. And so the lrt's.

Santi Siri

The easiest way to do that is. To go to the easiest way, the easiest. The fastest way. I would say the fastest way to do that is to go to the LRT's. And so behind the scenes, they're.

Jason Yanowitz

That's why I think you probably see a lot of, at least from some of the LRTs who are maybe being kind of like, quick with it. I'd say they are announcing a lot of partnerships with avSs. There's a bunch of money that is. Like off chain getting committed. Or I would say maybe it's like, you see the marketing announcement on Twitter, right?

Santi Siri

And what does that actually mean? It means that there is some loosely enforceable legal agreement or Loi of some kind that was negotiated off chain, obviously, between the AV's and LRT's. Okay. And it's. The LRT is saying, I will commit x amount, maybe $500 million of security to your AV's.

Jason Yanowitz

And there's a specific. So, and then there's terms of the deal. There might be duration, duration requirements. There might be amount of capital that they're talking about making this number up 100 million. There might be.

What's the acceptable collateral? There might be control over whether the AV's can, the state can be pooled with others. There's all these different there's terms. There's terms of the deal, and that all happens in some off chain sla. Yes, and I think that's mainly just kind of a moment in time.

Santi Siri

I think the closest thing that you could look at for parallels, if you go to the Cosmos hub governance forum and you see basically what stride or neutron proposed for terms, or if you go way back to the polkadot parachain days and you can go look at what were the terms of the Akala loan or something like that, and those were early forms of this. Definitely had a lot of issues, but at least they were out in the open. And I think right now it was partially a function of Eigen lair just being pre launch. There is no central place where you can go and see what these agreements are, where capital is, but I think we will see that over time. Brandon, over to you to tell us.

Jason Yanowitz

I mean, this sounds like good deals, right? Someone needs something, someone else is providing that thing. What is the problem that we're seeing with these early agreements, as you see it? Yeah, so there are a couple challenges here. I think the first is that these commitments are all in dollar terms, and these LRTs have deposits in ETH, so there's no way to control the ETH price.

Brandon Curtis

There's no way to predict what it's going to be. There's also really no mechanism, if you have open deposits and withdrawals, to constrain your net in and outflows. If you make a commitment to supply at least $500 million worth of shared security to an abs, and you have no real way to credibly constrain these flows so you can hit those numbers, then it really does turn into this off chain handshake agreement. Another challenge with this is definitely the duration element of it. If something happens with the market, if there's another Athena and the ETH wants to go somewhere else, or if another LRT comes out that looks more desirable for whatever reason, and you do have net outflows, and you made these commitments without really consulting users in any way, then there's really no saying that you're going to be able to hit these commitments.

Then there's some questions about what the ramifications of that will be for these LRTs and avss that have entered into these types of agreements. What's the actual downside of that, though? So users commit money to an LRT, LRT commits that money to an AV's, then maybe users say, and the duration is, let's say two years or whatever, and 500 million, then the users actually say, hey, actually LRT, I want to go to this other LRT that looks more exciting, or I want to go to somewhere else where there's better yield. Money flows out of the LRT. LRT can no longer commit that capital to the AV's.

Jason Yanowitz

Okay, maybe what's the problem? Here's the issue is, in my opinion, like, the LRT is making a commitment to an AV's, but the capital that the LRT is committing is actually controlled by the users who did not make that commitment. It'd be one thing if a user comes into an LRT protocol and says, hey, here's my ETH, I'm happy to lock this up for two years, or I'm happy to lock it up for six months, twelve months, and then the LRT looks at their balance sheet of deposits or, okay, so 20% of RTVL is locked up for two years, another 30% is locked up for a year, and then the rest set of users did not want any locking. They wanted the ability to withdraw anytime. Okay, so that means I have basically 50% of my TVL I can make actual commitments to avss with because I know that the users have locked up that capital.

Santi Siri

Right? Whereas today, according to the user agreements, everybody can withdraw at any point in time. Meaning, like, there's nothing stopping, you know, the TVL of an LRT from going to zero. Right. If every single user decided to withdraw, okay, that, that's fine.

Like, that's the product that they're selling. But now, you know, the commitment that the LRT made to the AV's is just, you know, kind of gone, right? Or it's, I would say it's broadly like, there's no way to actually enforce the terms of these agreements, if that's one way to put it. What about the. Well, okay, there's this interesting component that's happening here where the LR.

Jason Yanowitz

How do you pick? Is what I'm getting. Who picks at an LRT? Like, how does this actually work? So AV's goes to, like, a bunch of LRT's, and the LRT is deciding that someone's legit or not legit based on, I don't know, something, basically.

And you're now saying that you're not basically allocating users capital, you're now basically allocating capital on behalf of your users. You're almost like a hedge fund manager or a fiduciary. Now, I imagine there's like, a, I imagine some users are going to get pissed, but b, there's actually some, like, weird regulatory ramifications probably here. That's maybe like a difference from, like, how cosmos exists where, like. Well, yeah, yeah.

How do you. How do you think about this? Yeah, we can talk about it later. I mean, I. I definitely think that LRT is like, should be rebranded because they actually look more like, you know, yield vault strategies in a lot of ways than they do what you like, what an LST does under the hood.

Santi Siri

But, yeah, no, I think the. Where something has got to give here is that, you know, if the capital that you're committing to avss needs to also have some commitments around it. Right. Or you can say, hey, yeah, we are an LRT. We can't offer duration, you know, guarantees because we didn't build the protocol that way and we don't want to because users don't really want to opt into these things.

So that may be one way this all shakes out is like, this duration stuff just kind of goes away because it's not realistic or the market doesn't want it. Another way it does shake out is, again, the opt in has to come somewhere, and the opt in from the user side should come before the commitments. Because I actually don't see a problem if I commit for two years and I am depositing into this LRT vault because I want yield, one additional yield, and I'm happy to outsource the management of that to experts. Right. That's all fine and good.

I just. Yeah, that's kind of the main issue we see with it, is that it's not the users that are. The users haven't opted in before the LRT opts in on their behalf. Yeah. And Tarun Gauntlet and others have commented on the sort of the unexpected nature of some of these duration elements and these agreements, because I do kind of agree with miles that there was this rush to brand lrts, just to make the analogy with lsts, because the belief was that a lot of the dynamics would be pretty similar.

Brandon Curtis

Lsts have a little bit of duration risk. It does take some time to get ETH in and out of the beacon chain, for instance, but not to the tune of multiple weeks or months of lockup.

A lot of these things were initially getting set up. The thought was that things might play out more like they did with the yield vaults in Defi, where those vaults didn't go after things that really had a duration element, they went after things that had liquid incentives that they could liquidly get capital in and out of. And it looks like potentially that things will shake out a little bit differently. In the LRT space. It's also possible that over time, the market does restructure and we do move to just purely liquid incentives and no duration element and open operator sets.

I think that'll be a lot more palatable on the AV's side of things once slashing is actually implemented, because they'll have this additional degree of enforcement that the operators that do come in will actually do the work that they signed up to do, but it'll probably take some time for that to play out. Many of these agreements that are being signed now between lrts and AVss are happening before these AVss are even live. So in some cases, these lrts are opting in and they haven't even seen exactly what it is that they're committing to running, let alone, you know, talk with operators and verify that they're okay with actually running this stuff. Yeah, what is the better model here? Brandon or Mike?

Yeah, I think there are definitely some changes that you could make here to at least make these agreements a little bit more sensible. The first is probably moving away from this dollar based commitment structure. There's just no way to guarantee that any amount of ETH is going to be worth any amount of dollars in the future. So just moving to ETH based commitments or commitments that consider maybe a fraction of the capital that's committed to the LRT would at least be a little bit more enforceable. And I think there's some questions as well in the longer term, if potentially AV's has moved to a model of getting this additional restake security that maybe looks more like a lease, where they're maybe putting up some of their own tokens as collateral and then basically paying back that lease over time.

And if they stop paying or they're unable to pay, then potentially the LRT gets those tokens that were put up as collateral. There are a couple of different ideas that are being worked on now about what this market might look like as it becomes more mature. As Miles said, if there is going to be a duration element, and that does end up being an important consideration for some AV's designs, then if users have some way that they can opt in to these durations, then the LRT will be able to take a look at the capital that it has and reason more about the duration of agreements that they can enter into. Yeah, right. And there might be a.

Santi Siri

It might work out very well where I think avss could and should be willing to pay more to restate capital that has locked up the assets for the duration of the agreement. Versus what they pay to capital that can leave any time. And on the depositor side, there may be this might find product market fit because maybe there is depositors that are fine locking up their ETH for two years, they're going to hold it for two years anyways. And by actually locking it up, they get directed a higher amount of yield compared to the users that want to go take their LRT and use it in Defi. Maybe each LRT has two types of users.

The ones that lock up the capital in the protocol and can't go use the asset in DeFi for any reason or something like that. And then users that want something that looks a little bit more like an LST with a little bit more extra yield. But the lion's share of like rewards would go to the ones that lock up their capital for a long time. Right? And that would be a good outcome.

It's just, you know, what we're missing today is sort of like that alignment of those commitments. I would say another thing, just even zooming out, like, not even speaking to, like, the details of the agreements themselves, but what we've been thinking about at Rio, where reverie, we work very closely with the Rio team, we've been thinking about a governance process and what this looks like from the LRT side. And so even just like, the details of the agreements being out in the open and the details of the evaluation of the AVSs being out in the open and having token holders of the LRT opt into these things, similar to the way that like Lido, when they add operators or when they add a new staking module, like the DVT module, right. Everybody was able to vote on first approving that module and then a vote on proving how much of overall deposits are routed there. And so first step would be just like getting this stuff out into the open so that we can all like, see what the agreements are, are and where capital is committed to, and a couple of dashboards around, that would be nice too, for the rest of the general public.

And then we can think about, okay, like, what is here to stay, and then how do we design mechanisms that kind of enforce these commitments or whatever we're actually agreeing to, then I'll be happy. Yeah, there's a legibility problem here, that as a user, you want to come in and you want to believe that some of this risk is being managed. And so when you have all these commitments flying and there's not a lot of transparency into what is really being agreed, and these things aren't even live yet. The perspective from some is that because slashing is off that we should just play all the capital into everything and that there's not really a quality aspect that can be evaluated on the risk side. Basically there's no additional risk from opting into additional AVss.

Brandon Curtis

And so why not kind of opt into all of them? That's, that's going to be a short term thing. I think slashing is going to be here sooner rather than later and there'll be another element here that needs to be managed if LRT's are going to be managing risk in a way that actually helps users to get the best risk adjusted rewards from engagement restricting. And just as like kind of riffing off of that. It will be interesting if everybody opts into every single AV's free slashing and then slashing comes and people realize, oh shit, these are like, this is pretty, these slashing conditions are scary.

Santi Siri

I actually, hey, can we go look at that like agreement and maybe tweak some things? And so I will be interested to see, you know, if pre slashing, you know, everybody delegates to everybody or everybody, you know, opts into every AV's, how many people start opting out of AVss post slashing and how does that impact the downstream sort of like agreements and commitments that LRT has made to avss? Yeah, one thing I'm curious about is who has the leverage in the situation. It seems like especially with no slashing, the AVss have like a huge amount of leverage here. And I wonder if that plays into maybe there being some bad deals for the LRT side of things.

Ryan West

I know when you look at sort of cosmos and neutron, people were sort of realizing for the operators over there that maybe it wasn't a good deal for them given those terms. So is that something you're seeing where maybe LRT's are getting the bad end of the stick. So at least in restaking there is the ability to opt out. So with some of the earlier models of shared security that we've seen in places like the cosmos ecosystem, they sign this agreement and they're locked in. So now at least as the risk profile and sort of the risk reward ratio for these things changes over time, because eventually we'll get to see what usage looks like for these things, like what kind of users and what kind of fees they have, what the token's worth, what they're actually willing to pay, and the market will probably self correct there.

Brandon Curtis

But at least that's a step up over a situation where your whole validator set is just opted in and just has to kind of deal with it. Yeah, I think I would also make a distinction between stakers and operators of who's getting actually the raw deal here. And I won't speak for Brandon, but I do feel like the constraints of operators are not being thought through. They're probably getting the worst deal right now. A lot of these Avss are thinking about, you know, they want to airdrop basically the portion of supply as payment right to the lrts.

Santi Siri

And they're, you know, there's a very realistic possibility that they just send those rewards directly or make them claimable to the addresses of the depositors, basically to bypass the actual operators. Right. And I think as we saw the cosmos, hub and ics, the difference between really what a staker is willing to opt into is very different than what an operator is willing to opt into who's maybe double or tripling their fixed costs, their operating costs, while only getting a portion of that, what the yield would be from, let's say a normal sovereign l one. And so, yeah, I think more consideration to the constraints, the operators will start to, I think, probably self correct over time as well.

Brandon Curtis

Yeah, I would agree with that. I think that the operator constraints are going to end up being, in many cases, more constraining than the perspective of the capital in terms of what services you want to run. Because the capital may be happy getting a few basis points of uplift to opt into something because it's the same capital. They're not being asked to go out and get another token and be exposed to the price volatility of these new tokens. They just have their ethan there.

And any additional yield is additional yield. But from the perspective of the operators, the fact that the capital is being reused is perhaps less of a consideration for them because from their perspective, they're adding new infrastructure that they have to set up, that they have to monitor, that they have to maintain, and they need to hit certain targets when they evaluate networks just for revenue on the operator side. And so I think there's still a lot of open questions about what operator revenue will look like in some of these networks. And a lot of these early agreements don't really take that into consideration. But I agree with Miles.

It'll probably work itself out over time as it becomes clear who's actually willing to pay. All right, I mentioned them in the pre roll. Now I'm gonna bring them up again. It's arbitrum. Santi and I are really fed up with these high fees and we're really excited to have teamed up with Arbitrum for the next couple of months on Empire.

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If you're listening to this at scale scale space forward slash ecosystem, follow the journey along with scale on x at scale network. That's at scale network. Big thanks again to scale for sponsoring Empire, guys, as we round up the AV's conversation, because I do want to get into the kind of next part of this convo. How do you, if you are an AV's, if you're a founder building something, how do you decide if you should leverage security from one of these lrts or for Eigen layer, whatever you want to call it, versus just doing it on your own? What's the decision making rationale that goes in there?

Santi Siri

So I'd say, you mean if I want to launch a chain and the decision around should I launch this through Eigen layer or should I launch just my own sovereign, basically? Exactly. Yeah, I think that's so. I would say it is like you're going to spend a lower portion of your overall supply of on security if you're being secured by restakers who are not having to go out and buy your token and lock it up, right? They already have ETH locked up.

They already own ETH. And so the opportunity cost of capital is really, really low. And one way just to benchmark this, like, I think osmosis, it's, they've cut it down quite a bit. But osmosis originally was supposed to spend about 20% of its total supply on basically compensating stakers and operators, right? The numbers we're being seen thrown around here are like in the single low single digits of supply, right.

And it's getting a lot of people to opt in. I will say the second piece of this is this really hazy hand wavy turn, like a term of alignment. You know, I think the only way to really tap into the Ethereum user base and liquidity previous to Eigen layer was to become a roll up or just launch as a smart contract application, right? Or like you are completely on your own, right? You're out, you're building a completely new brand and really having to basically start from scratch of like building a user base and attracting mind share, getting brand awareness out there, right.

There is this component, this dynamic here of like, okay, if I launch as an Eigen layer, you know, AV's instead of a sovereign l one, not only do I get those cost savings, I also basically get something that's closer to this level of alignment of like a roll up or a regular smart contract dab. I'm going to airdrop a bunch of users my token from Ethereum, and they're going to look at me differently as an AV's than they do as a standalone l one. I think there is definitely a growth hack component here where you can break that trade off of not having the constraints of a roll up, getting what everything you want as an l one, while not at the same time just being left to your own means in terms of building brand awareness and attracting users and liquidity. I don't know, Brandon, anything you want to add there? Yeah, three things, actually.

Brandon Curtis

So the first is just around decentralization. If you launch a new network you raise from investors, you do some airdrops, you're still going to end up with a pretty, a pretty poor distribution of good tokens. And you can see this on a lot of new cosmos chains where the top couple validators are usually investors and maybe they're 20% of the network each. Whereas if you go and you're tapping into the ETH supply, it's already so distributed at this point that even if you're onboarding just a subset of the total operators that are involved in restaking, you can start out in a much more decentralized place than you can if you're just working with the tokens that you've done natively for a native chain. The second thing is, you might not actually have to make the choice in a really binary fashion in the future.

There's this concept of dual staking, which is where you are tapped into the shared security of restaked ETH, but then you might have another set of operators that are staking, or at least are delegated your native token. You can get the best of both worlds there potentially where you have this capital that you can bring in that's potentially a lot cheaper and more distributed, but then also involve your native token as well. Then you have to have basically both sets of those validators sign off on things in order for them to go through in your abs. Then the third thing is just around this concept of attributable security, which is something that folks at Eigenlayer have talked about quite a bit. So there are certain sorts of avss that you might build that might really benefit from the ability to reason about the amount of restake security they have relative to the economic flows within the AV's.

So probably the simplest example of this would be something like a bridge where you're bridging, let's say, ETH and BTC and USD to different chains. The ability to actually lock in at least the amount of capital on the restake side. As you have actively flowing through your system, you might be able to reason more readily about the security that you actually have on the AV's side. These are all things that are really, really hard to do, if not impossible, if you just launch your own chain and secure it only with your native token. Nice.

Jason Yanowitz

All right, let's get into the next part of this conversation, which is LRTs versus LSTs. I've seen a lot of people on Twitter and just in podcasts comparing LRT's to LST's because the name is similar. And I think, Miles, when we've spoken, my understanding is, Brandon, we haven't talked about this yet, but Miles, when we've spoken, it's clear that your view of how this market develops is going to be very different than how the LST market develops. So I'd love to. Yeah, love to get your high level thoughts here, and then we can dive into the details.

Santi Siri

Yeah, sure. I think it starts by just like looking at LSTs and LRt's of, like, what they are and what they do. And then from there, you can draw some, like, implications around, you know, what end state market structure looks like. And specifically, you know, does end state market structure of lsts, which we already know is basically winner take most, winner take all. Does that actually map over to LRT's?

And so maybe I can just run through, like, the differences first and then give you the high, you know, high level conclusions, I think. Well, first of all, like, lsts are extremely homogeneous in what they do, right? You basically deposit tokens, and they all are different ways of doing the same job, which is validating one network, right? Two, I think they don't really compete on yield. If they did compete on yield, then Lido would not have this dominant market share lead.

It's not like Lido is winning because it's double or triple the yield of the other lsts. They're really competing, I think, basically to achieve parity with Ethan in terms of, you know, Internet money ness, whatever we want to call that. Right? And so they compete in terms of, you know, liquidity integrations. And they're basically, you know, the goal of steeth, like, the stated goal of steeth, is it to be as ubiquitous as ETH itself, right?

And I do think that, you know, as more activity goes up the stack to l two s, and now native ETH, you know, on l two s is not. It is a derivative itself. It's a bridged, you know, derivative token, right? I think the. I'd say, like, the relative value prop of lsts is even stronger because it's like, you're not, you know, if it's bridged anyways, why don't you earn some staking yield on it, right?

And so I do think, like, lsts in general are basically trying to, I would say, like, replace ETH, but compete with ETH directly. Now, lrTs, I think a better way to describe them as, like, restaked index tokens rather than lsts, because they are so different than lsts and what they do, right? It's not just you're depositing into secure ethereum, it's basically you're giving them your depositing in assets and then telling them to go manage, you know, yield strategies for you. It's more like. It's more like a strategy.

Like a strategy vault token, or it's more like a mutual fund, right? And the reason I think that, you know, these things are going to look very different is because there are so many different ways to design an LRT in terms of, you know, how much risks do you take on with the Avss that you select? What do you do with the rewards? If these are all native token rewards, are you just holding all of those on your balance sheet so that this thing is actually not just like ETH anymore? And over time becomes less and less ETH and more and more of a mix?

Right. Now that starts to look more like an index or like a hedge fund. Right. And then I think even on the user preference side, people are going to have very different preferences in terms of yield. Let's think of, like, duration becomes a thing, right?

Maybe you'd now have, like, long term lrts. And I think that the more and more that, like, an LRT tries to appeal to everybody, like, tries to take as many types of collateral as possible, all the lsts as possible, native ETH tries to come up with one strategy that satisfies basically all types of users. It kind of falls into no man's land, and they end up not being really good at either one. And so I think over time, what we'll see with the LRTs is you'll have maybe winners at the entity level, but they'll have families of LRT products underneath that. Now, we haven't even started talking about USD restaking or all the other sorts of our BTC or Solana.

I could see winners kind of like fidelity and Blackrock are winners at the entity level of the mutual fund industry, but they have a family of funds that sort of do a better job of appealing to the different sort of preferences of their own demand side and really the preferences of what the Avss they're depositing into. Right. There may be some avss that don't really care about the duration stuff, and that's great. Okay, so now they can. We can tap into those from this LRT family.

And so, yeah, I just, I think over time, we will start to see that, like, it's going to be very challenging to create, you know, under the umbrella of one LRT token, a product that appeals to everybody. And so I think, you know, getting ahead of that could be the smarter thing to do. It's kind of like Lrt's are. LRT's are like mutual funds in a sense, where you can kind of pick your poise and pick your strategy, and then you could, oh, this might be extending the analogy too far, but you could say that LST's, like steeth is trying, is basically just like a us treasury market fund, which is basically a us dollar, like us dollar with a little bit of yield on top. LRT's are more like mutual funds.

Jason Yanowitz

Is that. How's the. It's like, I forget what I was trying to. I think it was like basically, you know, like corporate or sovereign debt that's collateralized with treasuries and you get the yield on both. Right?

Santi Siri

Like, that's what it kind of starts to look like. But yeah, there's no. I think these like, analogies are somewhat helpful, but you have to recognize, like, there's actually no perfect analogy here. You know, defaulting on like, debt is very different than a slashing event. And so you have to.

You have to view those differently, right. And maybe you can be a little bit more, you know, risk on with something like an LRT than you could as, you know, a fixed income fund at fidelity or something like that. Because the worst case scenario, you don't lose all of that, like all of that money, you just maybe lose a portion of it. But yeah. Brandon, you and I have been thinking about the future of the LRTs and different products to make, and we see a lot of, whether it's duration or multiple types of restaking assets, these are all coming and curious to hear if you'd push back on any of that.

Brandon Curtis

Yeah, you hit a lot of the differences in just the ways these things can be assembled, just what sorts of things you opt into, what your general risk tolerances, even the strategy capacity of different AVss. Not every AV's is going to need billions of dollars in security. Other considerations like LRT's, of other assets, which we could. We could totally see in the future here, the reward management strategies, duration. So a lot of these things are why we set Rio up to be a protocol that can issue potentially a number of lrTs.

I think it's a bit early. I don't think we know quite enough about the market structure yet to say which of these categories will be the most interesting. But my expectation is that there will be a broader range of lrts that are still interesting to users and still have a place in the market than in lsts, where it has been winner take most, because we could see a number of lrts that stay relatively small and go after some of these opportunities that maybe need less capital or have more constraints on participation. There's this concept that eigenlayer has talked about quite extensively of these attributes, these validator attributes, where you're basically trying to take into account other aspects of the operators that are engaged in your protocol that go beyond just how much capital they have. And maybe that looks at things like geographical decentralization, things like that.

And so there could be avss that are constructed that have more constraints on what kind of involvement they want from operators. And that could also just lead to a number of lrts that engage with those strategies that the larger lrts may choose to forego. Westy, I think your piece. When did you wrote, I think you wrote this Eigen lair piece on restaking back in like, fall of 2022 on blockworks research. Like, what are your thoughts on just having seen the.

Jason Yanowitz

On how the LRT market will develop in like, in comparison to how the LST market developed? I don't know if you have any thoughts on that. Yeah, yeah, I was definitely super early in running about Eigen layer. I remember when it first came across my desk, it was like this academic project almost. And a lot of the things they were talking about at the time were more like cryptographic solutions versus what we're seeing now, where, like, we're talking about where you can actually restake and have a sovereign l one under that control.

Ryan West

So it's really cool to see how it's developed over time. But, yeah, I really don't have much to add to what Miles said. I agree completely that the way this is playing out is much different than the LST market, where we sort of saw, like you said, lsts are more homogenous. So over time, it sort of converged to where the most liquidity was. We're seeing lido and steeth capture significant market share versus other players.

And what's really interesting to see, because LRT is, like you said, are more fragmented or will become more fragmented, we started to see a lot of the longer tail lsts actually start to pivot and focus towards LRT's swell being an example of that. But yeah, over time, I think it's going to be super interesting to watch the different strategies play out. And I wonder, as we talked about earlier, these agreements between AVSs and LRT's, if we start to see cartelization between those two. So if, like, big LRT's partner with big avss, and that's sort of like one center, and maybe there's a bunch of these. And so you might see market dynamics where it's top heavy.

Maybe there's not one winner, but there's three, maybe winners of these cartels over time, but it's definitely going to be more fragmented. And I'm interested to see going forward how we sort of categorize the riskiness of the different lrTs. If maybe we start to like see maybe tranches of products almost like CDO's in traditional finance that package together different risks along the spectrum. So yeah, I think there's a lot of cool things that can play out, but that's sort of how I'm thinking about it. Brandon, how do you think about this at Rio?

Brandon Curtis

I mean, there's like maybe we can. Double click on the varying degrees of riskiness that westy was saying. So the most extreme version of an LRT is one that accepts a bunch of, correct me if I get this wrong, is one that accepts a bunch of lsts I think is collateral, probably. And then maybe like a safer version would be if you only accept like ETH is the collateral or something like that, and then there's everything in between. So a, correct me if that's wrong, but b, if you're riskier, you're actually going to probably do better in this market, but a lot of those folks are going to end up blowing up in the bear market it when some of that stuff starts to unwind.

Jason Yanowitz

So how do you think about this as it relates to the Rio strategy? Yeah, at Rio we took a look at lsts versus native ETH. There's a bunch of factors that play into that. There is this risk profile. If you have your own operators doing the native staking versus having whatever operator set is running the lsts, do that portion of it.

Brandon Curtis

Obviously an LRT that's doing native staking has access to those native staking rewards flows as well. Whereas if you have an LST, it might be more difficult to try to take an additional fee on those flows because the LST operators are already doing that. And then just from a risk management perspective, I think we saw this really play out in the yield aggregator world in the last couple of years in DeFi, where there were some yield aggregators that kept things pretty simple, pretty straightforward, and only really went after these blue chip opportunities. Some of those yield aggregators are still around. We saw others that tried to differentiate themselves by just going way out on the risk curve and going after stranger assets and stranger places.

And a lot of those ended up blowing themselves up. And I think that the fact that there's an infrastructure element to opting into an AV's as well potentially puts additional constraints on this. Because every time you add an additional AV's at the LRT level, you're committed to running and maintaining and managing this additional infrastructure. Whereas if you have a multi strategy defi vault, the only infrastructure that you have involved is just the on chain transactions you need to do to carry out that strategy. So we're definitely going to take a more blue chip approach to things with this initial product with Re ETH, and we'll sort of see how the market plays out over time and if there are other opportunities that are interesting, whether those involve additional assets or going further out on the risk curve.

But I think the place to be right now is sticking more blue chips. Yeah. What do you guys think of? I don't know if this is a Brandon, I'm sure you don't want to talk negatively about any competitors, so maybe it's more of a question for miles or I don't know who it's a question for. But, like, you know, Etherfi has come out of the gate swinging.

Jason Yanowitz

They have three and a half billion TVL, depending on how you want to obviously count TVL. But, like, if you're just going off defi llama, like three and a half billion Etherfi. Renzo's just past 3 billion puffers. Over a billion. Kelp is at 750, swell is at 350, and there's a longer list of, like, 700 million.

What do you think are the. So obviously, that's impressive. What is the kind of downside of maybe what some of these other folks, the strategy that some of them have taken? I'm not sure if it's like a downside to call out necessarily yet. I also don't think there's not enough information on the differences between these lrts that really matter, I think, yet in terms of their design and maybe what they're committing to.

Santi Siri

You know, I'll say, like, when you go under the hood, there's a lot of different ways to, like, set up an LRT. Not to get, like, too technical, but you could have, you know, a separate eigenpod for every single set of 32 ETH, and then end up with tens of. Tens of thousands of eigenpods. Or you could, you know, basically direct all of your ETH towards one eigenpod. And the benefits of the former is that you can provision out capital very flexibly.

The downside of the former, when you have pods, thousands and thousands of pods, is that it's a huge amount of gas cost, basically just to run your operations. But if you put everything into one pod, then you can't actually provision out capital very flexibly. So those are things under the hood that will take a while for us to see, actually, what were the right design decisions? What were the bad design decisions. And then I think, yeah, to a lot of earlier points, it's.

I'm seeing a problem where if you like, design a protocol to try to cater as much as possible to the supply side, where you accept all these different types of collateral, you say you can withdraw any time. Right. It's very hard to then satisfy like the AV's side, which might say, we only want this kind of collateral. We want basically duration requirements. Right.

And so I do think it's kind of impossible to set up one design that satisfies both sets of the market. Now, if you could cut this up in another way, you might have one product that's longer duration, and that satisfies like the AVss that want that, and then different sorts of, you know, cuts and variations underneath that. But yeah, I think until slashing comes out and until payments come out. And we also start to see what the, I guess the operational burden is of some of just the general sort of under the hood stuff that Eigen layer does. Whether that's just reward sweeping or proofs of the.

Generating these proofs of your beacon state, beacon chain state and improving it to the Eigen layer contracts. That's like. It's pretty expensive. Yeah, I think a lot of like, Eigen layer's challenges are around the fact that it is built directly on ETH L one. And a lot of gas actually does eat into yield quite a bit.

And so we may see that, like, simple design choices of operations also could end up with like single or double digit yield differences. Right. Um, just because of the drag on costs. And so, yeah, there's a lot more to. A lot more to come.

But until slashing is even out there, then I think you can don't take these things like, like, I think they're reversible. And, you know, um, there's a lot of marketing. But yeah, that's okay. Yeah, I'll just, I'll just say that our philosophy at Rio, I mean, you can see how emergent the market is right now. You can see how many open questions there still are about the unit economics of all these AVss, about how operators are going to get paid, about what it's going to cost to run all this infrastructure, and, you know, even how operators are going to be compensated, these duration requirements, you know, even the things about AV's quality.

Brandon Curtis

And so we have, have just made this decision to take our time and let this market develop a little bit before. Before rushing in. And what that means is that we don't have billions of dollars worth of capital that we have, that we're forced to go deploy into whatever opportunities present themselves. And so I think that this approach will pay off as we're able to collect more information about what the market will look like over the medium term and act accordingly. Yeah, and the last thing I'll say is I think there's kind of two types of capital out there that's touching the restaking market.

Santi Siri

There's the mercenary farming capital. There's not thinking about, you know, an additional maybe three to 5% on my, on my native staking yield. It's the capital that's looking for, you know, basically points, farming and air drops. And then once they get it, they're going to migrate to the next, you know, highest yield generating opportunity. And then there's the capital that is, you know, the non farming bags, the long term holdings, that does genuinely find some additional ETH denominated yield on their ETH holdings really interesting and something that they'd be willing to hold and deposit for years.

I think it's unclear right now just how much of current TVL is in that long term or long term capital versus mercenary capital. And I think that everybody's gunning for that long term capital because they know that the mercenary capital is a vanity metric right now and will likely run to karak or whatever the next big airdrop could be.

Jason Yanowitz

Maybe the last dynamic that we could unpack here is native staking versus external staking. So far, it's all been external staking. Right. And I'm curious, as this market develops, we'll probably start to see more, like, native restaking come into the market and, yeah, I'd be curious how you guys think that this will happen or. Yeah, I mean, maybe we could unpack this.

Santi Siri

Yeah, it's probably worth, I guess, defining what those two are, because this is something Brandon introduced to me a while ago, and I don't think it's really kind of gotten out into the sphere of conscious quite yet, but I'll give it a shot. And then, Brandon, you can come in and tear me apart and correct me and do it the right way. But what the entire restaking market right now, all avss, you consider these, like, external restaking use cases, or the category of external restaking, meaning you have an external network completely separate from Ethereum that is secured by Ethereum operators and security. So you're exporting Ethereum security and operators to secure new networks. Now, there's another category of restaking that doesn't really get talked about that much, which is, well, what if you could basically pay Ethereum proposers to make additional commitments around the way that the blocks that they build, the blocks that they propose, at the risk of slashing if they don't uphold those commitments.

So maybe this is a builder paying a proposer to say, hey, next time you propose a block, you are committing now to taking the block that I give you. I'm going to pay you this much now. And if you don't do that, then we're going to slash you out of protocol like we're going to, same way you'd get slashed on regular eigen layer. Or maybe it's an l two ecosystem saying, hey, we'll pay you guys for the guarantee that you'll include our pre comps so that we get faster finality. And the way I see the big, so what about this is, well, first of all, these sort of block building commitments are only really useful once you have a significant portion of the proposer set that is opted in, right?

Like if I'm an l two and I want my guarantees on my precomps getting included, it doesn't really help me if only, like one out of ten proposers, right, are actually going to do that. And so these things get really useful once you have a large percentage of the proposer set opted in. But that means there's probably only going to be a few use cases where this thing is, you know, this is such a no brainer that the entire majority of the validator set is going to opt in and think about, like, Mev Boost, right? That was a no brainer for everybody. Now, builders get to make more money, right?

Because there's actually a way like an auction sort of function around here, right? And proposers get paid in the form of revenue share. And I think that's what this ends up looking like longer term, where, you know, it's a much more unconstrained market than external restaking because it's not cost on one side going to be, you know, revenue to proposers. It's like things, there you are now making, someone's making more money than they did beforehand because proposers are committing to whatever, you know, the use case is, and you're sharing some of that revenue with the proposer itself. And so, you know, these, this will only be kind of feasible once, you know, you have a large percentage of the proposal set opted in.

There might only be like, you know, five things that proposers that are no brainer enough that we actually might see this at some point. But I think the point here is that it's a lot easier to reason about, right? It's not like you're just going to do this every single block, probably. You're not going to have to evaluate the slashing risks across thousands of different avss. You're just going to say, okay, yeah, I'm going to.

Everybody's kind of agreed to do this. This is just another sort of check on the block I built. And so, yeah, I think we won't see this for quite a while until like, there's a significant portion of, you know, proposers that have opted into any sort of restaking. But when we do, I think it could be a very large category. And so I'll stop there and then, Brandon, please correct me.

Brandon Curtis

Yeah, I think the easiest way to think about these two categories is that there are some AVss that are, that are just using this restate capital as just cheap capital to secure whatever it is that they're doing. They're not uniquely facilitated by restaking, really, because they're not really making use of access to ethereum state or ethereum consensus in any major way. Those sorts of things might have potentially less demand for capital. I mentioned this sort of AV's strategy capacity consideration when we were talking a little earlier about how you might construct different lrts. Whereas this native category that miles was talking about does actually make use of the fact that there are Ethereum block proposers that are participating in this sort of thing.

And so, yeah, they could make additional commitments and that could potentially give you access to some pretty huge revenue streams that already exist, like mev, like longer term leases on block space, those sorts of things, and could potentially allow you to do experiments that involve more fundamental changes to how ethereum functions. So one that I've heard bouncing around is an exploration of restaking to do single slot finality on Ethereum. There's some architectural decisions that were made a long time ago in Ethereum that make it really hard to get to any single slot finality solution without radically changing how the network works. But if you were able to get a significant portion of proposers opted into some sort of AV's, you might be able to get there without making changes directly to Ethereum. I think these things are a ways off.

I think these things do come potentially with some enhanced risk to the host network that will need to be thought through. But these are potentially interesting because they are plugged into such large revenue flows and they would have essentially unlimited capacity from the perspective of an LRT looking to deploy capital because they work better as more capital comes in. And it's not that they're just trying to hit some security amount that they're willing to pay for, like some of these non native applications. Yeah, and I think that you touched on like, the most interesting part of this to me, which is, I think, let's imagine there's something that's not built into Ethereum, but 100% of proposers have agreed to follow this additional set of rules at that point. It's kind of effectively the same.

Santi Siri

You're getting the same thing as enshrining whatever this is into Ethereum itself. If every single actor that's building blocks for Ethereum is now following this additional set of rules in addition to the base Ethereum set of rules. And so it's almost a way for, if you could get this much of the proposer set to opt in, almost fix things out of protocol. Right, instead of having to make some really scary base layer changes that, as we know, are happening extremely slowly and very rarely, and especially when they come with significant trade offs. But that is very different way of looking at this thing.

And I think if you remember when Eigen layer first started coming out, I think the Ethereum core devs and the EF looked at this thing as potentially really scary. Don't overload ethereum consensus. But what if there's another angle here where it's actually, oh, this is actually a way for us to maybe improve Ethereum without having to make some base layer changes that come with trade offs we don't really like, or maybe it's just a canary network of sorts. Right. We can try things out, you know, with restaking before making that decision to build it into the protocol.

Jason Yanowitz

Anything else on the liquid staking versus, excuse me, with native staking versus external staking miles that you want to cover here? I have some other questions, but I don't know if there's anything else that we should cover. No, that, that's really it. I think it's. Go for it, Brandon.

Brandon Curtis

Yeah, I would just say that it's not, you know, breaking out these two categories isn't, isn't a value judgment against these external applications either, because I think all the existing avss fit in this category. And there's still some really exciting examples of, like, ethos taking a whole bunch of restaked ETH and then reselling that security across the cosmos ecosystem. I think you can build applications that still require huge amounts of restaked assets and they could still tap into some pretty significant revenue flows. But I'm just thinking about some of these more native consensus linked things, because I have a feeling that this is going to come up in restaking at some point in the future. Guys, there's a couple other things as we think about wrapping this up that I just want to get your take on.

Jason Yanowitz

One is, I'd love to just get your take on the other Eigen layer competitors that are launching and are about to launch. I think the first big one that launched was karak, or karak or however you pronounce it. And obviously you saw some pretty public Eigen layer kind of pushback. That obviously was the banter on Twitter. And I think there's the stealth project that's now become pretty public, but that hasn't launched yet.

So I'm not sure if I should say something. But yeah, there's a couple other Eigen layer competitors coming to market built by some really, really, really strong teams. And there's the new one coming to market is built by the strong team from the liquid staking space as well. So just be curious what you guys think of these competitors coming to market. Yeah, I'll just say to start things off, that this was inevitable.

Brandon Curtis

Anytime you see something, get as much hype and drive as much development as Eigen layer has, there's of course going to be competitors, and some of those will just be across other networks. So there's some folks working on restaking the Solana ecosystem, and there's a number of cosmos projects now that are slightly rebranding to add restaking elements. But then we'll also see restaking competitors on Ethereum, and I think that's totally expected. And I think it's probably a good thing as well. Just as there's a lot of different ways to implement an LRT, I suspect that there are probably a number of ways to implement just a restaking protocol.

And so it'll be interesting to see, as these other teams take a look at the design space and some of the trade offs that you have to make, and just some of the jobs to be done from the perspective of AVss and LRT's and operators, what they come up with. And I think any innovation in that area will just help us feel out the whole design space and figure out what we can do better in order to make restaking work really well. Yeah, I would echo everything Brandon said again and highlight the distinction between Eigen layer competitors on Ethereum and then this idea that every big l one will have its own native restaking provider, or probably multiple, if they're successful, then you'll have more competition. We see this with Babylon going after bitcoin right. And as Brenda mentioned, we're seeing already projects on Solana.

Santi Siri

We'll probably see them on Celestia. And there's something to be said for, okay, if you are the native sort of restaking protocol on that l one, then you probably know the use cases that are going to be, have the most demand on that l one and are going to know the l one well enough to kind of design the protocol in the best way possible. Or say like restaking on Solana or restaking on bitcoin. And you'll probably be able to do that better than, let's say, even an eigen layer that's pulling in bridged assets from somewhere else and trying to consolidate them in one place. So I think the question is, is there a kind of like a winner per l one, or like a winner per network?

Or is there going to be one provider that's able to aggregate know multiple l one base layer assets into one place and still do it really well. I think I lean probably towards there being specialized winners across different l one s. And then it's a question of, okay, how much bigger is the ETH restaking market than, say, Celestia versus Solana versus bitcoin? And yeah, I think on the demand side, then there's a question of, is there a world where it makes sense to get security from multiple providers at the same time or from multiple l one s?

We saw getting operators in stake. You can do that anywhere. There is this growth and alignment angle to why these projects are choosing to launch on eigen layer. Do you sort of dilute that as you add more l one s and say, like, well, I'm aligned with bitcoin, Solana, Celestia, Andy. Well, are you really aligned with anybody then, or are you really actually getting the most bang for your buck from that growth standpoint?

My guess is probably not. And so that's kind of where I shake out. I think there will probably be, like, one or more winners, you know, per major l one kind of ecosystem. And then I don't really see a world where a lot of protocols are, say, drawing security from four different l one s. And they're like this omni crypto, sort of omnichannel AV's that just, I don't know, it feels complicated and dilutive to the growth aspect of it.

Brandon Curtis

Yeah, I'll just add that I think that one of Eigen layer's strengths in how they've designed the restaking protocols, that it's very unopinionated. We talked about some of the questions that an AV's or an LRT needs to answer in order to get to market. So things about like how much security you need, what operators you need, what other avss you're willing to have, sharing some of the same capital that's securing your thing. Eigenlayer as a protocol doesn't really have an opinion on any of these things or on who gets to make those decisions. And so I think the market will sort through that.

If there are other protocols that come to market that take a more opinionated approach, that might work better or worse for certain applications, certain sorts of Abs. And so, yeah, I think it's a big design space, and it'll be interesting to see how it all gets mapped out. Yep, totally agree. There was an anatoly tweet the other day said Eigen layer, but instead of stake, it's reputation based on reputation is one of those things that anyone can build regardless of how much wealth they started with. I'd love to see someone formalize it and build it on Solana, because there's a deep bench of small solana validators.

Jason Yanowitz

So there are, these other ideas emerge. There's, like, staking things, other things like reputation. There's also this idea that I've been thinking about, like, can you stake for other things? Like can you stake to get access? Maybe stake for three months to get access to a whitelist or something?

Like. So there's these other, like, you know, v two s and variations of staking that I'd just be curious to get your guys's take. I don't know if you've been thinking about that much, but would love to open it up to ideas. Reputation is a tricky one. We've seen, you know, a lot of discussions over the years of things that we're going to use reputation to significantly reduce costs, and it's hard.

Brandon Curtis

I think there will definitely be innovation in the direction of more quantitative metrics for gaining access to things. That's the kind of reputation that I could probably get behind and see working. So we see some experiments with this, and the LST is on Solana, where you have a lot of lsts. Instead of going through the list of thousands of participants and trying to figure out who you trust, you just measure and then manage your set accordingly. And I could definitely see that here as some of these AV's launches are starting out quite permissioned, and maybe that's how they start to open things up.

Once operators actually have a track record validating these things, you could start to incorporate that track record in deciding who to let in. But in terms of a system that doesn't involve any capital at all and is just reputation based. Well, I don't know. We've seen a lot of proof of authority systems. I was going to say that already exists, I think.

Santi Siri

Yeah. And so if you want to build a wormhole or something like that, then. Then you absolutely can. I don't know if that's really comparable to what we're trying to do with restaking. Right, right.

I would just say, like, I think reputation staking of reputation is like, let's look at even Lido. Right? The operators in Lido, they don't have any capital staked. It's purely the user's capital that is being staked through Lido. If an operator does something wrong, what's at risk?

Their reputation. They get booted out of the lido set. Lido makes a big deal out of saying we don't deal with these subpar operators. And now everybody looks at this operator as subpar or with a big black mark, and that's gonna actually decrease their future cash flows because it's gonna decrease their ability to win new business. Now, I need to look at exactly, like, what Anatolia is talking about here, but I think what the other thing you mentioned is just like, restaking to things that have no slashing.

Right. For one reason or the other. Again, think that's already happening a little bit with Eigen layer today. Like, Eigen layer pre slashing is basically access to, like, the airdrop waitlists. Right.

And when there is slashing, I think there will be protocols that still launch on Eigen layer with no slashing. Or like, more explicitly kind of like binance launch pool. Like, hey, put your assets here as an indication of interest and we will reward you when we launch or something like that. Yeah, totally. I could absolutely see, like, really the growth aspect of why people will launch on Eigen layer being stretched to the extreme through something like that.

Brandon Curtis

I think you could argue that there are a lot of, like, delegated proof of stake systems that are already walking this line. So if you look across all the cosmos chains, of course, they do have slashing. Many, you know, many or most don't have any slashing for liveness. And so the penalty is you get jailed, you get kicked out, you lose some rewards, and there's a mark on your permanent record. And I think that if you look at slashing and you look at validator operator management across many different chains, it's often more about the reputation of whoever it is that's running these services and less about this capital at risk.

And I think there's a lot of reasons for that. If you slash too aggressively for things that don't hurt the quality of your service too much, you're just going to drive up your capital costs because users will rightfully see that there's way more risk in engaging in staking. I wouldn't be surprised as well if we see a relatively slow rollout of slashing in some of these avss and that we do see this reputational element kind of live on at the operator level in particular, because as Miles said, these operators, they don't have to have any of their own capital in any of these systems. They validate. Makes sense.

Jason Yanowitz

All right, guys, good chat. Good introduction to re staking on empire. Any last, I guess, closing thoughts from Brandon or miles or Westy? No, just that remind people, like, just how early we are in this whole game and that there's a lot of noise in the market and that's all totally okay and natural and, you know, I think there's, it could be looking, the landscape could look very, very different in just say, like six to twelve months from now. But, you know, we're kind of along for the ride here and.

Santi Siri

Yeah. Excited to see how it develops.

Jason Yanowitz

Cool. Yeah, I'll just say that there's a lot going on in restaking. I mean, we talked for an hour and a half and I think only got to really a portion of it. And there are still a lot of unanswered questions. This is, we're also just talking about Eigen layer v one.

Brandon Curtis

Things will change as the protocol is upgraded in response to demand from the AV's side. And yeah, it'll be interesting to see how it all, how it all shapes up, but we're only at the very start of what's going to take probably a couple of years to sort out. Nice. All right, guys, great pod. Brandon, Miles, appreciate the time.

Santi Siri

Thanks for having us, guys. Appreciate it, everyone. Jason here. Thank you so much for watching today's episode. Wanted to take a quick second to thank today's title sponsor, Arbitrum Video.

Jason Yanowitz

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Brandon Curtis

See you for the next episode.

Behind the Scenes of Restaking | Brandon Curtis & Myles O'Neil

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1. Introduction to Restaking

2. The Evolution of Staking Protocols

3. Challenges in Modern Staking

4. Future of Crypto Staking

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