AMA with Figment on Ethereum (ETH) Staking

In September 2022, Binance.US introduced Ethereum (ETH) staking, with an introductory APY of 6% at launch. Recently, we chatted with the members of the Figment team and Sreeram Kannan, a faculty member at the University of Washington, Seattle, and founder of the Eigenlayer Project to learn more about Ethereum and its recent transition to proof-of-stake.

Continue reading for a transcript of our conversation, which originally aired on Twitter Spaces, hosted on our handle @BinanceUS.

A Conversation about the Ethereum Network (ETH) with the Figment Team feat. Sreeram Kannan

Note: The following section features a transcript of our live conversation between guests Ben, and Park, who are members of the Figment team, and Sreeram Kannan, an Ethereum expert. The piece was moderated by Chris, a Figment employee working on Education and Governance. The sections below have been edited for brevity and clarity. Where possible, conversations have been condensed to make the content more readable.

The opinions expressed below are Ben, Park, and Sreeram’s own, and do not necessarily reflect the views of Binance.US. The commentary provided here is for general informational purposes only and does not constitute financial investment, tax, or legal advice.

Click here for a recording of the full, unabridged conversation.

Hello Binance.US community and welcome to the Figment and Binance.US Twitter Space on Ethereum Staking. My name's Chris and I'll be your moderator today. I'm a long-time crypto native and Web3 maxi working at Figment on the Education and Governance side. Joining us in this Twitter Space is Ben. Ben, would you like to tell the listeners who you are and what you're about?

Ben: For sure. I'm a member of the protocol team at Figment. I focus on Ethereum and the Ethereum ecosystem.

Awesome. And rounding out this panel, we have Park. Park, would you like to tell us a little bit about yourself?

Park: Sure. So my name is Park. I run the critical team over at Figment. I've had the great pleasure of working very closely with both Chris and with Ben so I'm really excited to talk today.

And last, but certainly not least, we have Sreeram on the call. Can you give us a little intro?

Sreeram: Hi, everybody. I'm Sreeram. I am an associate professor at the University of Washington, Seattle, and I run the UW Blockchain Research Lab. I've done research on consensus protocol, scalability, data availability, and game theory. Over the last year, I've been on leave building a project called Eigenlayer, which is a protocol for re-staking on Ethereum.

Very exciting. Thank you all for those awesome intros. Now, let's take a look at Ethereum. Why does Ethereum exist? What issues was it trying to solve? Ben, first, what was the fundamental value proposition and what was it that Ethereum was doing that was different from Bitcoin?

Ben: So the question that Ethereum tried to solve is, “How do we cast a wider net and provide decentralization beyond [Bitcoin]?” And so what Ethereum did was they took the blockchain and added programmability to the smart contract platform. That’s the reason for Ethereum.

Aside from that innovation, the other really important thing to bear in mind that really drove the success of Ethereum was its open-source nature. Ethereum gave innovators, builders, developers, etc. the ability to innovate. So, you can view the idea of adding programmability to the blockchain as the kind of spark, but opening it up to other folks to build on was the gasoline that really, really lit the fire. But the “why” of Ethereum, again, is to cast a wider net in terms of decentralization. Ethereum has achieved this by adding programmability to the smart contract platform to the blockchain.

And as with any open source software, what you start off as is never what you become. I'd be interested to know what you say, Sreeram, that Ethereum has become and what its current offerings are looking like.

Sreeram: You can view Ethereum as a mechanism for separating trust from innovation. If you look back to the Bitcoin days, pre-Ethereum, you had Bitcoin and all these different products. Each one trying to build a new application had to build a new trust network and a new approval network just for that application. This was obviously not sustainable. And one thing that Ethereum did is say, “Hey, I am providing this decentralized trust layer that any application can consume.”

If you think about venture capital, it's a major turning point in our society because somebody brings capital, somebody else brings ideas — and these two fuse together to create a new project, a new product. I think the value proposition that Ethereum brought to the table is the separation of trust and innovation. Somebody brings innovation in terms of writing these new applications, new dApps, new smart contracts, and Ethereum provides trust—decentralized trust—to back that application.

So what this has led to is the emergence of the pseudonymous economy. In order to create the new application, people needed to trust the person running the application. Not so with Ethereum. You could just take a smart contract and write it out and people don't need to know who you are, whether you are reputed, whether you are legally backed. None of that matters because Ethereum is enforcing the trust conditions. So this has actually led to the whole pseudonymous economy where anybody who doesn't need to be well-known can still contribute productively to the ecosystem. So it started with the separation of trust and innovation and has led to the pseudonymous economy.

And while I have you here, what was proof-of-work for? Why was Ethereum based on proof-of-work to begin with? And [why move to] proof-of-stake?

Sreeram: Proof-of-work was the natural option following Bitcoin because it required very little change to the established Bitcoin method. But very soon after the project was started there [was] a strong push to move to proof-of-stake.

The reason to keep proof-of-work was Bitcoin's proven model of building permissionless ecosystems based on proof-of-work. So that was the obvious, right thing to start with. But going from there, questions [arose] like, do we need to spend so much energy on proof-of-work? Can we have a more powerful incentive structure? Not only positive incentives, but also negative incentives for misbehavior. These all led to the drift to proof-of-stake.

I’d like to point out that the [key] difference between Ethereum and Bitcoin is that Ethereum is made valuable by all the things built on it. [With Ethereum having switched] from proof-of-work to proof-of-stake, what is going to change?

Sreeram: There [are] a variety of upgrades coming up, particularly one on improving the data availability rate. [I’ll] give a high-level of the roadmap of scaling for Ethereum.

When you talk about scaling, what we're looking at is each node in the network has a certain set of resources and we want to make sure that the resource usage per node is small, but the system performance is high. You can think of four fundamental resources of a node. One is computation ability. The next one is memory, like RAM. And then you have network bandwidth and finally, you have long-term storage. So the Ethereum roadmap for scaling basically is centered on a rollup-centric universe where the idea that rollups are basically externalizing or like outsourcing computation memory meaning you do the computation off-chain and prove to the network that you've done them correctly.

So network nodes do not necessarily need to store all the stake and process all the transactions. They can very quickly verify that the transaction is done correctly. However, there is still the network bottleneck to worry about. Every data item returned to any of these layer-2 solutions needs to be propagated through the Ethereum network so we can have an assurance that the data was publicly available.

And this is important because in some of the protocols you may want to know that the data is available because only then can you challenge a certain update proposed by a node. So this imposes a network cost. On the Ethereum roadmap, beyond proof-of-stake, there are two upgrades on the data availability.

One is called EIP-4844, which is also called “proto-danksharding'', and the full version of it, which is called “danksharding”. What both of these upgrades try to do is to improve the data bandwidth of Ethereum. When full danksharding is live it will ensure that each node in the network does not necessarily download all the data, but together all the consensus nodes have seen enough data to guarantee that it is available. The targeting goes from a throughput of 80 kilobytes a second to 1.3 megabytes per second, which is about a 20 x increase in throughput during this phase.

So this is one of the upgrades. Various others will be brought into Ethereum at various points in the future. All of these are somewhat complementary to the proof-of-stake upgrade.

Park: Moving to proof-of-stake in the Ethereum version looks very different from how it is happening anywhere else. [Sreeram], what is it that you think is more robust about this? What defines this as particularly advantageous?

Sreeram: One of the driving values of the Ethereum proof-of-stake design has been to maximize the ability for nodes to participate. Anybody should be able to participate as a home validator in the network and this means the network should be able to accommodate a huge number of validators participating. So the consensus protocol has put a lot of thought into actually enabling this.

But beyond this, there are also other aspects that are kind of unique to the Ethereum proof-of-stake design. For example, Ethereum proof-of-stake is dynamically available. So, if a large fraction of code suddenly goes offline, the protocol will continue to make progress. This is very different from any other existing models.

But if more than 33% of the nodes go offline, the system may have a perpetual stalling and can only be reinstated with a social recovery by all of us adjusting and binding to a new block or whatever the case may be. So it was designed that the proof-of-stake protocol be very sophisticated and combines elements of dynamic availability from proof-of-work and also brings in elements of finality and slashing from proof-of-stake and other protocols.

You use the word baroque here and I want to highlight one interesting aspect of the proof-of-stake protocol. People think, “What is the fraction of nodes that control a majority? And if a majority of nodes are not honest or adversarial, then clearly the protocol may not function as desired.” However, there is a counteracting force to this, and in Ethereum, and maybe a couple of other protocols, even if a majority behaves maliciously, the minority can slash the majority by providing a proof that they behaved badly.

So even if it turns out that 50% of the nodes are run by a few number of entities, it is still extremely beneficial to have a large number of nodes validating and monitoring the chain because they can verify and participate in a variety of slashing conditions without a majority and, when they behave badly, the system can still recover from that. So that's the unique properties of Ethereum proof-of-stake that attracted us academics to the system.

Park: So I guess that means that it is actually quite advanced in its articulation of adjusting to Ethereum's future.

Sreeram: Absolutely.

Extremely interesting. I was unaware of that myself. Speaking of these new roles, what ones are going to exist post-Merge for Ethereum?

Park: We have this ability to separate proposers and builders. Proposers are those who propose the blocks for consensus and the builders have this Maximum Extractible Value (MEV) model where bots can actually order the transactions that are presented in these proposed blocks.

And so by separating these two, it creates a market where the fees can be kind of ordered. And there are a bunch of different approaches to how that can be taken.

Ben: So there's the idea that you have to separate two roles. Currently, miners are building the blocks as well as proposing them.

So proposer/builder separation is something that will be enshrined at the network level in the future, maybe in the next year or so. But it does create an interesting new group. You have this explicit group of builders and it's going to become a role that's more specialized. I think the idea here is that proposers, validators, anyone will be able to continue to participate, the computational resources will not become overwhelming.

In time, as more is required from builders, the computational resources required to build a block will likely increase. I think the idea is to continue to maintain decentralization on the proposer side and then maybe more centralization on the builder side. But the hope is that there'll be enough competition there and enough actors that it won't become too centralized.

Park: Yeah, I think I want to also highlight other roles that exist within the staking community/ the community of validators. Liquid staking has come up as a way to make sure that we're maintaining liquidity of capital in systems like this

Sreeram, you and I were talking about it a little bit prior to this. I think it's fascinating to think about the fact that liquid staking is a solution to an infrastructural design that was supposed to keep people interested in locking up capital for the preservation of the protocol, but obviously locking up your capital and making it illiquid, it puts you in a space of feeling like you have less flexibility.

So this new solution boiled up, which is another role that we have, like existing in the staking model as it is. And so like I'd be interested to kind of think about that with you as well, just thinking about organic solutions to trying to get limitations in the system.

Sreeram: Yeah, it's really fascinating how economic forces find their way through the system. So let's zoom out and see what value staking provides. So, in the proof-of-stake protocol, particularly the one Ethereum uses, staking is used for economic security.

What is economic security? You're locking down a bunch of capital and agreeing to provide a certain kind of service, in this case, block validation, and you may lose your capital if you do something wrong. So there are aspects which are purely economic in the Ethereum protocol and instead of trusting somebody to do it, you're actually acquiring the trust from economic security.

But the problem with acquiring trust from economic security is that there is a capital cost. Just like in proof-of-work, the dominant cost was the cost of mining. The dominant cost in a proof-of-stake system is the capital cost required to lock up the capital for a period of time. So if a large protocol like Ethereum wants like $30 billion worth a week to be locked up for a year, then it should be paying at least a certain percentage APR on this capital.

And so all of this capital fundamentally is going to supply trust. What the market figured out is, “If I can trust a liquid staking provider to actually do this service correctly, they can give me another token that represents their position in the Ethereum staking protocol and as long as I'm willing to trust that these parties will behave correctly, I can actually enjoy the benefit of having a more liquid token.

So this was fascinating to see the emergence of these liquid staking protocols on Ethereum. Fundamentally, I think of them as a new trust replacing capital costs. If that's the case, then one would think that there should be no fundamental issue because the protocol continues to work as long as enough economic capital is at risk, which there is, and these other people who took a trust risk on these liquid staking providers are actually liable to lose their stake if those providers don't act correctly. So it seems like everything is balanced.

However, there's one twist to the story, which is that Ethereum's proof-of-stake security is not fully reliant only on economic security. It is reliant on economic security for safety, but it is reliant on decentralization for liveness.

What we mean by that is you need many different parties to potentially include transactions to actually get censorship resistance. So the second part, which is decentralization is not metered and not easily calculable inside the protocol, things like liquid staking can create externalities on censorship resistance. So that's a high-level view of how I see liquid staking feed into the ecosystem.

What happens to your staked tokens [now that the merge has happened]?

Ben: Good question. In terms of usability of staked tokens, not a lot has changed at all. Depending on who you are, the best time is always going to vary.

Does it matter who you stake with?

Ben: Yes. Yes, I think it does. It matters a lot. One core thing that you're looking for is trust, faith. And it's hard to measure, but it's one of the most important things that is needed when people are staking their ETH.

Where can people find out more information about Figment or our services?

Park: Our website and Twitter are the main places!

The transcript above has been condensed and edited for brevity and clarity. Listen to the full, unabridged conversation on our Twitter page.