Web3 Galaxy Brain 🌌🧠

Web3 Galaxy Brain

Staked ETH with Lido and Index Coop

28 June 2022


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Nicholas: Welcome to Web3 Galaxy Brain. My name is Nicholas. At the end of each week, I sit down for a casual Friday conversation with some of the brightest people building Web3. In this episode, I'm joined by three voices in the ETH liquid staking space. Walshi NFG works on business development at Lido. Cruz works on product and growth at IndexCoop. And Leo Glicic is a blockchain watcher who's active on Twitter. This episode is all about Lido staked ETH, IndexCoop's leveraged IC ETH, and more. This episode is a great starting point for understanding liquid staking and leveraged staking products. I hope you enjoy the show. Welcome everybody. There we go. Hey. Hey. What's up, everybody? Welcome. How are you doing?

Walshy: Not too bad. I've actually had a pretty good day today. I appreciate that. How are you doing?

Nicholas: I'm doing well too. Walshi, this is the first time we meet. Nice to meet you. You're working at Lido. Is that right?

Walshy: Yeah, indeed. Yeah, this is our intro conversation. I'm in business development and I've been working with them for roughly about like two to two and a half months now.

Nicholas: Okay. And Lido is like, what is it? Early 2020, something like that?

Walshy: Late 2020.

Nicholas: Late 2020. Okay. Yeah. Very cool. So what is BizDev at Lido mean?

Walshy: That's a great question. It means usually running around like a headless chicken.

Crews: Okay.

Nicholas: Because Lido does like tons of staking on different chains. I didn't realize this until recently.

Crews: Yeah.

Walshy: Yes, exactly. Right. Yeah. I mean, that's kind of the whole mission, I guess, from the outset was essentially to provide liquid staking. Well, I guess not at the outset. At the outset, we were wanting to provide liquid staking for Ethereum because the beacon chain and right when you deposit, you need to get it locked up. But as time went on, the multi-chain universe started unfolding. We kind of realized there needed to be the prime liquid staker, if you will, liquid staking protocol on each chain. So yeah, I mean, we are all over the place. That's correct, my friend. So Ethereum...

Nicholas: Is the presumption that there's like a network effect around being a liquid staking protocol per network?

Crews: Yeah.

Walshy: Yeah. There definitely is a presumption of that. No doubt about it. I mean, everyone seems to know our name and thinks we're the big bad guys, whichever chain we're in. We're always seen as the big bad guys.

Nicholas: That is true right now. It's actually funny because I think, I mean, I'm more on the NFT side most of the time. And I think I heard of Rocketpool and Lido around the same time and only a little bit later. did the sort of echo chamber produce this fear about Lido more recently. It's sort of in my field of reference. But yeah, I'm curious. I'm curious if we can talk about that a little bit too.

Crews: Let me say hello before we begin here. How's it going? Hey, guys. Doing great. Nice sunny afternoon here in Atlanta, Georgia, where I'm at after a big week of excitement in Web3 land. So happy to chat here.

Nicholas: Absolutely. Yeah. Happy to have you. Likewise.

Leo: Let me say hi as well. I'm Leo and super, super excited about everything that's going on in this space. I'm over in Oakland, also very sunny over here.

Nicholas: Leo, I know you posted a thread today. Was that just sort of out of interest for you? Or are you working in staking protocols or things like that?

Leo: No, I'm not working in this space. I just got super, super interested in it. And I just went down this rabbit hole of learning everything in and out about it over the past few days. I figured I might as well, you know, summarize it for everybody and let them have the benefit of it.

Crews: Yeah, that was an awesome thread, Leo. Just kind of full disclosure. Leo just DMed the NXScoop account like the day before he posted it. Hey, I'm working on this, you know, letting us know that it was coming and then we shared it. But that was my first time meeting him. And yeah, awesome work. Happy to share it.

Nicholas: Appreciate that. And Cruz, yeah, so index coop cop. Did we decide on how to say it? I put in a poll the other day.

Crews: Yeah, we love doing polls and that. It's totally, you know, in the eye of the beholder, the name is decentralized, just like the protocol. I used to say index co-op, but the coop for short, but I'm just like full coop maxi now.

Nicholas: And are you working specifically on ICEath?

Crews: No. I'm on the product growth and community teams work across all of the products at index. But you know, this is a big launch for us. Everyone in this community likes ETH, likes holding ETH. So it's a great opportunity for us to launch an ETH yield product.

Nicholas: Yeah, exactly. So leveraged ETH. And I think we'll get into a little bit later, but kind of interesting the way that because it's Steeth backed loans, you're maybe a little bit safer than if tokens are unrelated in value. So pretty cool product.

Crews: Yeah, just high level of view before we dig in. Yeah, I see ETH as an ETH staking, leveraged ETH staking product built on top of Lido's staked ETH. So you retain just 1x exposure to the ETH price going up and down, but get extra staking rewards and we'll dig into the rest later.

Nicholas: Super cool. Does anybody want to jump in on just like? very briefly, what is the purpose of staking in the first place? And maybe what Lido does is a good place to start in making that more accessible for people. You want to jump in on that Walshie?

Leo: Yeah, sure.

Walshy: So staking, its purpose in general is to secure proof of stake blockchains. The problem that Ethereum had once the beacon chain was released, of course, is that when you actually stake to the beacon chain, your funds are locked up. You're not able to utilize them and they stay there. So we saw an opportunity to go ahead and introduce liquid staking, which in my mind, how I like to explain to people is it's just a receipt token. So you deposit with Lido, you get about, I think it's 4%. now return on what you deposit and you get a receipt token in return that has value. And then you're able to go ahead and spend that. It's still composable. You can still utilize it throughout the ecosystem and do whatever you want and whatever you please from there.

Nicholas: So the liquid staking is the tradable position? Is that what makes it liquid?

Walshy: Yeah, exactly right. Exactly. It's usable throughout the ecosystem. And all over Curve and all these other places as well. And so you're able to trade for it and get a tangible value out of it. That's why it's liquid.

Nicholas: And for right now, there's no way to unstake if you're doing the full blown beacon chain validator staking 32 ETH. You can't remove your ETH so far, right?

Walshy: Exactly. You were basically forced to choose, right? Either if you want to help secure the network or if you just want to degen it out and chase higher yields. You had that option prior to live. It was just one or the other. And so it kind of created, I guess, a paradox of choice and essentially user behavior just kind of defaulted towards greed. Everyone wants to chase the high yields. And when you have an A or B choice and there's no C, it's just you're going to go for the higher yields every single time. So we kind of consider this a network risk.

Nicholas: And then it is fun, as we'll get into. the ICE product is built on the fact that it is liquid and a tradable tokenized version of not only fractions of the 32 ETH, any size fraction, but also lets you build other DeFi products and all kinds of things with it. So pretty cool.

Walshy: Yeah, exactly.

Crews: And then with the ICE token, you can go another layer down and you'll be able to use ICE as collateral and build all kinds of products underneath that, just further compounding the composability of DeFi.

Nicholas: It's super cool. Actually, well, I wonder where we should go from here. Maybe if anybody in the audience has a feeling about how if we should veer towards questions that are more basic or if you have questions, maybe just jump in, because I've been sort of looking at this all day. I actually spent all day writing a thread, which I hope doesn't have any factual errors in it, which was I was curious how staked ETH rewards can be given out to everybody how ETH rewards for validation can be given out to everybody who holds staked ETH without the gas being very expensive or what kind of mechanism allows you to do that affordably. And I think I understood it pretty well. It's a pretty interesting mechanism where instead of the staked ETH representing directly the amount of staked ETH in your wallet is, as you see it in MetaMask or on Etherscan, is really just multiplication of the, what is it? The shares of the total supply that you have times the, what is it? Total shares. I'm going to have to go find the formula now, but essentially the amount that you hold as a share of a value, which is the total ETH in the staking pool, that number can be changed and also shares can be added to the pool without having to iterate over every single wallet that holds staked ETH.

Leo: Yeah, this was actually a very big learning for me as I was researching this and I found out this is how Alito does it. is they use this rebase function, right? So you can, let's say you have one st ETH in your wallet and then now that it has earns 1% on it, they can use a rebase function to just make it so in your wallet. now you have 1.01 instead of, so there's a rebase function instead of just, instead of sending you a 0.01 as a transaction. And so that was, that was actually pretty cool, pretty cool to learn how that works. I didn't still haven't fully figured out what the gas costs of a rebase function are compared to, obviously, you know, sending out a transaction to lots of wallets would be very expensive. So the rebase function appears a lot cheaper, but it's not, it's not obvious to me why. I don't know if Walshie, you have any more, any more knowledge on that, on that end.

Walshy: I mean, quite frankly, I think you guys know more than I do at this point.

Nicholas: I can, I can quote the formula for you if you want. So, so basically, you know, like in, in ERC20s, you have this balance of function, you pass it an address and it tells you what's the balance for that address of the token, the, of this contract, Steeth, you know, StakeDeath for instance. But instead of that drawing on mapping, which is to say just like a database of, you know, this address has this much, this address has that much, which would be really impossible. It would be impossible to increase because basically when the rewards are calculated every 24 hours in StakeDeath, as far as I understand it, everybody's share stays the same. And when you call that balance of function to ask how much Steeth do I have? So the number that's pulled up in MetaMask or on Etherscan, what it does is a calculation, which is shares belonging to that address times the total pooled Ether, which can be added to or removed from if there's slashing. But generally speaking, can be added to based on the validation rewards. So you're multiplying your share of StakeDeath times the total pooled Ether. That number can be changed by just changing the one number divided by the total shares. So what's interesting is that you can every 12 PM UTC every day, as far as I understood it from reading the contract, an Oracle calls this function, which basically checks what's the amount of Ether in the beacon chain validator staking contract. The details of which I could not explain. But basically that accumulates ETH based on the rewards that it's received in the past 24 hours. The Oracle updates the StakeDeath contract with the new total amount of ETH, which has increased, let's assume 4% per year, or I guess 10% more, whatever it is before fees. And then everybody's shares have stayed the same. So this calculation of my shares times the total supply, times the total pooled Ether divided by the total shares, my amount of Steath has actually gone up, but nobody touched my shares. They just touched the total pooled Ether. So basically you can update just this one number and have it affect everybody's Steath balance without changing anything individually for them. The other little detail about that is that in order to assess the fees, because there's like a 10% fee on StakedEth, which goes to like node operators and insurance and the like, they just add shares for those three addresses or whatever represents those entities. So you can still cut off the mechanic for allocating the fee is to add shares, but only to those three destinations. So the gas costs don't affect, you know, they're not multiplied by the total number of holders of the token. It's pretty cool.

Leo: That is super cool. Thanks for explaining that. That's really awesome. Yeah, it's really interesting that you can have a token in your own wallet and the quantity of it can change either up or down based on some rebase function. This is just an Ethereum thing. It's not necessarily related to the staking. It's this function that allows you to do that. But it's interesting. if you have a token that can be rebased also down, it's like you can lose, you can technically lose tokens from your wallet without ever having transacted anything. The quantity can just change based on some external thing. So it's an interesting type of token and function. I wasn't too familiar with it before.

Walshy: We see a lot of people that really love to just have it in their wallet and see that number just go up. A lot of people give us feedback about how that works and why they love that so much. But on the opposite side of things, we also have people that don't really like the rebasing element of that. They'd rather something instead. It's more like, well, we have what's called wrapped staked ETH. And essentially, I think there's a multiplier that goes on behind the scenes in which like an index just steadily goes up and up and up. And the values multiplied based on that. So instead of the quantity of your token going up in your wallet, instead it's based on that value and that value goes up and up and up slowly over time. Some people think, I didn't have any issues with taxes this year on my end, but some people are afraid of taxable events when rebases occur. And that's a perfect solution for it.

Nicholas: It's also like a...

Crews: It could take a stab at framing a different way, I think. Ethereum is moving to proof of stake, right? So folks were able to, if you have 32 ETH, stake directly with the network, stake 32 ETH, become a node and receive staking rewards directly. Lido abstracted away some of that complexity, created the staked ETH token where you can basically get a receipt of ETH that you deposit into Lido. They handle the staking for you and just pass on the staking rewards to you. Recently, staked ETH, that STETH token that we've been talking about, the receipt for staked ETH got listed on Aave so you can use it as collateral on their money market, meaning you can deposit staked ETH and borrow against it. What IndexCube built with ICE is a leveraged staking product. It abstracts the complexity away again of creating a strategy where you deposit staked ETH to Aave, borrow ETH against it, and then stake that ETH. And then now you have more collateral so you can borrow more ETH again, swap it to staked ETH and deposit it back. And we kind of just reflexively repeat that process until you get to a leverage ratio of 3x. And then ICE is a simple ERC-20 token that you can hold in your wallet. that is a tokenized representation of that position. So you get 3x the staking rewards, but you're still only 1x exposed to the price movements of ETH.

Nicholas: So walking through, starting with ETH, let's walk through once again just like how do we get to the ICE ETH?

Crews: Yeah, maybe Leo, you want to take the ETH staking and then Walshie staked ETH and then I do ICE ETH. Yeah, and let's like present this from the framing of the value proposition to the customer. If I want to stake ETH, why do I want to stake ETH? What do I get out of it? If I want to buy ICE ETH, what do I get out of it? If I want to buy ICE ETH, what's the value proposition?

Leo: Yeah, I think that's a good order. I like it. So staking Ethereum is, as many of you know, we're moving from proof of work to proof of stake. And these are just consensus protocols. So right now, the way that the blockchain on Ethereum reaches consensus is proof of work and it's moving to this proof of stake. And what proof of stake does, it says, instead of doing a bunch of work and proving that you did that work in order to prove that you're a real person making a vote, instead you can deposit a bunch of Ethereum down to prove that you're a real person making a vote so that you're not some bot. And so that's the conceptual switch from proof of work to proof of stake. And that's why it saves so much energy and hard work, because you don't need to go do all this useless work to prove you're not a bot. You can just deposit your ETH down. And in exchange, just like with proof of work, where you do the mining and you get the mining rewards in exchange, you get staking rewards for putting your Ethereum down and you get to participate in the consensus protocol. You get to make these votes to include transactions in the blocks. And as a result, you get ETH back as staking rewards. And so this is a very, if you're long on Ethereum, this is a very safe way to earn an additional yield on Ethereum because you're not exposed to any risk other than the Ethereum blockchain itself, which you're already long on. So as long as everything functions correctly, you put your ETH down and you get an interest or a yield back in the form of staking rewards over time. And so, but as was mentioned earlier, there's a few drawbacks here. One is that your ETH gets locked up. So now you send your ETH to this deposit address and you can't use that ETH anywhere else as long as you're staking that you don't have access to that ETH. Once you stop staking, you can pull it out. Right now you can't pull it out because there's a lockup period. But once the lockup period expires, then you'll be able to pull your Ethereum out, but then you don't earn the staking rewards. So there is this trade off. And additionally, there's a couple of other things. One is you have to have the technical know-how. And that's really a big one. Most people don't have the technical know-how. They just have the ETH, but they don't have the technical know-how. And so that's another thing. And then like I said, there's this lockup period. So there's a few drawbacks to just staking directly, but that is essentially how staking works. Hopefully that's a good summary.

Walshy: That was perfect. Yeah, absolutely. I think you hit the nail on the head for sure. And that's where LIDA really comes in. As Leo said, there's a couple of things that are required to even stake to begin with. First is the hardware, which thankfully for ETH, it's not something super heavy, right? You can do with a laptop. But there's the technical knowledge behind that to ensure that you're not only always reporting properly, but you're also always up. Up time is important. You have to basically be up 24-7. Then there's the actual value behind it. In other words, you have to have 32 ETH in order to become a validator. And because of that, maybe like three years ago, it was a little bit easier to do that for sure. Nowadays, it's about six figures that we're talking about. So that's where LIDA really comes in. We want to abstract all that away. We want to make sure that anybody out there, whether it's my mom or it's my colleagues, if you want to be able to stake, you have that ability to stake. That's where LIDA really comes in. There's no hardware required. You don't need to worry about uptime. You don't need to have 32 ETH or 16 ETH or 8 ETH. You can have 0.01 ETH and participate in LIDA.

Nicholas: Actually maybe worth noting on this point, I made the mistake at first of staking my own ETH for staked ETH, which is not worth the gas. You might as well just buy it on an AMM unless you're really staking some massive amount of ETH. Are there any advantages to staking it in your mind?

Walshy: What, directly on the Beacon Chain itself?

Nicholas: No, no. It's just way more expensive to swap ETH for STEETH on LIDA. Actually stake it, submit it to the staking protocol versus just swap for it on an AMM. It has a much better price unless, I imagine there's some point at which the price impact becomes relevant, but probably have to be trading a lot of it.

Walshy: Yeah, yeah, exactly right. To be completely honest with you, there's obviously several advantages and several disadvantages. It really just depends on what your true outcome is. You still want to be able to utilize, if you want to be able to utilize the actual asset itself then it makes a lot of sense to go ahead and stake it. But if you just want to go ahead and quickly pick it up off an AMM, then it's really just risk and reward at that point.

Nicholas: I think it'll actually be the same. I don't think there's any difference to staking it yourself versus acquiring it from an AMM.

Crews: Yeah, well he's talking about minting new staked ETH versus buying on an AMM.

Walshy: Oh, oh, I apologize. Yeah, no, there's no advantage at all. Yeah, you can do either or. Either works. Yeah, I mean it really depends if you just want to use our beautiful front end or not.

Nicholas: It is front end. It is best in class front end, frankly.

Walshy: Yes, exactly. Props to my team.

Crews: Yeah, so enter Lido to solve the problems of. you don't need 32 ETH to stake anymore with Lido. You just buy a staked ETH. You don't even have the technical know-how anymore. You just buy a staked ETH. You now have liquidity in your capital. You don't have to... If you staked 32 ETH into Lido, now you have the staked ETH. You can sell some of it. You can hedge your position. You can do all kinds of things with that staked ETH. You're liquid now. And then to bring up the next point of why I see ETH, I think let's kick it to Nicholas. Like okay, so you found this staked ETH token. that gives you nice staking rewards. But then if you kind of like look around the DeFi ecosystem, it's like there's a lot of options for what you can do with that staked ETH token, right?

Nicholas: Yeah, there are. I looked at a handful of them. I'm really much more of an NFT person, as I said. So the complex like CRV Yearn vault, which was one of the more sophisticated strategies I looked at, was a little bit above my head. I don't think I actually looked... Maybe you could talk a little bit about the Aave approach too, like depositing staked ETH, borrowing ETH or borrowing DAI, swapping for staked ETH and then redepositing it. Is that how one sets up like an ICE underlying with ICE?

Crews: Yeah, I can break that down definitely. But I think, yeah, just to speak to the value proposition that ICE solves, staked ETH is this amazing money Lego that unlocks ETH staking, right? Makes you liquid, makes it simple. But then now you have this capital that's liquid. What are you going to do with it, right? Tons of options. You can put it in a Yearn vault. that just like kind of earns yield on the staked ETH and they kind of automate the strategies for you, which is great. You can put it in a Ribbon Finance vault. Again, they use that staked ETH collateral, kind of go get you some yield, a lot of different options. Those are both like automated strategies. I see it as kind of comparable to those. But you can also just manually deposit staked ETH into a DeFi protocol like Aave. That's a money market. It lets you take loans against your assets. So staked ETH got listed as collateral, I think in January sometime or February on Aave. You could use that staked ETH collateral the same way. you would use regular ETH as collateral or Bitcoin as collateral or any other token. you deposit into Aave. And you can take a loan against it. And then with that loan, that new liquidity, you can do whatever you want. So what I see ETH does, it automates the strategy of depositing Lego staked ETH token to Aave, taking a loan of ETH against it, regular ETH instead of staked ETH. So staked ETH and ETH are just about the same exact price. They're kind of redeemable one to one. So when you're taking a loan of ETH against your staked ETH, you're not taking on any like price exposure risk to ETH the same way you would if you were to borrow a stablecoin against ETH. Because then as the price of ETH goes up or down, your collateral ratio changes. It's like if you take a loan of the max amount of DAI you could against your ETH and the price of ETH in dollars starts going down, you're at risk of getting liquidated. But if you just borrow ETH against the staked ETH, if the price of ETH goes down or up, your leverage ratio doesn't change. You're not at risk of being liquidated because your debt is changing at the same pace as your collateral. They're one and one.

Nicholas: So maybe we could do a little sidebar on this. Why is it that staked ETH isn't worth more than ETH? Or you know, like they really are. Should it not be worth a little bit more, at least the gas for staking it worth more? Maybe Walshie, do you have any idea why the price is so similar and why it ever deviates?

Walshy: I can provide a little bit of insight when we start moving into the more technical areas, which I'll be honest, I'm not really proficient at. But we peg it to the price of ETH and we work really hard behind the scenes to ensure that peg stays stabilized. So that's always at a one to one value.

Crews: Yeah, I think I can take a stab here. Yeah, Lido works really hard to keep that peg because it's super important for folks to be able to swap back and forth between staked ETH and ETH. So it's because of Nicholas, what you did and depositing through the Lido front end versus buying it on an AMM instead. Right. Folks can always create more staked ETH by depositing ETH to Lido and then getting back staked ETH. Right. So the tightness of the price between staked ETH and ETH can always be like exploited by And that's what keeps the price of staked ETH right in line with ETH. Because if there's a gap, then I can always create more staked ETH by buying ETH on the market, depositing it to Lido, getting staked ETH back and then selling it.

Nicholas: Right.

Walshy: Yeah, that was what I've all said. It's a common, I guess, scare of ours. We're just constantly worried about that peg breaking. And so we've got the gurus, the giga brains, the chads behind the scene constantly looking and monitoring. In fact, we do a lot of PSA, public service announcement announcements when there's actually liquidation risks. We've been doing this cross chain now for quite some time. If there's a situation, but let's just use Terra, for example, in this case, or there's a, you know, Luna starts dropping in value. We'll send out messages to the entire ecosystem, just alerting everybody, hey, you know, 40% of all, you know, Terra is at liquidation risk right now. Like that's how serious we take the actual, the pegging for all of our assets, not just staked ETH. And we want to ensure that like our communities are healthy. We want to ensure that like no cascading liquidation events ever occur. It's really terrible for the ecosystems and something that we're just not, you know, fond of. And so we do what we can, we message what we can, make the announcements when we can, when these situations do arise.

Nicholas: So I pulled it up on Matcha here, the Steeth-Wheath pair. And I see, you know, sometimes, usually it's like, you know, one Steeth is worth 1.002 Wheath, you know, that's like a kind of maybe 0.001. And then occasionally like here in the past month, there was one day, March 22nd, where a Steeth was worth 0.986 Wheath. What causes a sort of relatively greater fluctuation? It's a liquidation of something like an Aave position or what would cause that fluctuation in the first place?

Walshy: That would be my guess. I wish I can give you a more concrete answer. You'd have to ask the, again, the technical giga chats behind the scenes, what the actual fluctuations are. I would guess, yes, maybe even arbitragers as well contribute to that.

Nicholas: Yeah.

Crews: I don't know how deeply accurate that Matcha thing is. Maybe for like a few blocks, the price could have gone down, that arbitragers would quickly step in to close the gap in that. All of the index group products are like permissionlessly redeemable for the underlying assets as well. So that same like schematic I talked about with like redeeming or minting new Steeth tokens for arbitragers to close the gap is how all of our indexes stay in line with net asset value. And then further, I would just add like the ETH plus staked ETH pool on Curve, I think is the deepest liquidity pool in all of DeFi. There's $4.8 billion sitting in that liquidity pool with just ETH and staked ETH. It is like the most liquid asset in all of DeFi and has like the tightest peg. And Lido and a lot of market participants kind of like direct curve emissions towards that pool to keep it that way.

Leo: Right. And my understanding is that that liquidity pool is what prevents the peg on the downside. Right. So if staked ETH goes above ETH, it's very straightforward to just go buy a bunch of ETH on the market and use it to mint staked ETH and make immediate money on that. And if staked ETH goes below ETH, there's this liquidity pool to bring staked ETH back up. And that liquidity pool is required to be really large as long as we're in this lockup. Because if we were not in a lockup, then you'd have a very direct way to do arbitrage on the other end as well. You could simply buy staked ETH at a discount and use it to redeem ETH by pulling ETH back out of the beacon chain to actually use it to unstake the ETH directly from Ethereum. And you would make money that way. But because you can't do that today, that's why Lido has to maintain this really big liquidity pool. And in fact, my understanding is that they're using the governance token to maintain this pool. So they're actually having to sell the Lido token to maintain this liquidity pool, which is putting downward pressure on the Lido token itself. So the expectation is that once the lockup is gone, this giant liquidity pool will not be needed anymore because you'll be able to arbitrage directly both on the upside and the downside. And then there won't be this big downward constant selling pressure on the Lido token. So it's kind of depressed right now in price at the moment because of that. At least that's my understanding. I don't know if you have anything to add to that, Walshie.

Walshy: That's just the nature of things right now. Providing emissions for pools and providing those incentives for people to actually become an LP into the pool itself is just how things are, unfortunately, at the moment. Yeah, and until we can really... I mean, you're going to see it. There's a lot of plans behind the scenes. Unfortunately, stuff I can't share today, which we do have plans for the LLT.

Leo: We won't tell anyone. Come on.

Walshy: But yeah, I'm just saying that's just the nature of the beast right now. So you are correct.

Crews: Yeah. I mean, for all intents and purposes, this staked ETH pool is the deepest pool in all of DeFi. The arbitrage is super tight. on one end via you can provide ETH to Lido to make more stake ETH and sell it. And on the other end, you can always provide stake ETH and ETH to this pool where they're trading at a one-to-one ratio. And profit-seeking arbitrageurs will keep the net asset value of stake ETH in line with ETH.

Nicholas: Do you know what percentage of total stake ETH Lido represents right now?

Crews: Yeah.

Walshy: Last I checked, it was somewhere between the 28 and 30%, I believe. Somewhere in there.

Nicholas: And something like 80% of staked ETH, like pooled ETH, pooled staked ETH, I should say. Is that right? Something around 80% of all of the staking options?

Walshy: I don't think it's 80%.

Nicholas: 70% or something?

Crews: Maybe like all of liquid staked options. Yeah. Oh, of liquid staked options?

Walshy: I actually don't have those numbers.

Crews: I think you're, yeah, I've seen the same tweets you're referencing, Nick, something like that. Lido is the dominant player in liquid staking.

Nicholas: It's interesting because I didn't know that it was only, what number did you say? 20, 30% of total staked ETH? From the tweets that I had read about its dominance in liquid staking, I just got the impression that it was dominant in all staked ETH, but actually no, it's not yet the case.

Walshy: Yeah. From the numbers that I recall, again, in terms of actual staked ETH, we represent somewhere between 28, 30%. And then, yeah, actually I am recalling, I think a Dune dashboard, which does say that we are like something like 85% of all total staked ETH out there. It's quite a lot. The way that the founders of Lido and everyone that came together at the original outset of Lido really envisioned and how they wanted to start to build Lido from the ground up was to ensure that regardless of the size of deposit, you were taken care of. We wanted to ensure that there was no slashing events and we actually socialized slashing, just so you know. So if anyone, and we've had zero slashing to date, but if there is a slashing event, everyone gets impacted. And so the quality of the node operators and the validators that we choose was like top of mind. It was right at the top there. Because of that, larger institutions, larger whales have seen Lido as being like the safe choice knowing that there won't be any kind of slashing events that occur, knowing that their stake is safe. And I think that's why you see that imbalance to be completely frank.

Nicholas: Because there's high confidence in putting your ETH there. I'm curious, when you say slashing is socialized, do you mean also that the node operator that is slashed suffers no additional consequences relative to other node operators who are performing their duties correctly? Nope.

Walshy: Everybody in that pool gets slashed. It's socialized. Everybody. So again, we have insurance, we've had zero slashings to date. And our node operating master, as we like to call him, Izzy, he'll be doing a great talk next week in Amsterdam. He'll be going into some really in-depth aspects of the decentralization aspect of Lido and what he does on the day-to-day when it comes to being the node operator, like master, if you will. They'll go into detail.

Nicholas: That's great. Yeah.

Walshy: For us, it just made more sense. I hate to put it like this because I love being able to stand up your own node and operate your own node. But ultimately, if an institution comes and wants to invest their money with Lido, they don't necessarily want the garage setup. Again, I'm a huge proponent of that. I'm in a two-bedroom apartment right now and I would be doing the same thing. Not somewhere else. But institutions, they have a different need. They have different risk assessments. Some are risk-averse, most are risk-averse. And so ultimately, that's why you see such a large dominance for Lido.

Nicholas: I think with staking in general, everybody's looking for a simple set it and forget it solution that is safe and that you don't need to worry about. And then even to build further things on top of, like the ICE. We should talk a little bit more about that. I just wanted to throw out one more number before we go there. I looked the other day for scaling things. There's 3.2 million stake deeths, like Lido stake deeth out there. 3.2 million versus double that, 6.3 million WEATH. So there's half as much steep as there is WEATH, which if you've used OpenSea or whatever, you need WEATH all the time. AMMs, anything like this. And by comparison, there are 59,000 wallets holding stake deeth versus almost 500,000 10X holding WEATH. So it'll be interesting to see that number grow. I don't know how much, I guess WEATH is growing too probably, but stake deeth is undoubtedly on the way up in both those metrics.

Walshy: I wish we could sit around and not work, but we have a job to do. Based in business development, is what I'm saying. It seems Ethereum, and there's a lot of good merit when it comes to ensuring the health of the beacon chain and Ethereum ecosystem. I was actually surprised. I didn't know that we're half of wrapped ETH now. So that's actually pretty cool.

Nicholas: Yeah. In terms of token volume, at least, what's interesting is that there's one tenth as many holders, which I guess is to be expected, but it maybe also says something about how much deeth people like to hold on to more than they do WEATH.

Crews: Yeah. I would just add another reason for Lido's dominance and network effects here. Again, just how hard it is to build that big and that deep of liquidity pool. Lido's main, for the stake deeth product, their main priority is maintaining that liquidity pool and peg. Market participants feel safer in stake deeth than some of the other options because of all the immense work they've done to create that liquidity.

Nicholas: Yeah, definitely. So maybe we could talk a little bit more about IcEth. Is it safe? I guess that's a question a lot of people will have for any kind of leveraged ETH product. How safe is it? If I don't typically engage with that kind of product, how do you keep an eye on it? What's the best practices for making sure you don't get into trouble?

Crews: Is it safe? Great question. That is certainly what we want to frame it through. Again, IcEth works by creating that leveraged position, stake deeth against ETH on Aave. So I think you first have to ask yourself, or I guess the way folks were creating this position, like I said before, was manually doing it on Aave. Doing that, you have to manually monitor your position to make sure everything's nice and healthy and you're on the line. We automate that away for you. So here are the risks. The risk is staked ETH de-pegging, primarily, and we'll come back and dive into that. Secondarily, you've got smart contract risk of Aave's money market, and you've got smart contract risk of the index Koop contracts, which are built by Set Protocol. It's the same modules that are used in our Fly series, flexible leverage index, which we created 2x leverage tokens for ETH, for BTC, and for MATIC. You can trade all those on Polygon, and then ETH and BTC ones on MayNet. Those have been live for a little bit over a year now, and they kind of have the same idea of automating a leveraged position on Aave, is what those contracts are designed to do. And then there's automated rebalances that trigger when the leverage ratio starts moving outside of our specified range. So for ICE, the leverage ratio that it floats between is 3x leverage to 3.3x leverage, with kind of a ventral target of 3.1x. So again, what you're trusting here, smart contract risk of Aave and the Set Protocol contracts, which all have been audited by OpenZeppelin and are battle-tested at this point. I mean, I think Aave, pretty much the most battle-tested of any money market, Aave and Compound. And the Set Protocol contracts have been running for a year now and are pretty solid. So really, the primary risk we're looking at is staked ETH de-pegging. Because the way this product works is using that staked ETH as collateral, of course. And really, the only way that the leverage ratio starts to run away is if staked ETH de-pegs. If staked ETH becomes worth less than regular ETH.

Nicholas: So maybe we could walk through a scenario. So right now, ETH is around $3,000. So if I were to buy one ETH worth of ICE ETH... Do you say ICE or ICEE? ICEE seems to be... It wants to be said.

Crews: I like ICEE. Oh, that's cool. But yeah, the D just comes from out of nowhere. I just teleported in there.

Nicholas: That's how you know you know. So if I buy one ETH worth of ICEE... You almost say it like a T in English. If I buy one ETH worth of it now and the price of ETH drops to $2,000, the Set Protocol contracts will rebalance... What actually happens?

Crews: Nothing happens as the price of ETH goes up or down. Because the position is staked ETH and ETH. So one ICEE is worth one ETH. And it will gradually go up the price of ICEE ETH against ETH. It started out as one to one when we deployed the contract. And now it's like 1.004 or something like that. It just gradually appreciates against ETH as the staked ETH rewards accrue to the token. So all you got to do is hold your ICEE ETH and a year from now, ICEE ETH... Right now it's producing about 9% to 10% APY. So one year from now, your ICEE ETH token is going to be worth about 1.1 ETH.

Nicholas: Crazy. Okay, so you should switch your CoinGecko to denominated in ETH when looking at this token. Definitely. And what you're saying is that it will be worth more and more ETH over time.

Crews: What I'm saying is the ICEE ETH in your wallet, if you're denominating in ETH, will go up.

Nicholas: Cool. Very cool. Could you tell us a little bit more about Set Protocol and Index Coop in general? Maybe even that FLI token, which was very interesting at the time, but has some downsides compared to ICEE ETH.

Crews: Yeah, definitely. Set Protocol is a protocol. They've been around since 2017, 2018 days. Kind of like one of the most edgy, solidity developing team. Someone's throwing a bunch of hearts down there. I wonder if they're on this. Oh, that's an Index Coop friend. Index Coop friend. Set Protocol is a protocol for creating token sets or like crypto index products of any kind. You can specify, I want to create an index token that has these 10 tokens on the backend. So the first products that Index Coop and Set Protocol created was the DeFi Pulse Index. In partnership with DeFi Pulse, kind of a DeFi analytics or data provider, we created a market cap weighted index of DeFi protocols, kind of like an ETF, like the S&P 500, except for DeFi. And they used the Set Protocol infrastructure to create that index. And they fed in a methodology that used kind of the market cap data from DeFi Pulse that says I want X percent, the Uniswap token, X percent of the Aave token, da da da da da. And we created a token set called DPI. That's an index token that represents that basket of tokens in token sets. So that's like high level how the token sets infrastructure works. That DPI index is like rebalanced monthly just as the market caps of those DeFi protocols change the same way like an ETF or like S&P 500 would. So that's like the kind of the standard analogous use case to what happens in TradFi with ETFs. But then we also have these leverage products. The FLI series or fly series where they give you 2X exposure to an asset by, and again, similar to the way I see ETH works, built on Aave or compound. All the polygon fly products are built on Aave and the mainnet ones are built on compound right now. But what the product does for ETH to XFLY, that's like the most popular one and the most like analogous example here. We take ETH, deposit it to Aave, take a loan of stable coins against it and then buy more ETH. So that way, right, I'm long ETH, I'm short dollars by borrowing stable coins and I buy more ETH. And for those fly series, they target 2X exposure to the underlying asset ETH in the case of the ETH 2X fly token. And then they have that risk automation. For that one, it actually has to rebalance frequently, right? Because the price of ETH is pretty volatile. And especially if you're a 2X leverage, you got to rebalance all the time. So it's like rebalancing daily. There's like this nice algorithm that the DeFiPulse guys wrote. That's why it's called the flexible leverage index, where like it targets 2X leverage ratio, but it floats anywhere between 1.7 to 2.3X leverage and then just rebalances as needed to keep it in a nice, healthy range.

Nicholas: I was going to ask where the name came from. So, so basically like these index coop products sort of automate leveraged positions on top of, built on top of Aave, but they give you more advantages than just a simple interface. They save you a bunch of gas and headache creating the position. And then depending on if they're denominated in their same, if the, if the deposit of the CDP is in the same token as the, I guess, I don't know, whatever the Steith advantages over the FLI token, FLI ETH, then you don't have to do the rebalancing. Also a lot of headache is removed from that piece of the puzzle as well.

Crews: So basically like the core thesis of index coop is like make investing in crypto simple, safe and accessible to everyone. So you got to build the crypto indexes like DeFi Pulse Index, which kind of simplifies the exposure of DeFi in a single token. The FLI token is like simplified leverage exposure in a single token. You don't have to stay up all night and watch your, your leverage ratio as the price of ETH is going around crazy, right? For like the ETH to FLI stuff. It'll automatically rebalance and keep you at 2X leverage without you having to do anything. And there's also a huge gas savings of like, you know, you're buying a share of this vault that's doing it at scale, but you don't have to manually submit the transactions and pay the crazy gas fees every time you want to do a transaction. Simplifying and tokenizing investment VCs is what we do.

Nicholas: And is there a name, flexible leveraged indexes, sort of the name of the series for where one is borrowing DAI? What defines that series from this almost newer, I guess, tech of the ICE style tokens?

Crews: Yeah, the FLI series, again, flexible leverage index is where that name comes from, FLI. And yeah, those are the 2X exposure, 2X leverage. And then this one, this first one in the yield product series, we're calling it the ICE series because it's I-C-ETH and we'll have I-C other things as well, or like stands for interest compounding. And those will be just kind of yield generating versions of tokens rather than 2X leverage because we're going to use the same asset as collateral and as the borrow.

Nicholas: Very cool. Leo, or if anyone in the audience wants to jump in with questions or comments, feel free. I don't know if Leo, you wanted to ask either of these guys questions now that you moved.

Crews: Yeah, Leo, I would love to hear your thoughts on the I-C-ETH products. And then I just shared a tweet here that kind of gives the best little explainer and infographic. And I've talked through it a few times, so I'll let you go ahead and ask questions.

Leo: Yeah, I appreciate that. And thank you. Yeah, I had two questions, one for each for you. First, you just, Cruz, you talked about the leverage ratio targeting between 3 and 3.3, and it's currently 3.1. Is it the case that if it goes above 3.3, that's a sign that the peg was broken? Or would it be possible to just let it go above 3.3, even if the peg still holds?

Crews: Yeah, good question. Yeah, it would be possible to go higher. It just depends on what Aave's risk parameters are. Right now, I think it's like 80% loan to value ratio. So the max leverage that this product can achieve is really a function of Aave's risk parameter for how much ETH they will let you borrow against your stake to ETH. And there is some potential for them to raise that parameter in the future. They're probably only going to do it on their Aave v3, which recently shipped. And they've got an E-mode that kind of lets you further automate the amount of levers that you're taking. But I'd have to let the Aave team speak to that.

Leo: So then the follow-up there would be, why not let it go higher? You would get a bigger multiplier, and it doesn't seem like it would introduce more risk because it's still a one-to-one peg. Yeah, why not let it go above 3.3?

Crews: It's because you can't go too much higher. I forget. I talked to the team this morning. The maximum possible leverage at the current loan to value ratio of Aave's risk parameter is something like 4x or maybe 3.5x even. So yeah, we're letting it run between 3 and 3.3. But it really doesn't move at all. Because again, the price of staked ETH and ETH are simpatico at one-to-one right now. It's not like this thing's rebalancing all the time the way the fly is. It just sits there at the leverage ratio of around 3.1x and doesn't move. But the higher we go with the amount of leverage is how big of a staked ETH depeg it would take for the position to be at risk. Or like forced to rebalance first hand.

Leo: I got you. So you're leaving yourself some buffer this way.

Crews: A little bit. Like yeah, we don't want if staked ETH goes to 1.999 versus 2 for that to be like, oh no, we need to rebalance.

Leo: Got it. Got it. No, thank you. Thank you for that. That makes a lot of sense. Okay. And then the other question, and we actually alluded to talking about this earlier. So Walsh, this is where Lido is becoming a little bit a victim of its own success where it's getting a higher and higher percentage of the overall staking. We said 28 to 30% earlier. Obviously, if it gets to 51% then Lido's staking operators alone, it's a big centralization vector, right? Even though there are multiple partners doing the staking for Lido, they could potentially, the argument here is they could potentially collude and control all of the entire consensus and do censorship of transact, 51% attack basically on the proof of stake protocol. How do you guys, yeah, how do you guys think about this? And do you, do you guys view this as undesirable? Do you say, okay, well, look, if we get to 40 or 45%, we should probably hit the brakes and let the rest of the ecosystem catch up or no, we think that we're decentralized enough on our end that we're happy to take more than 50% as you approach that line. How do you think about it?

Walshy: Yeah, this is a fantastic question. I want to say that I guess I have the privilege of being able to see how things operate on the inside of Lido. And I think the thing is, again, I started working with the DAO about like maybe two months, two and a half months ago. And I shared the same concerns. going in, right? That was one of the things I was really eagerly anticipating while going in is like learning how everyone kind of thinks about this on the backend. And the one thing that I think would shock a lot of people is how many like decisions get turned down and how much like alertness to like the actual, the ratio itself gets brought up on like a day-to-day basis. So that's exactly why we just put out that blog post. You know, the vision from the beginning of the founders was to have a permissionless protocol, which anyone, if you want to be a node operator can join. And I think that in itself, right, is the solution. There's no doubt about it. We're moving towards it. And next week, we're going to be revealing some more details about that in Amsterdam. But we're extremely cognizant of that. And again, that's the one thing that like surprised me. going in was just seeing like we were here. I'll give you a real example. We were in a meeting the other day, a business development meeting. And you know, we're throwing ideas around. And one of them, a big one, like a really good one, just got shot down, just point blank, just because of the 51% concern, which shocked me, right? You don't hear business development ideas get shot down that are so good. Usually it's the opposite way. You shoot down a bad idea, right? And so we're extremely aware of this. We're very cognizant of this. That's why we're doing everything out in the open. We're trying to show as opposed to tell, like what we plan to do to, you know, have a more permissionless node operating onboarding process. Very concerned about this. And that shocked me. Going into Lido, I didn't think it was going to be like that. I thought it was going to be like a, you know, smoky backroom. They're all like, yo, let's get 75%. You know, let's get 80% of all the ETH out there. It's the opposite. We're shutting down ideas. Like I said, because of that, just because of that concern. And you don't get to see that, right? You hear all the time on Twitter and everyone's like, you know, Lido's the big bad guys. There's centralization risks and all that, but no one sees what happens on the inside. And I think if they did, they'd have a completely different view.

Leo: Yeah, yeah, I know. And, and I believe you on that. So I guess there's, again, just to play devil's advocate here. So to ask a little bit more difficult questions. So there's your guy's intention, and then there's the intention of your operators, which are, which are at arm's length, right? Not, not, not directly in your control, whether they choose to do something or collude in some way. And it sounds like your guy's intention is, is all there, but then how do you, like, what's the current concentration of your operators? How many, how many different operators are there? Who, how much shared, you know, do those, some, some of the bigger ones have and, and how independent are they from each other?

Walshy: This is a, this is a really important question. So in terms, I think it's about 21 separate operators at the moment. And what we do is we evenly distribute the stake amongst them. And we're constantly rebalancing that stake to ensure that there's not an uneven distribution to just like one specific one. I mean, in the end of the day, can anyone control another human being's actions? I mean, I guess the answer is no, but it seems to me to be in, in like the, it wouldn't be in their interest to work together. It ruined the reputation, you know, have the entire world hunt them down just to collude to try to take over the system. Like it's in my mind, like it would go against their best interest to do so. Right. And we do what we can to ensure that, like I said, the stake is even, it's distributed properly across the entire stake. We just opened, I think it was like two, three days ago, I want to say, applications for the next round for Ethereum operators. And I believe that we're going to close that round at the end of the month. So we're obviously expanding, we're adding more, we're being limited of course, by like resources, just like everyone else's. But we were again, very aware of that. And I definitely agree with you. Like, you know, if a couple of node operators want to come together, what, you know, could they do something bad right now? The answer is no. And that's because that's the system we've set up.

Leo: Got it. Got it. No, that's super helpful. I really appreciate that. And then I think that the other argument here would be a state, a government level or state level censorship, right? If they, if you guys have 51% and it's 21 road operators, or even if it's 15 node operators and they're all institutions, it'd be very much easier, right? For the US government to just pass a law that they have to censor certain transactions. And they collectively have enough power to, you know, just to follow those regulations. And it would be a way, it would be a regulatory attack vector. If, if you got there. So I guess first, before I ask a follow-up question on that, any, any thoughts on that? Is that, is that a possibility in your mind or, or a valid concern?

Walshy: Is it a valid concern? State attacks are definitely a valid concern. Like what just happened to the Ronin chain? It came out today as a Lizer's group from North Korea that did that. I guess to your specific example, if the US government released some regulations, well, we're not based in the US, so. But on a more broadly, yeah, it's a concern. I don't have a solid answer for you. Unfortunately, I haven't put too much thought about a state attack into it. I really hope that, and I'm sure there's some giga brains at Lido that have, if you want to, if you'd like, I'd like, I'd definitely follow up with a better answer in regards to like a state attack. I myself have not put too much thought into that other than it's bad. We're not based in any country whatsoever. We're at Dow, we're international. And yeah, we want to ensure that, like I said, prior to that.

Leo: Yeah, no, I was more, sorry, just to clarify there. It's not about where you guys are based. It's where the, it's where the node operator, the institutions operating the nodes are based. I'm sure that's a big mixed bag. They might not all be in the US or maybe not. I remember in the US that I don't know.

Walshy: Yeah, I don't want to speak out of turn or make anything up. I don't know where they're, they're all based. I know that it's actually a majority of not in the United States.

Leo: Got it. Yeah. So I guess, uh, I guess one question would be, you know, you probably can't speak to it, but in case you can, I'll ask the question anyway, which is if you guys start approaching the 50% line, uh, before you're able to implement a full decentralization roadmap, are you guys considering just stopping and saying, we're not going to mint? We're not going to mint anymore. You can't, you can't mint anymore, uh, stake needs until, um, until we get to the decentralization point.

Walshy: I mean, quite frankly, you'd be surprised how much this actually does come up behind the scenes and how like amicable we are towards the idea of doing something like that. There's been a lot of talk recently about how we just need to kind of stop working on Ethereum. And again, this is the joke, right? Like you tell a business development team to not work. You can't do that. But, but that's why we've been pouring a lot more efforts into other chains. It's because of this exact reason. We're, we're not, you know, ignorant to the fact that like there's a significant amount of ETH staked with us and everyone's very concerned about, we bring this up and on a day to day basis, would I be concerned? I listen, I am concerned about it. And I bring this up every single day and everyone shares the same values as I do. We all want to make sure that we're not doing anything that would compromise the Ethereum ecosystem. We'll say it ourselves. We love Vitalik. We love the Ethereum ecosystem. It's our bread and butter. It's where we were born. Like we were, you know, we are a product of Ethereum. And the last thing that we want to do is to compromise its security.

Leo: Yeah, I know. I appreciate that. And, and, you know, frankly, 50% is a pretty good mark, right? I mean, if you stop at 50, the most you can get is a hundred. So like you're, you're only, you can only be twice as big. And so, so it's not a, it's not a bad place to hit the brakes either. Right. It's not like you're leaving a, like another iceberg on, you know, iceberg on the table kind of thing.

Walshy: The importance of the decentralization efforts that Lido is undertaking and even, you know, puts that into more of an important light of why we're releasing their blog posts. Why inside we have a department of decentralization. Why what we're releasing next week from Izzy, who runs the node, who is like, you know, on the council is what you would call like the head of node operators right now until it gets decentralized, but he's going to revealing next week. Like that puts so much more onus, so much more importance on like what we're doing in that regard. And I think that all the efforts that we're putting out and what you'll be seeing soon in the future, we'll back that up.

Leo: Got it. No, I really appreciate that. Thanks. Thanks. Thanks for that. And then that also leads me into, you know, in the, in the spirit of talking about decentralization here, Cruz, any plans to support, you know, Rocket, Rocketpool, RE's in a similar way that I see. does it for STE? I know, I know there's probably not enough liquidity at the moment, and I don't think it's on Aave as available as collateral at the moment. But are you guys giving thought to that? And, you know, I guess how far in your mind do you think we are from, from getting there?

Crews: Yeah, great question. I'm sure it's like, yeah, I've been thinking about it, discussing it strategically with the team and started to reach out to Rocketpool team. I think we have a little bit of comms with them from our business development team, and I've tagged them on Twitter a few times. But you mentioned it too, the two contingencies to building something like IceEve that we did on, on, on Lido StakeEve with RE instead. Number one, it's got to be listed on a mining market, right? We need to have RE as collateral on Aave the way we have STE as collateral on Aave, or else we can't borrow against it, we can't build a strategy like this. Two, we need deeper liquidity, you know, as a contingency for that Aave listing. I'm sure the Rocketpool team would like to get there. And they're, you know, going towards all, you know, similar efforts to Walshine, what they've done to get to where they are now. So it's going to take, you know, some, some business developments and growth from them for that type of product to be available. So we could do it in the meantime, or not even in the meantime, but like that would be complimentary and interesting as well. It would just be a diversified EVE staking product that is like a basket of StakedEVE, of RE, of StakeWise's EVE products, all of the stuff that Nicholas has been researching this week. We could just tokenize a basket of those. And I've, I've reached out to some, some folks to try to make that happen. I'd love to hear from Nicholas, like the different value propositions for these products. Like, what would you like to see built next? Or like, are you satisfied with the options? What do you think is most interesting? As far as, yeah, in the context of like, what do next?

Nicholas: Yeah, I'm curious about the forthcoming decentralization announcements. I know Hasu just announced joining Lido as some advisor role in the spirit of promoting the decentralization. So I guess, you know, when I got started experimenting with these things, I staked on both Lido and Rocketpool. And then I have since then continued accumulating StakedEVE, which I think I and probably many other people treat as just like a very safe, at least we believe to be a very safe way to passively earn on ETH, which we are long on, or at least that's the case for me. And then starting to think about these more complex leveraged positions that are a little bit riskier, or... There's definitely more contract risk at the very least for something like ICETH or the Yearn vault that I was talking about, the Rocketpool. I guess it's wrapped StakedEVE because I don't know if Yearn, but some of these DeFi protocols aren't able to deal with rebasing tokens as far as I understand it. Yeah, maybe you can jump into that if there's anything more to say on that subject.

Walshy: I just wanted to say you're correct. There's a lot of protocols out there that aren't really compatible with a rebasing token. So yeah, that Yearn vault you're talking about is wrapped StakedEVE, absolutely. And actually, we were talking about that pool when Rocketpool released it and actually promoted it because we're actually not opposed to even the idea of pairing the two together.

Nicholas: Yeah, I imagine it's becoming a little bit of a Microsoft funding bankrupt Apple situation where you need some competition.

Walshy: The reality is that Rocketpool needs to be a little bit more like Lido, and Lido needs to be a little bit more like Rocketpool, you know?

Nicholas: Because Rocketpool has some decentralization advantages currently, is that right?

Walshy: Well, it's happening behind the scenes. I do know that they have more of a permissionless onboarding process. Like I said, behind the scenes, I'm not 100% sure.

Nicholas: For onboarding node operators.

Walshy: Yeah, correct. Exactly. I don't know the actual core team itself, though.

Crews: Got it.

Leo: So to speak a little bit to that, and I'm not the expert here, just from the research I've done. With Rocketpool, anyone can be a node operator. So you or me or anyone. So it is decentralized from that point of view. Now, you do need to have at least half of the validator you need to put in. So you need at least 16 ETH to be an operator. So it's not like anyone can just do it because you're kind of staking, you're kind of having skin in the game. that way is the way that they're setting it up. So you put in your 16 ETH and then the other 16 comes from the depositors, the deposits into the pool. But it is much more decentralized in that regard, because then a lot more people can do it.

Nicholas: And I take it that reason for that 16 ETH requirement is because the slashing is not entirely socialized as in Lido.

Leo: I believe that's correct. I know that 10% of the 16 ETH does go towards an insurance fund. I'm sorry, does go toward the Rocketpool token, which then serves as insurance. That's the RPL token. But I believe the slashing is not entirely socialized because that wouldn't make much sense, right? Then anyone can go in there and just get everyone else slashed. So you have to have it more individualized because of decentralization.

Nicholas: So to answer Cruz's question, I'm not sure what I need next. I think the sort of future I foresee for myself, given the products available, is probably keeping... I guess one question is like, if you primarily keep your assets in ETH or if you have a large ETH bag, what percentage is a reasonable percentage to have in staked ETH? And then what percentage is interesting to have in something like IcyETH? I think I probably will put a little bit of my personal assets into IcyETH to sort of play around with it and get more used to playing with leveraged products. It's not something I typically do. And it does seem like, aside from all the contract risk, the advantage of the borrowed asset and the collateralized asset being the same makes a lot of sense to me. So I think I'll probably put a little bit of my ETH into IcyETH and probably quite a bit of it into staked ETH. But I'm not sure what a next product would have to do for me. I think I do really enjoy everything we've talked about today so far. I don't need to manage it. I think that's... Thinking in financial terms, every time I experiment with trading DeFi tokens, it usually doesn't go particularly well. Not that I'm negative overall, but I find NFTs much easier to understand. So having to... I was speaking with somebody last night, a Solidity developer locally here, went for a drink and he was telling me about how he quit his job a year or two ago and has just been managing DeFi positions and farming shit coins on all different chains. And it just sounds like a lot of work to me for relatively small gains for the amount of attention that you have to pay. So I think what I really like about these tokens and maybe... I don't know what features I would want particularly, but the main feature I would want of any future product would be that I kind of don't need to pay too much attention to it. I don't know if there's anything that you have in mind, Cruz, for what a future leverage token or something else like that on top of a staked ETH position would be.

Crews: Yeah. I mean, that's definitely our core thesis. We don't want people to have to spend time managing positions. We want to make it simple. And yeah, I mean, leverage is inherently risky, disclaimer for sure. But as we talked about, the risk profile for ISE is really staked ETH, DPEG risk, which you would carry just the same by holding your regular STETH token and then Aave smart contract risk and SED protocol smart contract risk. But yeah, as far as what I would like to see next, I think this is pretty much the ultimate like buy and hold staked ETH suite we have here. Staked ETH, you know, certainly we can get more centralized is one thing. And then I think what I'm looking to do next, what's currently on the tip of my brain, and this like updates frequently, but we just want to bring this product to layer two, right? We want people to get in and out of positions easily on Arbitrum, on ZK Sync, just on your phone via one tap. So we'll look to move this ISE to ETH products to ZK Sync. And we have a partnership with Argent Wallet where all of the index products are available right there on the home screen of Argent Wallet with like one tap and like zero fees, which is incredible. We'll go there. And then I think I really like to see like a balancer pool on Arbitrum. It's like the super ETH pool that has ISEETH, that has Lido staked ETH, that has Stakewise's token, that has all of, or not all, but you know, whatever, like a few of the top like staked ETH solutions, just so there's liquidity there on layer two so people can buy it on Arbitrum.

Leo: Cruz, how soon before we see an ISEETH where you can put down ISEETH as collateral and borrow ETH?

Crews: I'm literally, I'm like DMing, recruiting more developers while we're talking to make that happen as soon as possible. But you'll see it. You'll see it probably first. on Rari's Fuelspools. I'm a co-manager of one of them. I got that 181 hot tub thing in my bio. It's the GMI hot tub. I also do like the GMI index, which is like a DeFi 2.0 index with Bankless. And we've got a pool there that we want to do ISEETH as collateral there as soon as we can. It's just like having the right oracle in place for that. Like we're probably, we're working on getting a chain link oracle, which like, you know, helps keep the price feed nice and secure for everyone. It'll probably go there first. I don't know how long, but as soon as I possibly can. I will not sleep until I can. That's great. Also, like this is a whole other topic, but the ERC4626 integration that Joey Santoro, the founder of Faye Protocol and now like Faye Rari is building. Like we're building, we're going to build a plugin. Anyone that deposits ETH as collateral into any Rari Fuelspool can just like tap this plugin to like. when you deposit your ETH as collateral, it can like tap it into the ISEETH strategy and accrue the same, like nearly 10% yield on ETH for all ETH on the Rari platform. So we're also working on that. Super juice all of your ETH.

Leo: That's great. I love it. So there is this, if I kind of abstract everything, what's really happening with ISEETH is it's an arbitrage, right? Between the regular ETH out there and the borrow rate of it versus the staking yield. And as long as the staking yield is more than, as long as you can borrow ETH at a lower rate than the staking yield, you borrow it, you stake it and you do that over and over again. But that over time should lead to the two rates converging, at least getting very close to one another. In your mind, how long before we get there?

Crews: Yeah, pretty much. Yeah, I agree. It is like, it's kind of sucking all of the idle ETH available into staked ETH and then sucking that staked ETH into Aave to be deposit collateral because there's just more yield that you can seek on the open market with all of these integrations. How long? You know, I can't tell you. It depends. Like people have different risk profiles and whatnot. A lot of ETH people don't want to stake it. A lot of ETH, a lot of staked ETH people don't want to put it into a money market. A lot of ETH is held by Dow Treasuries, is held in all kinds of different scenarios where it's not necessarily liquid or movable. So I don't know, but you're right by framing it that way. I think that while there's yield available on ETH, it's going to get staked. It's going to get leverage staked. We're going to create all kinds of new integrations to make that simpler to do, right? With that ERC-4626 plugin I'm talking about, with getting it listed as collateral. And that's only going to accelerate the vacuum.

Nicholas: Could you describe the 4626 a little bit more?

Crews: Yeah, man, I can take a stab. The 4626 standard basically is about creating a common standard for all vaults tokens or yield bearing tokens. So when you deposit into a Yearn vault, you get back, or even like, let's say for the staked ETH, because that's what we're here to talk about today. When you deposit ETH until I don't get back this staked ETH token, that token is like a representation or a share of the total vault of staked ETH. Or even when you create an index token, like DPI or ICE, it's like a deposit receipt into the huge pool that is the smart contract of the separate low contract or the smart contract that is all the staked ETH. And right now, that deposit receipt token is not a common standard across all of DeFi. So Yearn may do it slightly different than Index Group do it. Lido might do it slightly different than Index Group do it than Yearn does it. And 4626 is about creating a common standard to make vault deposit tokens the same across DeFi. And then when you have that standardization and composability, then you can create plugins like I described to kind of swap back and forth into these yield bearing vaults when you deposit into a protocol. It can swap it out on the back end for you and they're all standardized.

Nicholas: I'm gonna have to wrap my head around that a little bit more about what exactly... It's crazy. It's crazy. I guess I don't understand exactly this plugin piece where you were describing that the Rari Fuse pools could essentially get ICE yield on all of the ETH in the protocol. Is that what you said?

Crews: Yeah, pretty much. Yeah, so the 4626 standard is just about creating a common standard for yield bearing tokens or for deposit receipt tokens. There's another kind of way to think of it. And then once you have that standardization, you can create a plugin of like, okay, I deposit my ETH into Rari. They can give me a little deposit receipt token. But if I can hold my deposit receipt token and then on the back end, Rari can swap out my ETH deposit for ICE ETH so it can go be productive while it's sitting there being... You know, while it's sitting there in the deposit vault, we can go use it with some other strategy. And then my deposit receipt can still be good for the same piece I deposited.

Nicholas: Does it mean that people would be holding tokens that are backed by something potentially riskier than what they imagine?

Crews: You're gonna know. You have to opt in and they'll make clear what strategy you're depositing into. But it just opens up the possibility to kind of deploy strategies anytime you're depositing it into a vault.

Nicholas: Awesome. I don't know if anybody from the audience has questions or if we should wrap it up here.

Crews: One more thing I want to say. Please. I'm working on creating the first music NFT by a T5 protocol. We created a beat, the Index Group team. I was trying to like growth hack this product. What can we do? that's super cool? And one of the contributors in my operations team was like, hey, I heard you were looking into doing some music stuff for ICE ETH. I actually make beats on the side. Let me know if you want me to do something. I was like, what do you mean? Of course I want you to do something. Make something ICE ETH. He was like, okay, I don't really know what that means. But he sent me a file back a couple hours ago or a couple hours later. Super cool. ICE ETH baby. Kind of a play on like ICE ETH baby, except ICE ETH baby. And then I had my girlfriend, Anna Luther, is a music NFT artist as well. I had her whisper ICE ETH baby into the mic. She threw those vocals in there, made a nice like three minute long mix. I started sending it out to people in the music NFT community. And Young Spielberg came back with this baby with a guy called Gate Citizens, some Grammy winning rap artist that's looking to get into music NFTs. He created this for me. I sent it to our design team. They made this nice video of the ICE ETH logo bouncing up and down to it. And we've got a nice 45 second clip, one verse out and live. We released it as part of our meme competition for ICE ETH. And I'm just looking for, I'm probably going to try and do an open verse competition to see who wants to add a second verse to this. And then I have our dev team working on a whole music video that's going to have the ICE ETH logo pulsing underneath the ice, underneath the sheet of ice and like bursting through it. And we're going to put the whole thing on Glass Protocol and mint it as a music NFT.

Leo: How do we hear the 45 second clip that's going to play?

Crews: I just shared it to the space. I've tweeted it out a few times and next week we'll tweet it out.

Nicholas: Awesome. Wow. So Index Coop, it's a multi-talented set of people.

Walshy: Love it.

Crews: Getting into the music NFT market. Absolutely.

Nicholas: Awesome. Well, thank you all for coming through today. Cruz, Walshie, Leo, this has been really awesome. And I've learned a lot about Staked ETH. Looking forward to keeping an eye on all these different products and what's coming next. And that the Lido talk coming up from your node operator, that should be interesting on the decentralized front. So thank you all.

Leo: Thank you for hosting. I really appreciate it. And Walshie and Cruz, thanks so much. I love all the work you guys are doing in this space. It's super exciting and it's just great.

Walshy: I love it. Hey, thanks guys. I appreciate the invite. It was nice to meet you all.

Crews: Likewise, man. I appreciate the great thread. Leo the other day, Walshie, huge fan of Staked ETH, obviously built the entire product on top of it. And Nicholas, thanks for having us all on.

Nicholas: Yeah, thanks so much for coming through. And thanks to everyone who came in and listened. And see you next week at the same time.

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