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🎙 Hasu: Lido's Staked ETH Poses No Systemic Risk to DeFi

This week on The Defiant Podcast we speak with Hasu, strategic advisor at Lido, strategy lead at Flashbots, MakerDAO delegate, researcher at Paradigm and host of the Uncommon Core Podcast. That’s a lot of titles and it goes to show just how deeply plugged into DeFi and crypto this anon researcher is.   In this episode, we’ll focus on Lido, as it’s become a crucial piece of infrastructure for Ethereum. 

Lido currently has the highest share of deposits in Ethereum’s proof-of-stake chain, at 32%, significantly larger than any other party. This is a growing concern in terms of security and it’s prompted an ongoing discussion on the protocol’s governance forum. Hasu talks about how big a risk this is, and what checks and balances can be introduced. Also, in the past few weeks, staked ETH has started trading below ETH. Hasu discusses what the potential outcomes of this are, and how investors can take advantage of this situation.

Lastly, this last cycle has prompted a lot of experimentation around DAOs and governance, with much room for improvement. Speaking from his own experience with Lido and Maker, Hasu discusses his key learnings and provides his take on how DAOs can become a truly better model for organizing businesses.

Podcast audio and video was edited by Daniel Flynn and Alp Gasimov. Transcript was edited by Samuel Haig.

🎙Listen to the interview in this week’s podcast episode here:

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👀 Only paid subscribers have access to the full interview transcript below.

Cami Russo: Alright, I’m so excited to have Hasu here on The Defiant Podcast. Welcome, Hasu!

Hasu: Hey, Camila, thanks for having me.

CR: It’s a pleasure. So Hasu wears many different [and] interesting hats. He’s a strategic advisor at Lido, a strategy lead at Flashbots, a MakerDAO delegate, a researcher at Paradigm, and the host of the Uncommon Core Podcast. He’s been deeply plugged into crypto and DeFi for a while and has a deep understanding of the market, so I’m super excited to have Hasu here to talk about all the craziness that’s going on in DeFi right now. So I wanted to start with Lido, where, as I mentioned, Hasu is a strategic advisor. To get everyone on the same page, maybe we can start with just an explanation if you can walk us through what Lido does?

Hasu: Sure. So staking on Ethereum in its native form has a couple of problems. So for one, users want to stake, but they don’t want to run the hardware — they don’t want to carry the operational and financial risk of getting slashed potentially… or miss proposing, and so on. So there’s an operational complexity in staking, and users want to delegate that to a professional party. That’s the first problem. The second problem is staking only works in multiples of 32 ETH, and that’s a lot of money for a lot of people [and] people that have less money than that should be able to participate in staking. And then the third problem is that locking up capital is expensive. So if you stake, you cannot use your capital anywhere else and that’s problematic, especially to how staking on Ethereum is designed because right now it’s not [Proof of Stake]. It’s only possible to deploy more stake on the Beacon Chain, but it’s not possible to withdraw the stake, so it’s a one-way door. So anyone who wants to participate in staking now they have to make a forward projection when withdrawals are going to become available.

So Lido is a decentralized staking protocol that solves all of these problems. Lido gives users the ability to give ETH to Lido, and then what Lido does is it gives this ETH to 29 professional node operators who stake the ETH on behalf of Lido’s users, and pays back 90% of the rewards to the users. 5% gets retained by the note operators, and 5% goes to the Lido DAO.

CR: So Lido has become a pretty key infrastructure piece in [Ethereum’s] transition to Proof of Stake [by] making it easier for people to participate in the network, stake ETH, and get some liquidity for the ETH that gets locked up. So it’s become a pretty key project. I believe it’s maybe the second project with the most TVL  ,so it’s really become very relevant in this space.

So we’ve seen some interesting developments with Lido recently because of the instability and volatility in the market. The value of Staked ETH ($stETH) has dropped below the value of ETH, before they were trading pretty closely because of this expectation that once withdrawals are allowed on the ETH Proof of Stake chain, you can simply redeem Staked ETH for ETH, so the value should be one-to-one. But now Staked ETH has dropped below ETH. On top of that, there’s a liquidity pool on the Curve DEX, which is what people use to trade Staked ETH for ETH, and that’s becoming imbalanced — right now, it’s like 80% Staked ETH and 20% ETH, so it’s making it hard for people to trade Staked ETH for ETH, and that’s causing some level of concern for holders and potential users of Lido. So I’d love to kind of get your thoughts on why this is happening and what the potential outcomes of this are?

What are the ramifications of stETH trading below ETH?

Hasu: There’s a reason Lido is called a ‘liquid staking protocol’ and not just a ‘staking protocol’. Lido issues a derivative token which is called Staked ETH, and the ticker for that is stETH. So every stETH is backed one-to-one by ETH on the Beacon Chain [that is] held by these different node operators. And once The Merge has happened and then withdrawals have been enabled in the upgrade that’s coming after The Merge… after that point, anyone who has 1 stETH can use it to withdraw 1 ETH from the Beacon Chain. So, as you say, once this point is reached, then stETH is objectively worth 1 ETH at all times.

It’s easy to visualize why that must be the case, because if it traded anywhere else, then arbitrageurs would have an opportunity to profit and arbitrage the price back in-line. So [once withdrawals are enabled], if stETH were trading above the value of ETH, then arbitrageurs could just buy ETH and stake it and then sell the stETH on the market. And if it traded below ETH, then arbitrageurs could buy up the stETH and then unstake it and sell the ETH. If withdrawals are enabled, then the prices must necessarily be always in-line with each other. But before The Merge has happened, that is not the case. So we know [that] at some future point, they will be [valued at] one-to-one, but before The Merge, it’s a bit more complicated than that. 

So there are some forces that push stETH to trade above the price of ETH, and some that push it to trade below. The force that pushes stETH to trade above 1 ETH is that stETH is yield-bearing. So, if you have one ETH, then one year later, you still have one ETH. But if you have one stETH, then one year later, you will have about 1.05 stETH — so you have a yield of about 5% on that stETH. So that’s the reason to prefer holding stETH over ETH. 

The forces that push stETH to trade below 1 ETH, is there is risk inherent to Lido, there’s risk inherent to Ethereum and The Merge, and there is liquidity risk. So diving into the first one, there is basically a risk that there is a bug in the Lido protocol, for example, that they somehow have a mistake in their smart contracts that would prevent the ability to withdraw from Lido after The Merge. There’s also the risk that governance gets corrupted and does something that would be bad for stETH, for example. Then you have the Eth2.0 execution risk, which, for example, is will The Merge happen as we know it? Will withdrawals become enabled as we [expect], or will there be further delays?… And then the final one is liquidity. So stETH is very useful because you can use it in DeFi. So unlike if you were just staking ETH yourself and you couldn’t withdraw, stETH gives you the ability to sell that ETH that’s currently being staked on the Beacon Chain before withdrawals are even enabled. So you can sell it so you have liquidity. You can also use it, for example, as collateral in a lending market like MakerDAO, Aave, [or]Compound. However stETH… is not one-to-one the same [as ETH] because ETH has more liquid markets than stETH, it’s in more trading pairs on exchanges, it has a higher loan-to-value ratio on lending markets. [ETH is a] more pristine form of asset and collateral. 

So these different factors are subject to market forces and new information. So, for example, what we see when the market has a major downturn like it had the last couple of weeks, then what always happens is that traders and market participants generally prefer liquidity. They [hedge] out from more risky assets into the most liquid forms of assets, and this is exactly what happened here as well. So there was a rush to go from stETH to ETH. People were selling stETH because they were favoring liquidity more than they were favoring the yield aspect of stETH. So that is high-level forces that make it so that stETH should trade above 1 ETH and below 1 ETH. You can use that to visualize what the current exchange is and why it makes sense.

CR: So the question now is what happens going forward with stETH trading below ETH, and with it becoming harder and harder to get liquidity and trade stETH for ETH in the main liquidity pool? What do you think? At some point [does] the dust settle and the price naturally starts coming closer to ETH? Is there something that Lido can proactively do to help the situation? What’s next?

Hasu: First of all… I think we should… put this in a bit of perspective because stETH is trading at a 5% discount to ETH, so it’s not much. And you can redeem… hundreds of millions of dollars of stETH for ETH without causing almost any price impact, so the market is very liquid. However,… there’s nothing that fundamentally binds the value of stETH to the price of 1 ETH, as we have discussed. So it’s definitely imaginable that if large stETH [holders] were to decide that they all prefer ETH and they want to sell their stETH in the market, then the exchange rate could go down further. You can definitely imagine that if the [Ethereum] foundation announces The Merge is like one year away all of a sudden, then this would mean that the fair value of stETH against ETH would go down further. So that’s possible.

There’s a couple of ways it can play out if you want to go into scenario analysis, right. So if you are a stETH holder and you have no preference to sell your stake before The Merge happens and withdrawals become possible, then you’re completely unaffected by any of this. You basically don’t have to watch these secondary market price fluctuations because your stETH is non-custodial; you can just wait it out, and then, at some point, redeem it. 

If you are not a staker, if you’re just a regular holder of ETH and you have been interested in possibly staking at some point, or you’re [bullish] on the price of ETH — that it will retain its value or even go up in value — then what you’re seeing is a very attractive opportunity to enter the market. Even if stETH weren’t yield-bearing, then it would still be attractive. So if you hold ETH today, to sell that ETH and buy a version of ETH that you can redeem in let’s say nine months and get paid 5% on top because there’s a 5% discount, it’s basically like selling ETH today and buying back the same ETH at 95% of the price, but you also get the yield on top. So it’s actually more like a 10% discount. You can make 10% if you’re fine with the risks that we have outlined and you are willing to wait like nine to 12 months for withdrawals to become enabled. So I would say, in that case, we actually have a very positive opportunity.

The other party that we have to talk about is people who use stETH as collateral in lending markets. So I think one reason that we are talking about this and that people are watching this price is that some people decide to use the stETH in, for example, Aave to borrow. They put it in Aave as collateral and they borrow ETH, and then they use the ETH to stake as well [to] acquire more ETH and repeat the process. Right. So that’s what we’d call ‘leverage staking’, but you can also do any kind of strategy with stETH that you can do with other forms of collateral. So if that happens, then the price of stETH to ETH matters to you because if you collateralized stETH to borrow ETH, then you are short the price of ETH against the price of stETH. Or in other terms, you are long the collateral asset, which is stETH, and you’re short the asset that you borrow. So in that case, you can get liquidated if the price of stETH against ETH [discounts] too much. And we have seen some liquidations and what we have also seen is Lido actually sort of working with the lending markets in order to make overcollateralized borrowers aware that they’re at risk of liquidations and make the market more educated and more aware of the risks around that, how they should think about the exchange rate between these two assets. If someone erroneously thought that stETH [would] always trade at a one-to-one ratio to ETH, then it can lead to bad decision-making on the part of stETH users. They should not make this assumption.

Does stETH pose systemic risk to DeFi?

CR: That’s interesting. How big is the risk systemically for DeFi? How much stETH is there now being used as collateral? And… in a ‘black-swan’ scenario [where] stETH suddenly fell very quickly and we see a bunch of liquidations, are Aave and Compound at huge risk? Can you provide perspective on that?

Hasu: I don’t know off the top of [my head] how much stETH is being used as collateral, but it can’t be more than a couple hundred million dollars, maybe in the smaller, single-digits of billions of dollars. And I would say there’s no systemic risk… What the risk is, is you can have cascading liquidations, so you can have a lot of leverage being wiped out from the system. But if anything, that has already played out. We have just seen, not just in stETH but in the market in general, a tremendous amount of leverage being flushed out of the system… I think… 40% of DAI used to be created by vault owners, and now, it’s below 20%. So billions of DAI have basically been paid back. So the outstanding debt in Maker has reduced dramatically. And in Tether, we have seen a similar thing. I think the amount of Tether outstanding, which is always a good indicator for leverage in the market, has declined by I think 30B over the span of a month. So yeah, just huge amounts of leverage [has been] flushed out of the system. So yeah, I don’t think there’s any more risk to stETH than to any other asset.

CR: That’s such an interesting dynamic playing out in this market with leverage. One more point on the different risks to Lido users, what about ETH holders who wanted to participate in staking via Lido? Right now, I guess it’s not very attractive to sell or to stake ETH and get a token that’s worth less than what you’re putting in?

Hasu: That’s not how it would work. If you stake 1 ETH in Lido, then you get 1 stETH, so you don’t get the secondary market exchange rate. If you stake or unstake via Lido directly, then you always have a one-to-one ratio; it’s only in the secondary market where the two assets are floating freely against each other.

CR: Okay, the issue would then be if you wanted to trade that stETH right away, instead of waiting out till you can exchange it?

Hasu: …I guess you would be selling it at a discount, so you’re totally right, you should not be doing that right now. In fact, if someone goes on the Lido homepage and tries to stake, then Lido actively encourages you to buy stETH on the market because then you can make use of the discount. You basically get around four-point-something more stETH than if you were staking because if you go and stake 1 ETH you get 1 stETH, but if you buy stETH on the market with ETH, then you get [the discount]. But Lido cannot make this decision actively for the user because staking and buying stETH from the market have, in many jurisdictions, different tax treatment. So in many jurisdictions, staking is not a taxable event, but if you sell your ETH on the market, then it definitely is.

CR: Oh, that’s interesting. 

Hasu: That’s why you see some people still deciding to stake via Lido in spite of the discount, and for them, it can be totally the right thing. But if taxes are not an issue for you, then at this point, you should always first make use of the secondary market discount and get your stake that way.

Is Lido’s staking dominance a threat to Ethereum’s decentralization?

CR: Super interesting. Final question I have on Lido, for now, is on the concern that Lido is getting outsized in weight and power in staking on Ethereum’s Proof of Stake chain. I believe… Etherscan is showing Lido has almost 32% of ETH deposits, and that’s way bigger than any other party is staking on Ethereum. This is a concern because, of course, we want Ethereum to be as decentralized as possible to make it more secure. So how do you strike the balance within Lido of the natural inclination of a company to gain market share versus this concern that Ethereum should be more decentralized to become more secure?

Hasu: There are basically a couple lenses [through which] to think through this question. The first is Lido is not one entity, rather, Lido is a protocol for many different node operators to work together and quote-unquote ‘fungibilize’ their assets. So what does that mean? If you go to one node operator and stake your ETH with them, then they can still issue you a staking derivative, but that staking derivative would not be fungible with the staking derivative issued by a second node operator, and a third node operator. So you would end up with a market that’s very fragmented and that has a lot of different staking derivatives, [but] none of them would be nowhere near as liquid as ETH, and they wouldn’t see nearly the same utility and adoption in DeFi that Staked ETH by Lido has. So there is a huge incentive for many node operators to work together [and] to make sure we all follow the same rules. And we all make sure that all other entities who join this DAO have a certain quality. They don’t get slashed, they are geographically dispersed, they self-host — [they] run their own hardware and don’t use any hosting providers online. There’s a lot of rules that the Lido DAO tries to enforce as the entry [requirements] for new node operators to join. So they don’t act as one entity, but it’s sort of a protocol that fungibilizes the stake from many node operators. That is the first lens. 

The second is ‘can Lido still become a risk for Ethereum under certain conditions?’ And the answer to that is ‘definitely yes’. So Lido has a governance layer, and… the biggest risk here is that Lido governance is responsible for adding new node operators, at least in its current form. So someone has to make sure that a new node operator that is added adheres to the qualities that we just mentioned. This gives Lido governance, a certain soft power to say [to] node operators ‘you have to do this or that, or we will remove you from the Lido DAO, or we will not give you any further stake’. So that’s, in fact, the only thing that Lido can do right now because unstaking, as we discussed, is not yet possible. So that’s the second risk. 

And the third is if Lido didn’t exist — so we have to look at the counterfactual. If Lido didn’t exist, would there be fewer risks? And the answer to that is no, there would be different risks, and in my opinion, Ethereum would be a lot worse off… There would be a lot more stake on exchanges because what Lido does is offer a competitive product to exchange staking. 

In many ways they have a very big head start to this product because an exchange [offers] sort of everything out of one hand. They already have these markets where you can trade ETH, and they can just say ‘we want to stake the ETH for you.’ It’s very easy for them to… issue a representation of that staked ETH and say ‘we are going to offer this or that market against it’. So FTX or Binance, for example could say ‘you can use the staked ETH as collateral as margin on our exchange’ — you [could] trade it, and then you have many of the same benefits. And, in fact, this has been predicted for many years and was one of the biggest concerns [for Ethereum] among the people who thought the furthest ahead, and that included the Lido founders. So in the Lido whitepaper, it says that the main motivation for Lido is [to] make it so that large exchanges don’t win liquid staking for Ethereum. So what you would have is much more [staked ETH] custodied by exchanges, you would have a much more concentrated node operator set. So it’s true that Lido has 32% [of staked Ether], but Lido consists of 29 different node operators.

You can look at the rest of the node operators that are not in Lido, and they are much less dispersed and much more concentrated. So you have effective individual entities that have 15%, 20% of the stake that don’t even make transparent the same qualities that node operators in Lido have to adhere to. If you pair this with a conviction that I’ve [had] for some time that motivated me to become active to begin with — I believe the liquid staking derivative that is being used in DeFi, used in money markets, and so on, has a very large network effect. If you want to stake your ETH, then as a user, you would never not stake with the largest provider. Why? Because you want your staking derivative to be as liquid and as useful as possible. And so this network effect creates a very strong dynamic towards… there just being one staking pool, one staking provider dominat[ing] everything. I saw this risk very early on, about two years ago. I thought ‘okay, so it’s not going to be possible to prevent this outcome, we have to make sure from the start that if there has to be one large party then you have to make sure that this party is as decentralized as possible’. And that is what motivates my engagement with Lido, and why I think that yes, it can be risky with them, but sort of the counterfactual would be even worse.

How can Lido mitigate validator collusion and governance risks?

CR: Yeah, I get that having a protocol that makes sure that node operators adhere to certain rules [is] much better than having one centralized custodial entity controlling all the stake. And I think you’re right, that it is definitely useful to have a more liquid-staked ETH derivative, and that everyone kind of gains from these network effects. But I wanted to just clarify what the risks are — how likely is it for Lido’s 29 node operators in the future to collude or coordinate some sort of attack? Is there a way to prevent this? What’s the risk of that happening?

Hasu: There are two ways to think about this. The first is ‘are Lido operators going to do anything unilaterally, so without Lido getting involved?’ And the answer to that is basically it’s extremely unlikely, or [it] can’t happen at least any more than they could without Lido. Basically, Lido is a complete non-factor in that equation. You can always have large mining pools or staking pools band together and do something that would be bad for the network, but they don’t do that because they have a lot of money at stake and they’re very long-term oriented, and very economically and in many cases also ideologically aligned with the health of the network. So they need the network to do well so they can do well financially. 

So in Proof of Work, if a mining pool would start attacking the blockchain, for example, by mining empty blocks, then the workers of the pool would start to withdraw the hash power and then the pool would die. So I think if you, as a pool operator started to do something like that, then all you do is basically commit suicide economically. In a staking pool, it’s basically exactly the same. So if a Lido node operator started doing something, or a group of Lido node operators started doing something that’s bad for the network, then Lido can withdraw the stake from them. They can’t do it today, but they can, after a future upgrade, withdraw the stake from them. And users of Lido can do the same thing. So users of Lido can sort of unilaterally exit Lido and withdraw their stake, and Lido can also make sure that the node operators don’t do anything that hurts the health of Lido and the health of Ethereum. So the much more interesting question is ‘can Lido do something to compel the node operators to do something bad?’ And so the exact same argument applies. So Lido is extremely long-term aligned with Ethereum. But it’s imaginable that Lido exerts a certain soft power to, for example, bring operators to censor certain transactions — I think that’s imaginable. So that’s the risk of exerting soft power.

And then you have a second risk, and that’s related to governance. So what Lido governance today could do — they cannot withdraw any stake for example, and they won’t be able to in the future either — but they can control the stETH token contract. So, for example, they could inflate the supply of stETH and then give themselves a claim on ETH due to that. So that’s possible, for example. 

So there are two ways that Lido thinks about addressing these [problems], or that we as designers of the system think about them. So that has to do with solving what we would call a ‘principal-agent problem’. So you can think of the stakers who put money in Lido as the principals who empowers Lido, the agent, to stake money on their behalf and manage their staking derivative. And while their interests are mostly very aligned, they are not one in the same party. So you can imagine that Lido has different interests than the stakers might have. 

In some edge cases that’s a problem, and there are two ways to minimize this risk and the first is to do with ossification of the governance scope. Wherever that’s at all possible we should remove the ability to govern the system at all, because there’s a lot more that can go wrong than can go right. And we can see Lido is extremely interested in ossifying itself because the fact that we are talking about this in itself is proof. Where stakers have to trust Lido to govern the system, there is a problem that prevents it from growing. So Lido would be much happier if they could prove to the market that they can’t do anything wrong because Lido has no interest in doing anything wrong, but the problem is the trust problem that they cannot prove it. So by ossifying the contracts, you sort of bind your own hands, and then there is nothing that can be done. For example, the stETH contract, down the road, can be ossified so that it’s completely immutable — governance can’t create any more stETH. 

So Lido’s approach has been to ossify every part of the protocol as soon as that becomes viable, but not every part can be ossified yet because The Merge hasn’t happened yet, withdrawals aren’t enabled, and it’s not yet clear how the interface between Ethereum and Lido should look like, because Ethereum itself, the specs, and the implementation around these things are still changing. So Lido has to wait for Ethereum to basically finalize the development of its Proof of Stake and withdrawal system, and then it itself can drive ossification even further. So basically, for the time being, you always end up with governance still having to play a role because we cannot ossify fully yet. So if you need governance, then it’s sort of the question of ‘how can we align stakers with Lido governance?’ 

Sam from Lido, among a couple of other authors and myself included, about two weeks ago, put forward a proposal that I’m super proud of that is basically revolutionary in the context of DAOs and DAO governance. We [propose] the ‘dual-governance model’, where Lido governance can make proposals… and they can also vote for proposals, same as they can today. But a quorum of stETH holders can veto any proposal that’s being made. After withdrawals are enabled stETH holders already sort of have the ability to say ‘I’m opting out of Lido’ by just withdrawing [their] stake. But today, they have this to a much smaller ability because they can only exit via the secondary market. But we were thinking ‘how can we replicate this ability for Lido’s stakers to opt-out of any governance decision that Lido makes that could be potentially bad for them and pull it into the present where withdrawals are not yet enabled?’ The secondary market does fluctuate, and you may not get your full stake’s worth by selling it in the secondary market, especially if there is a panic because Lido has announced that they will make a governance proposal that would be very bad for stakers. And the answer is you introduce veto rights for these stakers, and that allows them to basically opt-out of any changes that can be made to Lido that would hurt them.

CR: But is it opt-out? Or is it to prevent that action? You gave the example before of inflating stETH, and I don’t know if you can kind of opt-out of being impacted by market forces?

Hasu: What the stETH holders can do is if they see a proposal to inflate the supply of stETH, then they can block the proposal forever. So the proposal would never even go on-chain, that’s the veto that they get. According to the current proposal, you need 5% of all stETH to disagree. So it’s high enough so that basically a small minority can’t just block everything, but it’s low enough so that any proposal that would meaningfully affect stETH would definitely reach the quorum, especially since it’s being paired with a much longer time-lock — I think [it is] somewhere between two to four weeks between a proposal being announced and the proposal being enacted on-chain. So there is a good amount of time for the community to become aware of any proposal that’s being made to Lido governance and review the proposal, and then they can decide if they want to pull their veto or not.

CR: Got it. So where does this proposal stand? Is it still being voted on?

Hasu: It’s not yet being voted on, it’s in the stage before right now, it was a research proposal that laid out a possible path to, to implementation. And yeah, I think the next step is a more concrete technical proposal including the source code. And then after that it’s, it’s going to be voted on and enacted on-chain.

The challenges of DAO-based governance

CR: Perfect. We’ll be definitely tracking the progress of that at The Defiant. We are coming to the top of the hour, so wrapping up, we’re talking about governance and we’ve seen… so many interesting experiments with governance [and] DAOs… in this cycle… and so far it seems like there’s been a lot of progress in the evolution of DAOs, but I don’t think we’ve kind of come to the best decentralized organization structure yet. I think there’s still a lot of work to be done in that area. I’d love to hear your thoughts on what you’ve seen with Lido [and] with your experience at Maker. What are some of the most interesting takeaways or main lessons that this last cycle has taught us about DAOs and how to improve this new way of organizing?

Hasu: Just off the top of that, if I had to give two things that we have learned from the previous cycle and how it relates to DAO governance, I think basically DAOs are afraid to make a profit I think primarily for regulatory reasons. With aDAO that has issued a token that runs the Dow to the benefit of the token holders that actively maximizes holder value, and then also pays forward these profits to the tokenholders I think there’s a large fear of being seen as having issued a security. And so just to circumvent that, I think a lot of founders you know, go one of two routes. Either they just stay sort of pre-revenue forever, so they never make any revenue, for example, by never turning on the fees of their protocol. Or they do make a profit, but they never sort of pay it forward to the tokenholders. And the [other] way also reflects in the way that governance itself is structured — I think there is a lot of worry that if you work on a protocol and make decisions that you become responsible for that, or legally liable, And the solution that has unfortunately emerged for the people who work on protocols [is] to kick any decision that they’re making to tokenholders to vote on. The way that this plays out is… many organizations in crypto are being micromanaged by their tokenholders. That’s completely non-viable. Could you build an iPhone by designing it by a committee of stockholders? I think the answer is most likely ‘no’. 

So for one, I think there’s no incentive to even participate in governance for these stockholders; they’re not getting paid for it, there’s no necessary expertise. So how would Apple stockholders know how to build your iPhone? It’s not what they signed up for… Every project is being put in many different, oftentimes competing directions. Oftentimes it would be better for a project to make the second-best decision, but use all its power to actually execute that strategy instead of executing 5% of many different strategies just because tokenholders are kind of a populist group. So they only want to do what’s best short-term. And when the market turns, then what the tokenholders want turns. 

So yeah, in many ways, what we are seeing right now is these protocols overload the role of the tokenholder and give them more power and more responsibility than they optimally should have. In traditional markets, tokenholders basically provide the risk capital for the firm to work, and they provide an important accountability layer or checks and balances on the leadership of the company, but they are not involved at all in the day-to-day management of the company — I think there are very good reasons why this governance structure has evolved over hundreds of years in traditional markets. 

The reason is because it just works, it’s not like other models haven’t been tried, but what you’re seeing in traditional markets is just the survivors. It’s not all of the failed experiments of the last hundreds of years. The cooperatives that were run by the workers, it’s not like those haven’t existed. It’s just that they’re not around anymore. So I think that anyone who builds these systems should probably study up a little on the history. And then I think it’s the problems that we talked about… the problems of founders [being] afraid of being liable if they decide anything, or if they make any revenue, or if they pay any dividends to their tokenholders. But I think the current solution is not it, we need to take the next iteration and then see what we get from there.

CR: Do you think more regulatory clarity will be needed before DAO models can meaningfully improve?

Hasu: I think there are some ways this can play out. Regulators stepping up and saying we provide you the necessary clarity that you need to do business in the blockchain world as a DAO, I think that would be the best outcome. And then the second-best outcome is we basically adapt our protocols to the governance style that is made available to us by the regulators. So if only certain forms of governance can be performed in a secure way, then the protocol itself has to be built from the start in a way that doesn’t require more governance than we can have. It doesn’t make sense to build a very complex protocol that [requires] a lot of governance. In that case, you’re much better off building a very simple protocol. If you can have only very simple governance, then you need a very simple protocol. But if you can have complex governance, then you can afford to build more complex protocols. So I think the things we build need to adhere to the reality that we live in.

CR: So maybe it’ll be simpler governance and simpler protocols for now, and then hopefully we get that regulatory clarity needed to make DAOs in kind of this ideal situation where tokenholders do get a percentage of revenue and where there can be more effective management that doesn’t need to leave everything to tokenholders because of fear of some regulatory clampdown saying that they’re managing some unregistered security. Okay, I know that you have to go, hopefully we can do a follow-up and talk more about DeFi, but this has been fascinating. I really appreciate your time, and you really cleared up all my questions on Lido. So thank you so much again for joining me today.

Hasu: Thanks so much, Camila, for having me. I’m a big fan of your podcast.

CR: Thank you so much, talk soon!



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