Alluvial: Institutional Liquid Staking and Spot Ethereum ETF - Mara Schmiedt

This episode explores the intersection of institutional investment and Ethereum's staking ecosystem, focusing on Alluvial's efforts to innovate within this space.

1. Institutional Interest: There's growing institutional interest in Ethereum staking, driven by innovations in security and capital efficiency.
2. Technological Innovations: Developments like multi-operator architectures and liquid staking tokens are crucial for integrating institutional players into the staking ecosystem.
3. Impact of Spot ETFs: The potential approval of U.S. spot Ethereum ETFs could significantly influence the market by increasing mainstream and institutional participation.
4. Security and Compliance: The importance of robust security measures and compliance with regulatory standards cannot be overstated, especially when dealing with institutional funds.
5. Future of Ethereum Staking: The evolution of Ethereum staking continues to attract attention, with discussions on how to balance decentralization with the influx of large-scale institutional participants.

1: Introduction to Institutional Staking

Mara Schmiedt discusses the growing interest from institutional investors in Ethereum staking and the challenges and opportunities this presents. Mara Schmiedt: "Institutional interest in Ethereum staking is growing, necessitating innovations in security and operational efficiency."

2: Technological Innovations in Staking

Exploration of new technologies like multi-operator staking architectures and liquid staking tokens that enhance the security and efficiency of staking operations. Mara Schmiedt: "Multi-operator architectures and liquid staking tokens are pivotal in accommodating institutional needs."

3: The Impact of Spot Ethereum ETFs

Discussion on the potential market impact of U.S. spot Ethereum ETFs and their role in mainstreaming crypto investments among traditional financial entities. Mara Schmiedt: "Spot Ethereum ETFs could significantly influence the broader market by facilitating institutional entry."

4: Security and Regulatory Compliance

Focus on the importance of maintaining high security standards and adhering to regulatory requirements to protect institutional investments in crypto. Mara Schmiedt: "Robust security practices and compliance are crucial for institutional participation in crypto staking."

5: Future Outlook on Ethereum Staking

Considerations on the future of Ethereum staking, including potential regulatory impacts and the ongoing debate over decentralization versus institutional involvement. Mara Schmiedt: "The future of Ethereum staking will need to balance increased institutional participation with maintaining decentralization."

• Research Thoroughly: Before entering the staking space, ensure thorough research and understanding of the technological and regulatory landscape.
• Evaluate Security Measures: Prioritize platforms that offer robust security measures and compliance with relevant regulations.
• Consider Diversification: Diversify staking approaches to mitigate risks associated with specific technologies or operators.
• Stay Informed: Keep up-to-date with the latest developments in Ethereum's proof-of-stake mechanism and related regulatory changes.
• Engage with Community: Participate in governance and community discussions to influence and understand the evolving landscape of Ethereum staking.

The massive success of the recently approved spot Bitcoin ETF showed tremendous interest from large institutional players. Even despite negative takes in public appearances, behind the curtain, more and more ‘smart money’ accumulate $BTC, either directly or through ETF shares. The same is to be expected for Ethereum, yet uncertainty still looms due to its proof-of-stake consensus model and, ultimately, staking yield. While crypto natives quickly embraced both ETH staking as well as liquid staking, institutions could not justify the higher risk profile and lack of regulatory compliance. Alluvial and Liquid Collective seek to change this and provide ultrasound infrastructure for enterprise-grade security in liquid staking.

People

Mara Schmiedt, Felix Lutz

Companies

Alluvial

Books

None

Guest Name(s):

Mara Schmiedt

Content Warnings:

None

Mara Schmiedt

A lot of the asset managers that we talk to, I think to some degree maybe underestimated the impact that the spot bitcoin ETF would have on the market. How can you create some type of standardized architecture infrastructure policies on the compliance, on the performance, on the security side? And how are you going to make these different platforms and partners, custodians and exchanges and asset managers sort of interact, interoperate and work together when they're in many ways competitive? I think there's a few, I guess, problems that people are pointing out with this concept of excessive staking participation. We might end up in a position where these players could get too big or the protocols could take over, you know, decisions on Ethereum consensus that are not maybe maximally trustless.

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Start staking today at Chorus one. Welcome to Epicenter, the show, which talks about the technologies, projects and people driving decentralization and the blockchain revolution. I'm Felix Lutz, and today I'm speaking with Mara Schmied, who's the CEO and co founder of Alluvial, the software development company behind Liquid Collective. Liquid Collective is offering staking products for institutions on Ethereum. Hi Mara, welcome to Epicenter.

Felix Lutz

Great to have you on. Thank you for having me. Yeah, so we go way back, I think, and you especially also been part of the staking ecosystem, like me, since probably more than five years now. And yeah, a great place to start, as always, on epicenter would be to kind of go back to how you got into the space, sort of like a little bit, your path that brought you to where you are today. And then we can roll or we can discuss how all that impacted what you were working on today.

Mara Schmiedt

That sounds great. I've been working in the crypto space for about seven years now and spending most of my time on staking and started working on Ethereum staking, particularly in 2019. I think that's when you and I met, when we were working on the liquid seeking working group, which was really early at the time, I was still at consensus working on product and strategy development. I started working pretty closely with the Ethereum foundation to support the rollout of then the surrounding spec, or yeast two as we know it today, and just got really enticed by focusing my time and energy on thinking about innovations at the staking level, how we could continue to improve security so that the protocols and applications building on top of it could really harness that sort of competitive advantage that Ethereum in many ways has in providing that security budget. I later decided to join bison trails after leaving consensus to really double down on staking, not just across Ethereum but also other networks, and supporting the rollout of institutional grade and enterprise grade node infrastructure, which was a really exciting journey.

We actually got acquired by Coinbase in February 2021 and then really formed the foundation of what became Coinbase cloud. So Coinbase is developer and enterprise focused offering that covers a number of different product protocols where I ended up leading the sales team. So those were some of the focuses that I had in the last couple of years before starting alluvial. And I think in many ways alluvial and what we are building with liquid collective is a culmination of many years of work and research with great folks in the industry thinking about how we can to innovate and bring more participants into staking. Yeah, definitely.

Felix Lutz

It seems like what you're working on now kind of combines your like sort of the close relation to Ethereum as a protocol and you know how staking works and your experience on the sales side or like working with enterprises. So really keen to dive into that. Maybe to start out, I guess we can kind of go back and like roll out the timeline. You already mentioned ETH two, right? Maybe you can talk a little bit about how we got to where we are today in the ETH timeline, and then we can talk a little bit about how the market has changed and how new players are coming in.

I think one of the core focuses we were discussing earlier, but also before the episode of this episode, I think is also to comment a bit on the markets surrounding the pure tech. I think we would be really key to understand the tech first, but then also see how you're seeing people interact with the tech. Of course, I think that sounds great. So maybe we start with Ethereum's lifecycle as a proof of stake network. Obviously a ton of research went into that upgrade for many years before the Beacon chain ended up launching in December 2020.

Mara Schmiedt

What's been super interesting since that launch is, I think the continuity of participation in staking on Ethereum, despite, of course, many interesting fluctuations in the market over that period of time. Staking actually ended up sort of growing consistently with certain influxes that we saw after major upgrades such as Schappella that introduced withdrawals and also reduced some of the risk, I think, that participants and also institutions saw in participating in staking. Today we have around $95 billion staked on the network. 26% of all Ethereum is staked today, and that number continues to grow. I think there's probably a couple of trends that are contributing to that, that we can dig into a little bit more.

But on the technology side, I think the barrier to entry risk and capital efficiency of participating in staking has significantly improved over the last couple of years. Today you have access to innovations that ensure that staking setups are more robust. You have better correlation protection and anti slashing technologies. There's better capital efficiency when you think about receipt tokens or liquid staking tokens that have penetrated through the market. And then there's a lot of other things that are exciting and happening at the moment that I think are going to continue to drive up the participation and the appetite for staking in the market.

On one hand, you have restaking, which we can dive into a little bit more. But that's obviously, I think, contributed to a lot of the more recent uptake in staking participation on ethereum when you look a little bit more out into the future, I think coming down from a fairly high interest rate environment, obviously can create more macro perspective and interest in participating in staking rewards that are around 3.8% to 4% today. And then I think last but not least, of course, there's major developments on the institutional side, including the current pending approvals for us Ethereum spot ETF's that could again continuously drive more and more appetite and participation in that market.

Felix Lutz

Right? Yeah, it makes a lot of sense, I think. Yeah, it's very interesting to have, we have this sort of two sides. One, the very frontier of innovation, let's say, and often kind of like where crypto Twitter is at, or like sort of the more degen side, and then on the other side, kind of the more institutional, slower adoption, the tech maturity side, let's say that also like, you know, I guess more risk averse participants kind of waiting to get involved until like, there are certain things in place. And I think, yeah, you guys are like at an interesting crossroads there by, on one hand, being pretty crypto native product, but also trying to kind of bridge the gap there to the newcomers and ecosystem.

So maybe you can talk a little bit about liquid collective, how you're trying to do that, or how the whole project is structured to sort of achieve the goals. Yeah, for sure. Let's dig into that. So I think, in short, we designed this product around unmet needs that we saw in the market, or in a matured market where new segments, enterprises and also regulated institutions are looking to start participating in the space. As I mentioned before, there's been a few innovations that have really improved security and capital efficiency in staking.

Mara Schmiedt

On one hand, we've started to see a trend from single operator architectures to multi operator architectures that can inherently provide better security to participants and to companies. And on the other hand, we've seen receipt tokens. So liquid staking tokens really enable a very fundamental, quite primitive mechanism that allows people to prove an on chain position. The problem with a lot of this innovation in the early days is that when Ethereum launched and the first multi operator and liquid staking token models became available, you had incredibly early market leaders like Bido and Rocket pool come to market with their products. But these products were really designed for the early part of the adoption curve.

Crypto native power users that felt comfortable using direct interfaces and maybe didn't have a lot of questions around compliance and other considerations. But that's not necessarily a model that seemed compatible with the needs that we were hearing from businesses as it related to the way that they view security and the diligence that underlies it, the capabilities that they need in order to make integrations very seamless and accessible, and of course also compliance. And so we saw this opportunity to really think deeply about what kind of parameters, what kind of architecture would be needed in order to help bridge those participants into staking and through that, continuously support adoption in the market. And so one of the things that's unique about what Collectiv is doing is that our business model is actually quite similar to something like Visa, which is a business that we drew a lot of inspiration of. For the people that don't know the founding story of Visa, I really recommend you read a few books from De Hawk, who ended up really being the brainchild behind Visa as an organization as we know it today.

Very similar to visa, we thought, how can you create some type of standardized architecture, infrastructure policies on the compliance, on the performance, on the security side, and how are you going to make these different platforms and partners, custodians and exchanges, and asset managers sort of interact, interoperate and work together when they're in many ways competitive. And I think for us, the answer was, it needs to be a distributed, jointly owned and operated organization that can bring these different counterparties together in order to build something that is better. Right? And I think that's sort of the approach that we took in the early days. We actually brought together Coinbase, Kraken and Figment as our early partners.

I actually left Coinbase and my co founder Matliff Figment, to start the company, and we kind of brought more people around the table to do that. And so today, what we concretely offer is a product stack that provides orchestration, integration and then standardized receipts. On Ethereum, it's called lseth. On the orchestration side, we support distribution across top operators, including Coinbase, Figment and staked. We have embedded performance SLA's as one of the first protocols to offer this kind of thing, natively embedded slashing coverage, a risk auditing standard that was jointly developed by different participants inside of the collective.

We also have an integration suite. So a suite of enterprise grade APIs that really seamlessly integrate it to the stacks of different businesses and institutions. And last but not least, we obviously have our perceived design. So LSEth, which is a c token that is standardized and so can be used across different venues and different platforms interchangeably and very similar to USDC. Even though the entry point, so minting and burning, has a natively embedded compliance model, the ERC 20 is actually permissionlessly exchangeable and tradable.

On the secondary market. And so you could almost think of liquid collective as a standards making body that works collectively to sort of define some of these standards in the market. And today, I think one of the exciting things that we've seen is that we've actually already been able to build support for LSE across nine different platforms and growing, including market leading businesses like Coinbase, bitcoin, Swiss Figment, Bitgo, Fireblocks, Anchorage and others.

Felix Lutz

Yeah, super, super cool. I think. Yeah, very interesting how this model ports over. And I think actually also to contrast it or to see, I guess these are even goals in the sense of the underlying blockchain itself, to be this distributed platform that has different stakeholders, ETH holders essentially. But of course, building a model that's maybe more inspired by traditional corporation model, basically bridges that potentially better.

Because I guess many of these are not so comfortable buying ETH right away either. I think that's actually a thing that only now is happening after, I guess, I don't know, when Ethereum launched for almost ten years now later we have some of the first bigger institutions that are not crypto institutions, let's say, entering the game. Yeah, interesting to see that maybe they can be more comfortable with this sort of hybrid approach there. How do you view the current ETF's and sort of some of these products that are poised to bring more inflow and more institutional capital into crypto and how that impacts, I guess, the layer below Ethereum staking and kind of the participation at large? Yeah, it's a very timely topic.

Mara Schmiedt

I think a lot of the asset managers that we talk to, I think to some degree maybe underestimated the impact that the spot bitcoin ETF would have on the market. I was checking this morning. I think we're at like almost $60 billion in assets under management, and trading volumes are just growing consistently. I think I was reading about 110 billion in March. That's almost three x what they were trading at in February.

So I think there is a signal that there is real appetite between this intersection of traditional financial products and making accessible cryptocurrencies as a new solution to a more mainstream and institutional audience. I think when you look at the spot ETF's on the Ethereum side, obviously there's been a ton of applications go through submission that are obviously pending in the US. I think when you look at just the current numbers on the bitcoin side, it is indicative of a pretty significant market opportunity that these products can capture. If you estimate maybe 30% of the market size that we currently see on the bitcoin ETF side, no, that's still $20 billion in assets under management. Or if those products were to be staked, that could almost be 20% of an increase in the current levels of staking participation.

So these numbers do start getting pretty big. I think there's a few things that have been interesting. So I think on one hand there's some, I think, consensus in the market that it's going to be interesting and different with Ethereum because these products will be able to offer some type of total return because Ethereum is stakeable and there's a reward rate that's associated with that. And I think to be competitive, these funds are going to have to pass some of that back to their customers. And on the other hand, I think we're starting to see other jurisdictions that I think are more friendly to providing these types of approvals starting to roll out and enable these products.

I think you have mostly Canada and Switzerland today where you have staked ETPs and ETF's already the 21 shares at the three iqs of the world that are being the first to market with these kinds of products. Probably indicative of a trend that we're going to continue to see and hopefully unfold in the US and other markets as well. Yeah, it's super interesting to see and I guess then how these ETH actually will be staked. I think one of the core things we wanted to discuss here is actually probably more as we are epicenter, we wanted to go more a bit on the technical side and I think I wanted to talk about the institutional side as well because I think it has a lot of impact also on the actual discussions that Ethereum researchers or the Ethereum community at large are having right now. You just mentioned if all this ETH would be staked, it would be 20% more staking ratio.

Felix Lutz

At the same time, we have these conversations going on in the Ethereum community right now of potentially even capping how much should be staked, and a few, I guess, concerns about centralization at large of Ethereum staking and curious to hear how you think, I guess would obviously people might think that if ETF comes and it's all staked, probably with some big provider, that would probably lead to more centralization or. Yeah, I guess. How are you seeing these discussions currently? And maybe you can also provide a bit of more background of what is actually being discussed and I guess the market's impact on that and how you see that. I'm quite curious to hear your take.

Mara Schmiedt

Yeah, I think probably two questions in there. So I think the first one is, how do I view this new entrance of markets or market participants? I think we're trying to build a mainstream technology, and so getting mainstream participants to be able to access, and I think on the topic of staking actually contribute to a public good of Internet infrastructure is really, really exciting. Ultimately, that's what I feel like we have been building towards for many years. And I'm not saying that, you know, the institutional market is the one and only holy grail, but I do think seeing progression and the uptake of this technology into sort of more mainstream and also potentially incumbent, you know, technologies and financial infrastructure is exciting.

I think the second question was, yes, there's a lot of discourse right now in the Ethereum community on how much stake is too much stake, and what does that mean for Ethereum and the way that the system is currently designed? So I think maybe just to look at where we're currently at. So the staking issuance curve, which is basically the amount of rewards that are issued by the system, is actually an inverse function. So it's sort of pretty high at the beginning, and then it slopes down, but it doesn't really ever go to zero. And there is definitely no mechanism in place that says, I will cap where there is a cap to excessive staking participation.

I think this concept of excessive staking participation is maybe a little bit more novel because it takes an opinion on how much stake is too much stake. And I think that opinion was not previously expressed in the way that the staking issuance curve was originally designed. So I think there's a few, I guess, problems that people are pointing out with this concept of excessive staking participation. We spoke a little bit at the beginning about how there's different market trends that are all sort of continuing to indicate that staking participation will just continue to grow and grow and grow. And we've seen the data over the last, call it three or so years that that has actually been consistent with what we've observed.

So I think on one hand, there's this concept of what's the impact to real yields. So as staking approaches 100%, the real yields actually end up going down to zero, because once you adjust for inflation, you know, no one's effectively better off participating in the staking market. That also does have some other consequences, including the fact that if there's a lot of participation and a lot of issuance in the system, then actually holding ETH and not staking ETH becomes really expensive. It's a little bit like holding your dollars in your bank account. When the inflation rate is really high, your nominal value might not go down, but your purchasing power does.

And so that kind of counteracts the idea that ETH, in and of itself, without being staked, can really be useful as money, because if inflation is really high, then people are going to try to figure out how to protect that purchase power. And so as a result, I think there's this underlying question about what does that mean in terms of what will become sort of the de facto network currency? And is there maybe substitutive currencies that can go in place of that? And I think people often quote staked ETH, or sT ETH in particular, as a potential consideration or also concern that may eventually supersede the use of ETH side of the network for both consumable and transaction purposes. And of course, then that can present other challenges.

It's less competitive for solo seekers to participate in that environment. We might end up in a position where these players could get too big or the protocols could take over decisions on Ethereum consensus that are not maybe maximally trustless. I think there's a lot of different considerations and topics that are being unpacked at the moment. Maybe you want to talk a little bit about what the proposal is and what, what people are discussing at the moment. I'm happy for us to dig into that as well.

Felix Lutz

Yeah, I mean, I think, yeah, that was a really good breakdown of why this is happening. I guess also ETH as money and sort of ETH being staked, not being able to be used as money anymore, and then sort of liquid staking tokens, potentially taking that spot. I think we, as you mentioned, the liquidity worker group, we were pretty early to discuss things like this. And I think also, in a way, this is down to ethereum's design. Right?

I mean, especially in the beginning, it was even more predominant because there weren't withdrawals yet. So the illiquidity premium extremely high. So liquid staking tokens actually got way more adoption than on other networks, as we can see, for example, on Solana or other networks that are now live five years plus, the liquid staking penetration is actually much lower. So I'm wondering how much it is also down to that. And another thing that we were sort of wanting to talk about here in that discussion is also that was another side effect of like trying to control it in that way that you lower the issuance.

I think. Yeah, this is kind of the core argument right now. That we lower the issuance, we make it less attractive to participate in staking. I think you have also other side effects there that especially probably impact solo stakers actually that want to participate, but also other trends or like innovations that maybe try to bring the yield elsewhere. So I think, yeah, I would be curious to hear your sort of impression of how this discussion, what are these counterpoints that are maybe under discussed actually in the public discourse to some degree, from what I see, I think maybe you are even more deeper in there than I am, being so ethereum focused.

Could you kind of elaborate on your side or your view of this? Yeah, for sure. So I think, I mean, in principle, like what's being proposed at the moment is something called stake ratio targeting. And so basically having an opinion about what stake participation is sufficient from a security standpoint and adjusting the way that the reward curve or the issuance curve works. So we were talking about how today it's inverse.

Mara Schmiedt

Well, I guess the proposal is to turn it more into an s curve where with very little participation, the incentive and the staking, issuance is really high. But then after a certain point would again, as an opinionated point about what ratio of stake is enough or sufficient or too much, that the yield or that reward rate eventually goes to zero or it even goes negative. Right. It's not too dissimilar, I think, from sort of policies that you would see in broader, like economic structures today. I think the problem that people are raising with the concerns they have at the moment is one like interventionism obviously is a question.

And the question is also how does that impact critical neutrality of a system if you're adjusting the system to prevent a predicted outcome? Because there is an opinion about whether it is or isn't desirable. There's also, I think, a confidence question, like what is the impact of changing these monetary policies on the developer community, even businesses like us, in the midst of building? It's already hard enough to build in such an incredibly fast paced and volatile market. But if the rules keep changing while you're building, that's quite costly.

And that can sort of erode confidence with also emerging market participants, like institutions who may require adjustment to that kind of swift shift and change of something that is as fundamental to the system as this. And then some people, of course, are also raising concerns around just the timing. Is this the right time to have this conversation? While, you know, there is sort of outstanding reviews by major jurisdictional and regulatory bodies on the classification of ethereum and things like that. So it's a really nuanced argument.

There is different perspective, different sides. It's an incredibly dynamic system. So I try to take a sort of more holistic perspective. I think observing the market the way that we do, practically speaking, it's going to be extremely difficult to create one liquid staking token or one liquid restaking token that fits all customer cases. I think there is definitely network effects that underlie these systems.

But at the same time, we're already seeing a universe develop where the market share and structure is changing. You're seeing very dominant liquid state tokens like stethoscope come down significantly as new solutions like liquid restaking tokens emerge. And as new customers enter the market, new solutions emerge that are fitted to suit their needs. And so I think there's a question of are the assumptions correct about what the end game could potentially look like? And if those assumptions changed, would that change the way that we would view this potential proposal or change in the policy?

Right. So I think there's a lot of different opinions and perspectives, but that's sort of one that we currently observe and sort of anchor to. Right, yeah, thanks a lot for that, I think. Yeah, so we're interesting times and like we mentioned it a few times already, right? The emergence of restaking also playing a big role.

Felix Lutz

And I guess generally the market cycle right now, as we record this being pretty bullish and a lot of like sort of the trends that we saw in previous cycles kind of reemerging in like a new form. I guess nothing ever really changes too much. But I mean, now we have through like points and restaking, like sort of the second, or like maybe it's already the third iteration of like kind of yield farming that we saw in Defi summer, and that obviously also changing the market in some ways. Actually, I guess maybe like you were saying that Lido lost some market share in ways that might make it more decentralized on the outside. But I think it also, interestingly, I guess is mostly driven by speculation and not really people reviewing the underlying tech too much, but more like trying to farm the new shiny thing.

So yeah, I think very dynamic system and yeah, interesting. I guess you always need to look at it in this holistic way, like you already said. Right, but how do you see it in that discussion? Or like, what do you want to comment on that? I mean, you also, being a founder, I think that was like something we wanted to discuss earlier.

How do you navigate this space as a project yourself? Maybe that could be an interesting question. I think it's a great question. I mean, we've both been in the space for a while, and I think we've seen the bull markets and bear markets and all the things that sort of emerge in them.

Mara Schmiedt

I think in the current market there's two, I think, interesting observations. I think the first one is, with new technology and with new customers, a market's given the opportunity to mature and to centralize and diversify. And I think maybe we're starting to see a little bit of that with restaking and institutions entering the market sort of changing a little bit, the configuration that almost felt like steady state for a while, where you had projects like Lido sitting up at about 30% market share, and sort of things seemed to be getting a little bit more static. But I think that's changed a lot. I mean, in the last month or so, you've had projects like Lido boost like three, 4% market share.

There's some liquid staking tokens that lost like 40%. I mean, we thankfully grew a lot this quarter. But on the flip side, you have liquid restaking tokens like booming like crazy. And so you see a lot of these very crypto native users move swiftly from one opportunity to the next. And I think when you think about restaking, in many ways, the underlying is the promise of maybe points or airdrops and people farming that in the cycle.

And so when you think about the fact that with eigen layer, you don't actually have AVSP's enabled yet and AVss haven't deployed, and, you know, we kind of really think through that, then I think you start realizing that I think the very early adopter market is very swift to move on new innovations and opportunities. There is definitely financial motivation underlying that. And not to say that's necessarily good or bad, but it's definitely something to consider. So I think one of the things that is interesting as a project in this space is sort of having to make that decision or the trade off to decide how to counteract maybe some of the more short term focus and incentive mechanisms that are active in the space today. And I think for us, the decision, I mean, we're kind of very long term thinkers.

You kind of have to be if you're going to go after a market that's going to take years to mature and fully grow into its existence. And so as a very long term thinking team, I think for us, it's very important not to take shortcuts or compromise on things that could potentially stand in our way of achieving the goals that we have or partnering with the types of businesses that we want to partner with. And so while that pragmatic approach maybe sounds like taking a high road, it is also a challenge. Right. You're sort of confronted with that in many conversations, whether you're talking to investors or other founders or partners where, you know, I think there's sort of a more open, I think, conversation about how we as a space build and how we can build with an incentive to build for things that can last.

So. But I would love to hear your perspective on it. I mean, you've seen loads of this too, so not just in this cycle. Yeah, yeah, yeah. It's very interesting because I think it's almost like table stakes to, you have to somewhat participate in it to even be able to compete in some way and sometimes, like, maybe something good comes out of it.

Felix Lutz

I also think in general, like, incentivizing the right stakeholders and some of the core ideas of what are sort of behind the distribution mechanisms or like, these, these sort of programs are, are good because it's pretty hard to, like, get the right stakeholders aligned. Right. Like, I mean, maybe with proof of work, you had a little bit of like a moment where people could, like, mine on their computers and no one knew about it. But that's not really the reality anymore now. So you need to, like, find some other ways to find the right people.

So I think, yes, it makes sense. It should probably be there, but at the same time, it's a lot, it adds a lot of noise. It doesn't really incentivize maybe building the right, the products that actually solve problems, but more like just create more problems potentially even, or at least create more infra that maybe isn't even. It's very hard then also to tell if you even have market fit or if you just have mercenary capital that will like, move on to the next thing or once they get the chance. So, yeah, definitely like a thin line to balance.

And the more it's almost like, yeah, I guess it's like kind of leverage. Almost like it's the more you go into the short term thinking and the more success maybe I've done, like, the harder it will almost be to, to make that last because I guess you attract even more short term thinkers. So trying to find some balance and be somewhere in the middle or maybe even on the right side of the spectrum, which will be probably the hardest to say, like, hey, okay, we're not doing it at all, then I think you might find it pretty hard to compete at all. So I think, yeah, some balance in between there. And that's a very.

Yeah, hard space to navigate. Like you said, you will have different parties trying to talk you into stuff. And I guess also the market always, no one is immune to it, I guess. So in a bull market, everyone gets sort of into it. I mean, there's the good side to it and maybe also a not so good side to it.

Mara Schmiedt

I think on the good side, I think these incentive systems, the bootstrapping and user ownership perspective that underlies protocols, does create an environment where I think it's harder to deeply enshrine a product as the de facto monopoly in a market. And I think we're seeing that happen right now. And I think that is good because it sort of erodes this dominant, I think, like market tendency or centralization tendency, and it gives way in space to different innovations with different differentiators. And I think maybe in part like a maturing tech market or technology landscape, I guess the flip side to that is that demand, those customers, those users might just not be that sticky. And so that, I think can create challenges for protocols that have to sort of play inside of that realm because that demand can very quickly move on to the next thing and the next thing and the thing after that.

Right. But I think there's sort of a balanced perspective to it. I think we are continuing to do a lot of innovation in this space around what user ownership looks like, what distribution should entail, and I think what are sort of the functionalities, the governance, participation, other things that we want to see. I'm generally excited that we get to really continue experimenting and finding the right strategies to do that. But yeah, I think it's definitely an interesting conversation.

Felix Lutz

Yeah, surely maybe one thing that I also was interested in, we talked a lot about the liquid staking tokens or sort of that market structure. But I guess on the other hand, we have the more centralized players also participating, I think. Yeah, like we mentioned in the beginning, the ETF also probably custodying with renown custodians and real businesses. How has that actually developed? Or is that how is the market share of those changing?

Have you followed that? And maybe do you have your take on why, which directions these are moving? Is it going to be more staking through Coinbase and institutions like that in the future? Or do you see what's your take on how that will play out? I think that was the big concern.

I guess initially how Lido was created is counter the trend of having the staking inside decentralized places. Now, then Lido becomes almost a problem itself. I guess it's the natural evolution. Yeah. How do you think about that?

Or have you observed that? Well, I think that's exactly right. If you think back to 2021, I think four players, or even three players made up 60 or 70% of all the staking. Market centralization was pretty high and of course there was sort of an impetus to bring more participants in and I think more innovations, Lido and others taking protocols ended up sort of breaking that up, reconfiguring it, and now, I think in themselves ended up becoming a little bit of a problem as a result of it. I do think all of these things are healthy.

Mara Schmiedt

For what it's worth, as technologies evolve and mature, it's good to see these types of shifts in the market. It keeps everyone competitive and operative, and I think that's important. I think, as you said in the beginning, we kind of are operating on this adoption curve where the most crypto native early adopters are going to and are moving away from traditional staking. They're moving into liquid staking and from liquid staking into liquid restaking, and they're going to really be on the, I think, forefront, on the edge of all the innovation that is taking place. And then as you move along the adoption curve, I think it follows a trend that sort of continuously more conscious, more risk averse, more security aware, until you sort of end up with the institutional market, where I think conversations about restaking are incredibly early.

I don't really see people materially moving to approve or being able to integrate these in products at this point in time. But I think sophisticated operators continue playing a significant role in the market because at the end of the day, they're the lowest common denominator that guarantees a really robust security architecture and design. And so the way that we, for example, have thought about this is we think multi operator diversification is critical. Ethereum punishes correlation. So ideally you don't want to have a single operator underlying your infrastructure.

And so by partnering with some of the most sophisticated operators in the market, like figment or Coinbase or stake, that have been running and building for a while, we can sort of create that risk optimized allocation or design that can be distributed through a single API. Right? So it's really incredibly user friendly to support that kind of deployment. I think that consideration at this multi operator design continues to be more and more important when you think about some of the more recent conversations that are happening. I think just a week ago Vitalik put out a post that proposes increasing correlated penalties.

Today, those only applied to slashing. But I think there's a material discourse emerging now to potentially extend these correlated penalties to other things, including liveliness failures. So that's a little bit of how we think about the market and leveraging great operators on the back end of our products and continuing to ensure that we sort of raise the bar on what it means to provide really great security and correlation protection. Yeah, that's a really interesting point there, I think because a lot of people also mostly look at the entities or kind of the wrong layer almost in terms of when they think about centralization. For example, often you would see Lido, okay, 30%.

Felix Lutz

But in many ways Lido is actually 40 operators and pretty decentralized and kind of very transparent structure also forced maybe through the market. But I guess the same goes for big entities like Coinbase or even, or you guys, of course, where often they might have operators underlying them that are actually not just Coinbase cloud when they get big. Although in some cases that is a little bit less transparent. Of course then, because it's like these decisions are more, or like the distribution is more private, given the nature of the enterprise. But yeah, I think that's a really interesting topic to really see what underlies this.

And there's also a lot of fluff about it, or talk like many people say, hey, we have decentralization, or we help decentralization, but then you look under the hood and then at some point maybe you find, okay, it's actually like the guy in the basement, like one employee running everything or something. So I think also building up that capability to have multiple operators and just that just takes time. I feel like there's also a struggle for the new projects coming along that have probably more focused on their initial go to market and have not built out that side as strongly as maybe someone like you or lido or even decentralized exchanges have. Yeah, kind of interesting to see how that impacts the ethereum underlying sort of staking infrastructure at large. And these proposals are probably.

Yeah, I wonder. We haven't seen much, I guess, in slashing. Right. We haven't seen that many slashings, but maybe with correlated penalties on the rewards, maybe that would be a bigger thing because I guess that's something that happens much more often. And then we could actually see changes emerging from direct impact on the rewards.

Yeah, super interesting. Yeah, I agree. And I think there's almost sort of this underlying consideration, which is not only does it encourage more operators to be more broadly distributed, like different servers, different locations, different physical machines, but there's also like, another thing that becomes quite interesting in this conversation, which is can we implement mechanisms that are maybe more effective at creating distribution and decentralization in certain parts of the technology stack? I think execution client distribution has been like a really much discussed topic in the market. And I think maybe as we see potential liveliness failures in execution layer clients, this is actually maybe an interesting way to think about how that could be extended or a forcing function for client distribution more generally.

Right, right. We kind of didn't even look at that. That's a big part. That was a huge discussion. It already feels like ages ago, but was just really three weeks ago.

Yeah. So I guess overall, yeah, lots of moving parts. Super interesting. It remains interesting. So, yeah, I think, I mean, I sort of covered everything I want to talk about.

So thank you so much for coming on. If you. Yeah, I don't know if you have any last things you want to share about liquid collective or about you or to our listeners, please feel free to do so. But yeah, thanks so much for coming on and your time. Thank you so much, Felix.

Mara Schmiedt

Yeah, for sure. I mean, if folks have any questions, feel free to check out our website, liquidcollective IO, or head over to our Twitter, liquid downward Cole and give us a shout. So thank you guys.

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