Episode 184: March 31, 2022

--- tags: G&R --- # Episode 184: March 31, 2022 ## Agenda - [00:00](https://youtu.be/P9DBZ5sXwcI?t=1): Introduction - [00:58](https://youtu.be/P9DBZ5sXwcI?t=58): Votes and Polls - [02:32](https://youtu.be/P9DBZ5sXwcI?t=152): MIPs Update - [09:02](https://youtu.be/P9DBZ5sXwcI?t=542): Forum at a Glance - [13:40](https://youtu.be/P9DBZ5sXwcI?t=820): Discussion: Staked ETH: Market Share and Strategy - [45:52](https://youtu.be/P9DBZ5sXwcI?t=2752): Open Discussion & Conclusion ## Video [Link](https://youtu.be/P9DBZ5sXwcI?t=1) ## Introduction ### Agenda and Preamble #### LongForWisdom [00:03](https://youtu.be/P9DBZ5sXwcI?t=3) - Hello, everyone, and welcome to the MakerDAO scientific Governance & Risk meeting #184 on Thursday, March 31, 17:00, UTC. My name is LongForWisdom. I am one of the Governance facilitators of MakerDAO. I will be hosting this meeting today. As usual, we have a bit of an agenda to get through, and we have a few updates on Governance: - We have Forum and MIPs updates as well. - I do not think we have any initiative updates this week. - We will go into a discussion on Market Trends around Stacked ETH, specifically. ## General Updates ### Votes #### Patrick [02:12](https://youtu.be/P9DBZ5sXwcI?t=64) *Polls:* - Short Ratification Poll for ETH Amsterdam SPF - **PASSED** - Initial Parameters for Starknet Bridge - **PASSED** - Short Ratification Poll for MIP62 - **PASSED** - Investigate Notional D3M - **FAILED** - 9 Completed Ratification Polls to be Covered in our MIPs Update *Executive:* - Last week's Executive: Authorizing the ESM on DssFlash and Adding Support for TUSD Implementation - **PASSED AND EXECUTED** - Tomorrow's Executive Proposal: - DAI Budget Streams and/or Transfers - GovAlpha - Real-World Finance - Immunefi Security - MKR Budgets Streams and Transfer: - GovAlpha - Keeper Network DAI Stream: - Gelato Network ### MIPs #### Gala [02:40](https://youtu.be/P9DBZ5sXwcI?t=160) [Weekly MIPs Updates #79](https://forum.makerdao.com/t/weekly-mips-update-79-pinata/14106) ![Weekly MIPs Updates #79](https://i.imgur.com/U1chkAA.png) ![MIPs General Updates](https://i.imgur.com/IpTQjKr.jpg) #### [_Weekly Cycle Subproposals_:](https://youtu.be/P9DBZ5sXwcI?t=170) - [MIP4c3-SP2: MIP62 Amendments](https://forum.makerdao.com/t/mip4c3-sp2-mip62-amendments/13779) - Amends MIP62: *Collateral Offboarding Process* to reflect the removal of the Content Production CU. - **YES**: 93,992 MKR Voting (**94%**) - ABS.: 6,000 MKR Voting (6%) - NO: 0 MKR Voting (0%) - [MIP55c3-SP3: ETHAmsterdam Event SPF](https://forum.makerdao.com/t/mip55c3-sp3-ethamsterdam-event-spf/13781) - Creates a SPF that allocates 50,000 DAI for the hosting of a MakerDAO event at ETHAmsterdam. - **YES**: 73,856 MKR Voting (**69.7%**) - ABS.: 20,019 MKR Voting (18.89%) - NO: 12.093 MKR Voting (11.41%) #### [_Ratification Polls_](https://youtu.be/P9DBZ5sXwcI?t=208) - [MIP13c3-SP12 - Declaration of Intent: Invest in Short-Term Bonds](https://forum.makerdao.com/t/mip13c3-sp12-declaration-of-intent-invest-in-short-term-bonds/13084) - **YES**: 72,524 MKR Voting (**91.65%**) - ABS.: 8,000 MKR Voting (7.58%) - NO: 610.5 MKR Voting (0.77) - [MIP40c3-SP59 - GovAlpha Budget 2022-2023](https://forum.makerdao.com/t/mip40c3-sp59-govalpha-budget-2022-23/13144) - **YES**: 83,855 MKR Voting (**100.0%**) - ABS.: 0.0 MKR Voting (0.0%) - NO: 0.0 MKR Voting (0.0%) - [MIP63c4-SP2 - Keeper Network Onboarding: Keep3r](https://forum.makerdao.com/t/mip63c4-sp2-onboard-amend-keeper-network-keep3r-network/12748) - **YES**: 79,134 MKR Voting (**100.0%**) - ABS.: 0.0 MKR Voting (0.0%) - NO: 0.0 MKR Voting (0.0%) - [MIP40c3-SP61 - Real World Finance Budget](https://forum.makerdao.com/t/mip40c3-sp61-modify-core-unit-budget-real-world-finance-rwf-001/13152) - **YES**: 66,172 MKR Voting (**78.91%**) - ABS.: 11,683 MKR Voting (13.93%) - NO: 6,000 MKR Voting (7.16%) - [MIP40c3-SP60 - GovAlpha MKR Budget](https://forum.makerdao.com/t/mip40c3-sp60-modify-govalpha-core-unit-mkr-budget/13145) - **YES**: 83,855 MKR Voting (**100.0%**) - ABS.: 0.01 MKR Voting (0.0%) - NO: 0.0 MKR Voting (0.0%) - [MIP63c4-SP3 - Keeper Network Onboarding: Gelato](https://forum.makerdao.com/t/mip63c4-sp3-onboard-amend-keeper-network-gelato-network/12749) - **YES**: 79,134 MKR Voting (**100.0%**) - ABS.: 0.0 MKR Voting (0.0%) - NO: 0.0 MKR Voting (0.0%) - [MIP4c2-SP17 - Rapid Payment for Small Bug Bounty](https://forum.makerdao.com/t/mip4c2-sp17-rapid-payment-for-small-bug-bounties-mip64-mip40c3-sp42-amendment/12869) - **YES**: 66,782 MKR Voting (**79.64%**) - ABS.: 11,074 MKR Voting (13.21%) - NO: 6,000 MKR Voting (7.16%) - [MIP61 - Recognized Delegate Compensation](https://forum.makerdao.com/t/mip61-recognized-delegate-compensation/10640) - YES: 22,038 MKR Voting (26.28%) - **ABS.**: 61,807 MKR Voting (**73.71%**) - NO: 9.62 MKR Voting (0.01%) - [MIP41c5-SP5 - Facilitator Offboarding (MDS-001)](https://forum.makerdao.com/t/mip41c5-sp5-facilitator-offboarding/13005) - **YES**: 40,273 MKR Voting (**48.03%**) - ABS.: 9,067 MKR Voting (10.81%) - NO: 34,515 MKR Voting (41.16%) #### [_Proposals in RFC_](https://youtu.be/P9DBZ5sXwcI?t=312) [MIPs](https://youtu.be/P9DBZ5sXwcI?t=317) - [MIP65 - Project Clydesdale: Monetalis Arrangement I](https://forum.makerdao.com/t/mip65-project-clydesdale-monetalis-arrangement-i-liquid-bond-strategy-execution/13148) - [MIP66 - Payrwise Licensure](https://forum.makerdao.com/t/mip66-pairwyse-licensure/13554) - [MIP67 - Formalise Methodology Review and Process for Structured Finance](https://forum.makerdao.com/t/mip67-methodology-and-review-process-for-structured-finance-transactions/13737) - [MIP68 - Monetails Vault V2](https://forum.makerdao.com/t/mip68-monetalis-vault-v2/13789) - [MIP69 - L2 to L1 Fast Withdrawals](https://forum.makerdao.com/t/mip69-l2-to-l1-fast-withdrawals/14041) [CU Budgets](https://youtu.be/P9DBZ5sXwcI?t=343) - COM-001 - [MIP40c3-SP62/63](https://forum.makerdao.com/t/mip40c3-sp63-modify-core-unit-budget-com-001/13654) DAI Budget - DIN-001 - [MIP40c3-SP64](https://forum.makerdao.com/t/mip40c3-sp64-add-data-insights-core-unit-budget/13791) DAI and MKR budget - SH-001 - [MIP40c3-SP67](https://forum.makerdao.com/t/mip40c3-sp67-modify-core-unit-budget-strategic-happiness-sh-001/13805) DAI and MKR budget - PE-001 - [MIP40c3-SP68](https://forum.makerdao.com/t/mip40c3-sp68-modify-protocol-engineering-core-unit-budget-pe-001/13797) DAI budget [CU Onboarding](https://youtu.be/P9DBZ5sXwcI?t=361) - [MIP39c2-SP32](https://forum.makerdao.com/t/mip39c2-sp32-adding-events-core-unit-events-001/13780), [MIP40c3-SP66](https://forum.makerdao.com/t/mip40c3-sp66-events-core-unit-dai-budget-events-001/13777), [MIP41c4-SP33](https://forum.makerdao.com/t/mip41c4-sp33-events-core-unit-facilitator-onboarding-jon-perry-events-001/13775) - Events CU Onboarding (EVENTS-001) [Amendments](https://youtu.be/P9DBZ5sXwcI?t=378) - [MIP4c2-SP15](https://forum.makerdao.com/t/mip4c2-sp15-core-unit-offboarding-process-amendments/12920): CU Offboarding Process Amendments - [MIP4c2-SP18](https://forum.makerdao.com/t/mip4c2-sp18-mip7-amendments/13788): MIP7 Amendments - [MIP4c2-SP19](https://forum.makerdao.com/t/mip4c2-sp19-mip40-budget-process-amendment/14250): MIP40 Budget Process Amendments - [MIP4c3-SP3](https://forum.makerdao.com/t/mip4c3-sp3-amend-mip64-to-allow-more-flexibility-in-scope/14200): Amend MIP64 to allow more flexibility in scope [Others](https://youtu.be/P9DBZ5sXwcI?t=478) - [MIP39c2-SP30](https://forum.makerdao.com/t/mip39c2-sp30-governance-communications-core-unit-com-001-mandate-refresh/13197): Governance Communications Mandate Refresh - [MIP39c2-SP31](https://forum.makerdao.com/t/mip39c2-sp31-update-data-insights-core-unit-mandate/13790): Data Insights Mandate Refresh - [MIP7c3-SP7](https://forum.makerdao.com/t/mip7c3-sp7-ces-domain-team-onboarding-ces-001/13794): Collateral Domain Team Onboarding (CES) - [MIP6c3-SP2](https://forum.makerdao.com/t/mip6c3-sp2-modify-the-collateral-application-form/13787): Modify the Collateral Application Form - [MIP47c3-SP1](https://forum.makerdao.com/t/mip47c3-sp1-dissolution-of-content-production-mkt-001-multi-sig-request/13991): Dissolution of Content Production (MKT-001) Multi-Sig Request ### Forum at a Glance #### Artem Gordon [09:01](https://youtu.be/P9DBZ5sXwcI?t=541) Post: [Forum at a Glance: March 24th - 30th](https://forum.makerdao.com/t/forum-at-a-glance-march-24-30-2022/14332) Video: [Forum at a Glance](https://youtu.be/P9DBZ5sXwcI?t=541) - [_News & Announcements_](https://youtu.be/P9DBZ5sXwcI?t=572) - [Introducing Impact Estimations](https://forum.makerdao.com/t/introducing-impact-estimations/14267) - [SES Incubation Announcement: Legal and Transaction Services Core Unit (LTS)](https://forum.makerdao.com/t/ses-incubation-announcement-legal-and-transaction-services-core-unit-lts/14192) - [MakerDAO Actual Expenses vs Budget - February 2022](https://forum.makerdao.com/t/makerdao-actual-expenses-vs-budget-february-2022/14327) - [_Discussions_](https://youtu.be/P9DBZ5sXwcI?t=641) - [Request to Poll for Maker Wormhole Deployment and Associated Risk Parameters](https://forum.makerdao.com/t/request-to-poll-for-maker-wormhole-deployment-and-associated-risk-parameters/14209) - [Towards taking asset risks - A primer](https://forum.makerdao.com/t/towards-taking-asset-risks-a-primer/14265) - [Clarity Around Collateral Onboarding Process](https://forum.makerdao.com/t/clarity-around-collateral-onboarding-process/14221) - [_Active Signal Requests_](https://youtu.be/P9DBZ5sXwcI?t=719) - [Onboard PAXG](https://forum.makerdao.com/t/signal-request-onboard-paxg/13768) ## Discussion ### Market Share and Strategy [14:03](https://youtu.be/P9DBZ5sXwcI?t=843) ![stETH - Market Share & Strategy](https://i.imgur.com/POUvkDl.jpg) - monet-supply: We just wanted to discuss stETH, liquid staking in general, recent market trends, and then discuss what that means for MakerDAO. - To set the stage: ETH is our core collateral asset, but the expectation is that ---over time--- a lot of that is going to move to staking and particularly to liquid staking solutions that still let you transfer it or use it in DeFi while you are staked. - Staked ETH from Lido is the first large-scale solution; it is very liquid and has a large supply. So we are beginning to see lots of DeFi integrations and how that is being used. - If we can closely follow these trends and see what our best move is, I think that'll set us up for success as we transition to proof-of-stake. [15:15](https://youtu.be/P9DBZ5sXwcI?t=915) ![Leveraged stETH Yield](https://i.imgur.com/6duqOU4.jpg) - monet-supply: How stETH has it been used lately? It has primarily been sitting in the curve pool. - A few months ago, MakerDAO was the first lender to integrate it, and we have seen a decent amount of demand, between 100 to 200 million DAI generated from stETH. In the past month, Aave has also integrated stETH and shifted how it has been used besides showing a significant increase in DeFi usage. - Up until now, I think they have gotten over 1.5 billion in TVL of stETH deposited. Mostly it's being used to borrow ETH and not to borrow stable coins. If the rate of borrowing ETH is below the staking rate (which typically it is), you can end up getting a higher yield with limited price risk because they are both referencing ETH. - So, we have seen a ton of people depositing stETH in Aave and borrowing ETH, leveraging up their yield. - We are even beginning to see some tokenization of these strategies, which attracts the attention of Index Coop. There is even a sort of leveraged index: ETH Max Yield [(ETHMAXY)](https://www.coingecko.com/en/coins/eth-max-yield-index). It makes it accessible for small users who do not necessarily have the amount of money needed to do it themselves to participate in that. I am expecting that many other lending protocols will see the success and the usage Aave is getting right now and are probably going to follow along on this integration. - So, we are likely to begin to see Compounds and RARI integrating with stETH and trying to get some of this leveraged staking business. - _Some of the side effects of this_: - It pulls up the deposit yield on ETH. - So, recently, we have seen on Aave that the ETH deposit yield has gone from 0% to maybe 0.5%. And that is likely to even increase further up to maybe 2%. - So, for people using Aave to borrow stable coins, their effective costs have now gone down a little bit. - I think that is an effect that we are going to see probably across liquidity protocols like Compound and RARI: the cost of supplying ETH and then borrowing stable coin ---which is directly competing with us--- is going down. - That is one of the most immediate impacts we need to look out for. [18:18](https://youtu.be/P9DBZ5sXwcI?t=1098) ![Impacts/Taking Action](https://i.imgur.com/XNE4YC8.jpg) - _About impacts_: - Higher ETH rates on lending protocols offset borrowing costs, but, on the flip side, it increases the risk you face of having some of your collateral decline in value if some of those stETH loans default --- which is unlikely, but not impossible: Lido could face significant slashing or technical issues. - It creates a little more differentiation between what Maker is offering: when your collaterals are with Maker, it's not being lent out to somebody, which is maybe safer. - Another big impact: - As Lido becomes more deeply integrated into all of these money markets and lending protocols, it increases the systemic level of risk that we should also be aware of and look out for. Like any D3M integrations, if protocols are using Lido substantially, this creates risk, and we could lose some money if Lido had issues through the D3M, not just to our direct exposure stETH that we have for a vault. If some people get too aggressive with trying to get the most yield, they could get liquidated due to the regular price variation for stETH. So, there is a little bit of potential for a liquidation cascade event, which is another risk factor for Lido to become a little more integrated. - Another thing to consider in the bigger picture is that it might not be healthy for one liquid staking provider to be so dominant in the market, and that is another consideration that Maker will have to look to overtime. - _About some ideas for taking action_: - How can we best take advantage of this staking leverage and this overall stETH demand? - We have the ability ---which a lot of other protocols like Aave and Compound do not---to have multiple products for each asset. - So, an idea like having a WSTETH-C vault with a higher liquidation ratio but a lower interest rate is an area where we might outcompete with other protocols. - If we want to go a bit heavier on the risk but maybe be able to charge higher stability fees, we could integrate one of those leverage tokens, which is earning that sort of enhanced stETH yield. So, if you are earning an extra yield, maybe there is more willing to pay a higher rate on your loan. - Then, other liquid staking solutions are coming up that are becoming more liquid over time, and we have the opportunity of exploring integration with them as well. - Another way that we can roll with the punches here is by continuing to lean into our D3M integrations: they would benefit a little bit from the higher ETH staking or ETH supply yield on these lending markets, and that is another differentiation that Maker has because our collateral practices are less risky. [22:46](https://youtu.be/P9DBZ5sXwcI?t=1366) - LongForWisdom: It is unclear how D3Ms benefit from increased ETH yield. Can you elaborate on that point? - monet-supply: The thesis is that if you are earning yield on your collateral, it works as offsetting the cost of the interest you are paying on your loan. If people on Aave are earning 1% or 2% on their ETH, they might be willing, in Equilibrium, to pay higher rates on their stablecoin loans. - It could be beneficial. Maker might see stronger demand for borrowing Dai, even if our target rate for the D3M is somewhat higher. We would be able to earn a little bit more. That is the theory. - LongForWisdom: Thank you. If anyone else has questions or comments, feel free to address those written down, share your thoughts, or comment directly on the topics we discussed. - Person 1: Excuse me if this is a question already answered. Regarding the staking of Ethereum collateral on the future proof of stake, will that be done by Maker itself, or are you using services to run those validators? - monet-supply: Until now--and, probably, in the future--we have integrated only Lido, a liquid staking protocol. They handle arranging with validators to stake the ETH. They also have a tokenization and governance protocol to overlay it. - There are other protocols in that space that we have not yet integrated. Rocket Pool is notable. I do not remember a few others. Most likely, it will be external to MakerDAO itself. - Person 2: How is the assessment of Rocket Pool looking? Is there more liquidity? - monet-supply: Interesting point. It is getting better. Rocket Pool just created a curve pool with incentives. A decent amount of liquidity has gone into it. - They have not paired directly with ETH but with Lido's wrapped staked ETH. The benefit for them is that the cost of capital of putting money in that pool is lower because the entire amount of it is earning staking returns. Nevertheless, this makes it less reliable from a lender's perspective: What if Lido's staked ETH market blew out and suddenly there is a 10% discount? Rocket Pool will eat all of the discounts Lido has, plus anything else they have. If Lido experienced slashing or hacking, their liquidity would evaporate. It is getting better, but there are still caveats. [26:42](https://youtu.be/P9DBZ5sXwcI?t=1602) - monet-supply: I have seen a comment in the chat about Rocket Pool having issues attracting node operators. - They have a very decentralized approach, but they are limited on the supply side, like Maker. They need to have people willing to run nodes, put up 15 ETH of their own, and potentially have RPL tokens to stake on that. It is tough to get a decentralized network of a group of stakers together. - Person 1: It seems that the operation is much more involved than I had in mind. I think it is orthogonal to Maker's core business. Your strategy makes sense. - LongForWisdom: The question has come up a few times about whether anyone at Maker is considering running our own staked ETH token. Personally, it seems like too much work. As you say, it is orthogonal to what we are doing currently. - monet-supply: There are synergies, probably some Oracle elements involved, and other things as such that we already do. But it seems like many great protocols are currently in the full-time business of doing liquid staking. Focus is good. - Nadia Alvarez: What are the odds of people closing their current ETH positions to convert them to staked ETH and borrowing them at Aave, or even opening a Vault at Maker but with staked ETH? If that is a possibility, what can we do to prevent that? - Andrew Burban: If I had the option to leverage staked ETH, I would probably use that rather than Aave. The upside and downside are higher if you leverage against stablecoins than just against ETH. I think the true degenerates will probably stick to leveraging through Maker. We do not want delta neutral, but those who do most likely will be using Aave. - Kirk: It is important to distinguish two types of borrowing against staked ETH. One is borrowing in stablecoin to leverage up against it. Whether people do that at Maker or choose Aave, we can benefit either way. - If they do it at Maker we have got a Maker Vault. If they want to leverage up with stables on Aave, we have to turn the D3M up and make sure Dai is the cheapest stable for them to use to get a loan. - The flip side is that Aave allows--and Maker does not offer--collateralizing staked Ether or borrowing ETH against to swap to more staked ETH. That is very different. You are going along the yield. Like monet-supply said, that might cause people to tolerate slightly higher borrow rates for stables against ETH because of the yield they can get through that mechanism. - But that is another type of market demand. On the one hand, you want to go along with the underlying asset. On the other hand, you only want to exploit the yield. Those are two different classes of people or market participants. [31:42](https://youtu.be/P9DBZ5sXwcI?t=1902) - monet-supply: I will echo Brian's comment in the chat. On a strict basis, staking ETH and getting yield sounds better than just holding regular ETH, but the risk profile differs. Our standard ETH-A type Vaults might see people transition to either put their ETH on Aave and get 2% yield or put it in Lido and then borrow and get 4%. Despite this, there will always be a place for people who want to keep their collateral as secure as possible. - It is almost an advantage for us because our ETH Vaults become unique compared to Compound and Aave and all the other liquidity protocol style projects. - Primoz: I can also say that half of our yielding loan book consists of institutions, such as Nexo and Celsius. They are refinancing their loan book, basically making a spread on it. Since they currently deal with ads directly, they probably feel safer here than at Aave. - If one of these big institutions should start borrowing at Aave, even with regular ETH, they will be indirectly exposed to staked ETH because much of the ETH supplied is now borrowed and collateralized by staked ETH. That is another layer of risk that might not be acceptable for everybody. - Person 1: I cannot substantiate this, but in my opinion, it would be good to differentiate between saying "this is a less risky approach" and "a reduced Premium is acceptable." From a market perspective, it makes sense to have a differentiated approach compared to what others are already doing. - Nadia Alvarez: In the end, if you think about the risks of staking ETH, it is the same as Wrapped Bitcoin. Nexo and Celsius are holders of Wrapped Bitcoin. I do not see them caring that much about converting their ETH to staked ETH, right? - monet-supply: You are right, Nadia. There is _that_ risk. But there is even additional risk because the staked component can get slashed. If they are too heavy in one client, and it is a majority client or non-majority, if they accidentally have a configuration error on their side, they could instantly lose a third of their stack on some of their machines. The slashing is one of the most interesting and dangerous components that adds risk. It is not just a multi-sig. It is a machine with active keys running on it that is staking and could suffer any number of software faults. That is not even to mention Oracle pricing risk and other things, which are additional risks compared to Wrapped Bitcoin. [35:42](https://youtu.be/P9DBZ5sXwcI?t=2142) - Person 3: Contrary to Wrapped Bitcoin, which only has BitGo as a custodian, staked ETH uses multiple node operators in smart contracts to balance between them. That is also something that is weighing down in the other direction. - Brian McMichael: It is important to note that staked ETH is running on a hot machine. The keys for the validations are _on_ the machine, whereas, with Wrapped Bitcoin, they could go to a cold wallet that maintains the keys more safely. - Person 1: When comparing staked ETH solutions, a simpler solution is less risky than what Aave is doing---where the staked ETH risk is lending out defaulting loans. Keeping it simple and not multiplying the risk is differentiation from other protocols. - monet-supply: We will get dragged in a bit with D3M if there is a massive collapse. That is worth considering. - Primoz: Currently, we are not as exposed to D3M because the Dai market is somewhat isolated. Dai itself collateralizes all the Dai that is being borrowed. You have a huge percentage of recursive leverage position. For the other part, which is organically being borrowed and collateralized by crypto assets, its collateral consists mainly of regular ETH and Wrapped Bitcoin. We have not observed much staked ETH as collateral and Dai being borrowed. Of course, this would affect us. - monet-supply: Yes. We should keep an eye on that. You are right. Maybe there is not plenty of room for Dai. If there was, we could offer the same type of incentive. - Person 3: We also added the curve LP token, which offers the Lido rewards. It is not highly utilized now, but it can get to around the 6%. It can compete as well. - Person 4: Good point. This might only be tangential, but we should talk about the general implications of the merge, moving to proof of stake, how the game-theoretical incentives of that proof of stake model have slowly started sliding into delegated proof of stake, and how there are negative centralizing effects on things--such as stake death--in the entire ecosystem. This could threaten the entire foundational level of moving to Ethereum and proof of stake. Since Maker runs on Ethereum, maybe we should think about those implications. - In addition to that, there is this staking client validator diversity, which is another major issue. There is no incentive for validator diversity at the moment. These seem to be systemic-level risks for moving to proof of stake in a few months. [40:09](https://youtu.be/P9DBZ5sXwcI?t=2409) - Person 1: What is interesting to me is how decentralization changes when applying proof of work, where a lot of the mining capacity is bundled in a couple of hands or mining pools. - LongForWisdom: Maybe it is not worth getting into fully for this call. - monet-supply: Yes, but we are on a proof of work model. It works right now. We are moving to a proof of stake model. There are debates between proof of work, proof of stake, and the implications of the latter possibly becoming more delegated proof of stake/client diversity. We should have an idea of what those risks look like for the protocol. - Maybe together with other top lending protocols, like Aave, Compound, and whoever else is integrating with these liquid staking derivatives, we have some leverage if we think development is not going in the right direction. It is worth our time to figure out the sustainable path for these systems and then try and align ourselves with that. - Person 4: That is where I was headed with it. We do have some power to provide liquidity. For example, if we believe that Rocket Pool is better and more decentralized, maybe we would want to incentivize liquidity for that. There might be some actions that the protocol can take to help make the substrate it is built on top more resilient against the failure cases of proof of stake. - Brian McMichael: For some context, we had the same discussions around Wrapped Bitcoin when we added it. There was not enough liquidity on the market, and it did not seem like it would be worth it for some people. Then we added it, and the liquidity exploded. We need to be worried about the tail wagging the dog with some of these analyses. - LongForWisdom: It may be worth discussing some of the possible actions, like money outlines. R/ETH was one of them, also onboarding the combined ETH/stETH/leverage yield thing. The other one was monet. - monet-supply: Yes. That was most of it. Other staking providers, most notably Rocket Pool, used the leverage tokens themselves, which in Equilibrium would have a 6% or 7% yield, instead of staked ETH having close to 4%. I think Rocket Pool is a tiny bit below that. The other thing is that we can have multiple products for staked ETH itself. We can have the C-type Vault with a high liquidation ratio but a relatively lower interest rate. We can have the B-type Vault that is somewhat inverse to that. - We would want to be sure that we will get enough demand to make it worth our while. Nevertheless, we have the opportunity to differentiate our products more than most other lending protocols do. - Onboarding the leverage tokens sounds good, but it is not that great of an idea. This leverage is taking Lido further into the lead, which may or may not be good--probably leaning towards the _, not_ side--. It is also creating another risk: suddenly, there will be a billion dollars worth of force-selling if staked ETH ever gets back to a 5% discount. This could immensely blow the discount and be bad for us and everyone. If there is an idea that is not as good, it is most likely that one. - LongForWisdom: We might be coming to a natural end for the Staked ETH discussion. There is still a last chance if anybody wants to say anything related. Otherwise, we can move to open discussion. If anyone has more general questions or comments for the people on the call, feel free to speak up. ## Open Discussion [45:52](https://youtu.be/P9DBZ5sXwcI?t=2752) - Andrew Burban: Who is going to Amsterdam? - LongForWisdom: I am not sure. - Person 1: I think I will go. I want to see the space built for the event. I will be in Austria before, so it will only take a short flight. We are thinking about going there and hanging out. Of course, it would be lovely to meet any of you there. - LongForWisdom: All right. I am not feeling any desperation to discuss anything presently. If there is nothing people want to bring up, we can finish earlier and give everyone 20 minutes of their time back. ## Conclusion #### LongForWisdom - It seems like everyone is happy. We will wrap up for this week, and we will join you again for the next one. The hope is we can have the on-chain collateral management initiative updates then. Also, more questions, answers, and status updates. Thank you, everyone, for coming. [Suggestion Box](https://app.suggestionox.com/r/GovCallQs) ## Common Abbreviated Terms `CR`: Collateralization Ratio `DC`: Debt Ceiling `ES`: Emergency Shutdown `SF`: Stability Fee `DSR`: Dai Savings Rate `MIP`: Maker Improvement Proposal `OSM`: Oracle Security Module `LR`: Liquidation Ratio `RWA`: Real-World Asset `RWF`: Real-World Finance `SC`: Smart Contracts `Liq`: Liquidations `CU`: Core Unit ## Credits - Constanza produced this summary. - Ivan produced this summary. - Larry produced this summary. - Everyone who spoke and presented on the call, listed in the headers.