Episode 20
ClayStack: Pioneering the next generation of liquid staking

Our guest today is Mohak Agarwal, CEO of ClayStack. ClayStack is a next generation liquid staking protocol that is launching the first DVT-based Ethereum liquid staking asset, csETH.

In this episode, we talked about the current state of the liquid staking market, how ClayStack is working to improve the decentralization of Ethereum validators, and the associated risks of liquid staking.



Hey everyone, this is Dawei from Exponential and you're listening to Degen Responsibly, a podcast where we invite protocol builders to showcase their innovations, how they work, as well as do a deep dive on risk. Exponential is an investment platform that makes it easy to discover, assess, and invest in DeFi yield opportunities. We want to help you understand the trade-offs and opportunities so you can degen responsibly. Our guest today is Mohak from ClayStack to talk about the next generation of liquid staking. ClayStack is an upstart protocol in this space. You're heading a novel liquid staking architecture that is more secure, scalable, and decentralized than base alternatives. Welcome to the show, Mohak. Hi David, for having me, excited to be here, for having me have a few listeners. Yes, yes, for sure. Yeah, definitely excited to have you here as well. Just to get us started, what about the liquid staking protocol, or what about the liquid staking opportunity excited you and how did you sort of end up building ClayStack? Sure. Let me give you like a brief intro and the story towards starting ClayStack. So my background in computer science, I've been programming since I was 15, have been into startups also very young, started my first one when I was 16 in the e-commerce space that I was selling garbage all over the world. Then I was trying to transform education in form of games for a couple of years with my game development and game designs. So when I came into crypto around 2016, and when I saw crypto, I see like crypto is a strong amalgam of technology and finance. And at that time, I felt like people are either too trade fast or too technology driven. And me having background in both kind of helped me a lot to, to extract a lot of value. So then I started my own fund called Wolfridge Capital, you know, to invest in early age projects. I did that quite well, then I changed the fund focus or expanded the fund into running validator nodes. At peak, we were running around, or we had like around $200 million worth of assets in our dedications, you're like running all these nodes. So at that time, like one of the biggest challenge that I saw in staking was inequity, that when you stake your assets, your assets get locked. And as humans, we want freedom in our life. So that was a time like liquid staking was a very theoretical concept. This was mid 2020s. And at that time, my idea was like, let's see if anyone is building in liquid staking, I saw like a couple of people who were discussing. So I reached out to a bunch of people who are building, I thought like, I'll just invest in liquid staking. Then I saw a couple of architectures and I was like, okay, this is not gonna work. Let me let me solve this. So that's when I started ClayStack in late 2020. Then we had an MVP that fundraising round, raised around $5.2 million with some of the top funds and angels in the space. Like the round was led by Coinfund and Parify, with participation from Coinbase Ventures, Hashed, Animoca Brands, Solana, and a bunch of other funds. And then at the same time, some of the industry leading angels like Founder of Compound, Aave, Synthetix, Gnosis, Grav, and again, like a bunch of more names. Yeah, since then has been just like one growing and launching new by expanding into new liquid staking. We'll discuss more on that, but yeah, that was my journey towards starting ClayStack. Nice. Nice. It's been in the game for a while now, and you definitely saw some of the earlier reviews on how liquid staking would transform. So we'll be curious at a high level first, how exactly does ClayStack work? And we can start from there. Sure. At a high level, so that everyone, I know now liquid staking is not a fancy term anymore, but like very quickly to explain what liquid staking is, when you stake your assets in the traditional staking, what happens is your assets are locked. Anytime you want them back, you have to unstake these assets. By liquid staking, you get a derivative or receipt token for your staked position, which is completely tradable, fungible, and transferable, which gives you all of these unlocks on liquidity. Now at a high level, so we started with Polygon last year. We launched liquid staking for Matic, both on Polygon as well as Ethereum. We were the first ones to do it directly on Polygon in a trustless manner, because Matic staking happens on Ethereum. Then after that, we launched a couple of testnets like Graph, Phantom, and Aptos. For us, the biggest focus has always been Ethereum, but I strongly feel that if we launch it pre-withdrawals, then we'll have to make a lot of compromises with our architecture, like most of our competitors. I feel like anyone who has launched pre-withdrawals have a technical debt which can never be repaid. I realized that we are not building this architecture for a few months. We have been building this architecture for a decade, so I wanted to have it from the day one itself. We launched Mainnet around five weeks back from token 2049, where I was explaining the liquid staking dilemma. So that was the launch journey. At a high level, when you deposit, let's say for, I'll use the ETH primarily for this discussion. So when you deposit your ETH, you get CS ETH in exchange. In the background, this ETH is getting staked to multiple validators, and as the rewards are being accrued from these validator nodes, the price of CS ETH increases in comparison to ETH. So it's a value-accrued token rather than rebase. That's at a very high level. Awesome. Yeah, it's super interesting. Obviously, the liquid staking opportunity is a massive space, and we're seeing different companies and projects trying to tackle this issue. LSD 5 this year was one of the biggest narrative and value drivers. And so it would be interesting to get your thoughts on where the current liquid staking market is today. What are some of the main types of protocol design you see in some of the major projects like LIDO, RocketPool, or FraxETH? Sure. I mean, that reminds me, I used to tell my friends last year, around the same time, that I was a bear market, and I think 2022 was kind of a year of perps. And I used to say, 2023 is going to be a year of LSDs. And coincidentally, ever since the beginning of this year, this became one of the hottest days. So good to just see that people are understanding the potential. Because in my opinion, LSDs are the highest quality of collateral that can exist in crypto. Because everything else for the bear market was just relying on government subsidies versus LSDs. Now in terms of architecture. So, there are various approaches that multiple projects have taken in order to solve liquid staking. So, let's start with the first one. So, if you see the spectrum, okay, there's, if you talk about like, let's say the extreme left end of spectrum in terms of decentralization. So, that's Lido. What happens is, let me give you a little bit more background. So, Vitalik coined this term called blockchain trilemma a few years back. And he said that no blockchain can be secured, scalable, and decentralized. Every blockchain has to make at least one or more trade-offs. And in most of the dApps that were built on blockchain did not have this trilemma. But liquid staking kind of faces the similar trilemma. So, now, if you think about Lido, I feel like they have, or kind of that's the centralized approach where the scalability has been solved very well. If you deposit a large amount of ETH, then that can be staked pretty easily because the validator set is small and the validators are all top-tier validators. But at the same time, it creates a lot of centralization and also security risk, which is kind of debatable. Some can say that because it's top-tier validators, it's more secure. But at the same time, because it's few players, it makes also the system more susceptible to risk. Then the other end, this approach, which is like decentralized liquid staking, something like Rocket Pool, where the decentralization element has been being worked upon. The focus was more on decentralization, but then it came with a huge trade-off of scalability because every validator before the Atlas upgrade had to deposit 16 ETH worth of collateral. After the Atlas upgrade, it was 8 ETH of collateral. Now, the challenge with that is if you deposit a large amount of ETH, it becomes very difficult to find validators very fast who are willing to provide this large amount of collateral. Then came the second wave of liquid staking, where this year a lot of protocols are coming into the space, which was DVT-based liquid staking. In that one, at least theoretically, no DVT-based liquid staking is live on mainnet yet, except KStack. We're the only one which is live on mainnet. So theoretically, most protocols took this approach, where now, I'll explain like DVT in more detail, but the idea was that now every validator, because of DVT, instead of 8 ETH as collateral, they can bring 4 ETH of collateral. That seemed to have solved, theoretically, the scalability issues. But for me, even theoretically, it's very tough. I feel like 4 ETH collateral is not a small bond that you expect from a validator. I've run a staking service company before. When you're an infrastructure business, you don't want to keep buying more crypto assets on your balance sheet. You want to run up your infrastructure business. That's why that approach even is not very scalable. Got it. Yeah, that's super interesting. To your point, one of the biggest issues right now in the LSD space is centralization concerns. In particular, Lido is now, its stake is approaching the 33% threshold in which finality could be theoretically delayed on the network. You mentioned one of the features that sets Klaystack apart is the distributed validator technology or DVT. It would be interesting to hear you talk about what that is at a high level and how that enhances the security and decentralization of Ethereum. Sure. This was something that Vitalik discussed last year. DVT stands for distributed validator technology. Now, in any liquid staking without DVT, what happens is, when you stake or when you deposit these ETH, every validator requires 32 ETH. This 32 ETH is given to a validator who is operating these validator nodes. Now, if tomorrow, if the machine is offline, if they do double signing, if they do any malicious transaction, then you get slashed or you miss attestations. So, that's the reason no liquid staking protocol has been able to decentralize the validator set fast. Because if you start staking to, let's say, hundreds of validators, then what if they go offline? Then who's going to be responsible for that? Now, with DVT, what happens is, every node is not being run by one operator. Now, imagine like a consensus or a fallback within that node. That now, each node, I mean, you can define different thresholds, but in our architecture, we have defined four. I'll come to that. But in our architecture, we have taken a threshold of four. So, every node will be operated by four operators. So, now, as long as three are working well, you are never going to lose any attestations, even if one is offline. And if anyone wants to do, like if anyone do malicious transaction just by themselves, it's not going to work. Even if they want to do malicious transaction, all four has to go nude and do the same malicious transaction. So, the chances of slashing theoretically becomes extremely low. What we have done is, so we are working with both the players, SSV and Obole network. Right now, we've launched the minute with SSV. And the way we will be designing our clusters in the phase two is, it will be a combination of home stakers and professional validators. So, if OFAC sanctions any of the professional validators tomorrow, home stakers can take it over. If home stakers lose internet or have some connectivity issues or whatever, then the professional validators can take it over. That way, we do not hit any scalability issues. But even then, there is one issue that still remains, like what about collateral, which again, like most of our competitors have come up with for it as a minimum bond slash collateral. To overcome that, we have come up with this new concept, a very innovative concept called VFPs, which is validator funding providers. Think of VFPs as capital underwriters or risk underwriters. So, VFPs can underwrite this bond for validators who have been performing very well. And we have this system by which all the performance data is going to be on-chain on layer 2s. So now, as a VFP, you can see how each validator is performing on testnet, let's say, on any other chain or whatever. What's their setup? And then you can choose to underwrite their bond. And even here, you are not just underwriting bond. This space was downloaded via Spacesdown.com. Visit to download your spaces today. With single validator, rather again, like cluster of four validator. So, as long as three will remain honest, it's going to work well. And then we have a very active monitoring system. If, let's say, any of the single operator is dishonest, then we can rebuild the clusters very, very fast to have another operator joining in. And this is until the operator setups of four. But there has been a discussion going on in the Staker community where they... discussing if they can change the max effective balance from 32E to 2048E, which means like every evaluator will have 2008 instead of 32. If that happens, then this architecture becomes even more bulletproof because then instead of four operators operating a node, we can have like, let's say 16 operators and then like as long as nine are operating well or 11 are operating well, we will not have any issues. So that way, we solve the decentralization or centralization issue by having a large set of evaluators. Then at the same time, because of VFPs, we do not hit any scalability issues. And because of DVT, we get security. So that way, we are working on solving this LSD dilemma. Nice, super interesting. Yeah, in crypto, we definitely see a lot of these trilemma dilemmas across bridges, stablecoins, blockchains, and LSDs as well. And so, yeah, it's interesting that with the DVT technology, you're saying it kind of removes the single point of failure that exists today with some of the more centralized validator sets. And with the DVT, you could have, I guess, four different people joining to become the validator. And if any single one of them fails, if the other three are still operational, you wouldn't be exposed to that slashing risk. Is that correct? Right, right. And even if like, let's say two are offline, then also you're just like missing some attestations. But the cluster can be rebuilt again, like very, very fast to have, because there will always be operators in the waiting queue who like want to be in. So if anyone is offline, again, like system can be very fast, that if you perform below a certain threshold, then the new operator comes in in that cluster, which is not actually possible. Like in the traditional architecture, you can't just like, say that, or you can't change the operator without exiting a node. And here you can. Right. And yeah, I think we just also just saw recently that LIDO was slashed for about 20 due to some node operator performance issue. And with their design, I think they have an insurance fund that will cover some of these slashing events. In the case of Claystack, say there were to be a slashing event, is there any mitigation measures in place or like an insurance fund that would cover that slashing risk? Yeah. Yeah. I mean, we just like launched five weeks back. So it's hard to build an insurance fund. But like, we have multiple methods. So one is like, if the cluster is comprised solely of professional validators, then these validators can make us full or make the users full in case of any slashing event, which is an isolated slashing event, as long as it's not non-isolated. If the clusters are a combination of home stakers and professional validators, then again, users never take the burden. The VFPs take the first slashing hit, because they are underwriting this risk. So as a protocol, protocol never takes any slashing risk or never passes that slashing risk to the users. Got it. That makes sense. And so right now, you just launched, like you said, like five weeks back. Can anyone come to Claystack right now and start operating as a node operator? Or is that still permission in the beginning? Yeah, in the beginning, it's still permission. But we are actively taking the request. There is a node operator form that anyone can come and fill it and start accruing some performance on the testnet. So that when the phase two goes live with VFPs, VFPs can actually assess these performances on testnet, see more information about those variators, and then underwrite their bond. And if they want to self-underwrite that bond, that's also fine. But I don't think that that would be a very scalable model. But we are actively, yeah, we are actively taking the request. So if anyone wants to be an operator and feel like you're not able to get into any liquid staking that easily, please come to Claystack. I know this journey. I've been a variator and I know how hard it is. Once you become like a big variator, then you keep becoming bigger and bigger. And the smaller variator just like goes out of the picture. That's the sad reality in variator space. It's a very brutally competitive space. And there are so many hundreds or thousands of technical variators or variators who are very technical, very savvy, but they do not have enough capital to put send delegation. So that's why they never come into the active variator set and they never like gets part of that journey. So we are here to help you out and make you active variators on team. Yeah. And in your opinion, do you see like a clear path to actual decentralization of these node operators? Just because as I think about it from more of a, I guess, institutional perspective, it feels like to me, LIDO still makes the most sense from an investment perspective, just because of its lending effect. It's already managed millions or billions of dollars of withdrawals and it has the most liquidity in DeFi. And so from a more rational perspective, would you trust a more upstart protocol like Claystack just for the sake of decentralization? Yeah. So it's not just for the sake of decentralization. It's, I think, what people, a lot of times what we miss is like the security issues that like when you have such a small variator set, just 30 variators, okay. And you have $16 billion worth state. Now, theoretically, that's the, like, that's one problem in crypto that people just like believe a lot of things. When they read documentation, they believe that like everything is coded already, where you'll find like 90% of the times the documentation is three generations ahead of the actual code. And that's the problem. Like when people think about like service level agreements, they feel like all of this is sorted. So imagine if there is one, just one big or massive isolated slashing event by particular variator. There is no way when you have $16 billion worth of each state. And let's say a variator loses like $100 billion worth. This is not like, we're not talking about crazy bull markets where something like Wormhole can make users full of $300 million hack. Now, if anything like this happens, most variators will not be able to make users full. And that's when like the insurance fund does not even like come together. So it's huge security risk. It's like, for now, it's okay because it hasn't happened. But that's the thing that when things don't happen in crypto, we stop assessing the risk. We feel like things are bulletproof, which most of the times is not the case. And at the same time, to support the early users, you're right. Like it's just like for a new user, they do feel like discomfort in, let's say, depositing in our new protocol versus established one. So there are two things or two, either one is on security, we are also audited by one of the top auditors called NetherMind. And then at the same time to support the early users, we launched this program. called IGD, which is Initial Governance Diversification. And we are giving actually pretty strong incentives than like most protocols out there. And then at the same time, what we have done is, if you see most protocols right now, they have different points program, where you actually don't know how many tokens you will get in the future. If the end of the program, the points are 100 million and tokens are 1 million, you're getting like one raise to 180 points become billion, winning one raise to, I don't know, thousand raise to one or different, different. So you don't know, but here in our program, you're directly getting incentives in the form of clear points, which will be redeemable one raise to one in future. And then we have a very unique model, where in most liquidity mining, what happens is it's always a depreciating curve, that the people who are early, they make the most yield and then it keeps going down and down and down. Whereas we do like a lot of interesting stuff there. We have like bonus boost every week. The caps are refreshed every week. It really depends upon like the demand. So we will be able to support the same base rate that we have right now, which is around 20 clay per ETH per week for quite substantial TVL as well. So I would highly recommend everyone to check out iGD if they are looking to deposit their ETH. Nice. Yeah, these early governance distribution mechanisms are a great way to get early into some of these protocols, get a voice in the governance. And we're seeing this also as a way of kind of vampire attacking these larger, more established protocols, like yourself and Deiba staking, where you're accepting the competitor's liquid staking token as a form of deposit. Yeah, we do. People do deposit REIT and STETH as well. Right, nice, nice. And I guess outside of this, where do you envision some of the biggest opportunities for liquid staking and DeFi? And for CST as well, do you see that being accepted as collateral in the markets and market making pairs indexes? Yeah, for sure. We are actively working on that. So it's just like a process. So first is like, we're working on one of the liquidity pools to deploy soon. So once the liquidity pool is live, then we are sticking to oracles to have the oracles ready. So as soon as like the liquidity is there and the oracle is there, then it becomes extremely easy for other protocols to partner. And then we have a model, which is also very unique in our governance diversification, that even the protocols who will integrate, the DAOs will also get incentives to integrate CSE. So we will have tons of utility for CSE. So there's the kind of short term play. In the long term, there are a lot more interesting things that can be done with liquid staking. As I said, this is the highest quality of collateral that exists on planet, or at least in crypto planet. So if you think about it, liquid staking primarily has three risks. One is the slashing risk. Then second is the smart contract risk, which exists across DeFi. Third is the price risk, that when you stake any asset, or if you buy ETH just to stake, and the ETH price goes down by 10%, you just lost two and a half year worth of yield. Now, today, you can still, even today, you can hedge all these three risks. It's just like, it's not cost effective. But eventually, this will become ultra cost effective to hedge these three risks. Eventually, the US treasury bills, like T-bill yields will go down. It will never, like it has never stayed at 5% before, it will not stay at 5% now. So eventually that will go down. And that will be an opportunity where you can build a structured product, hedging these three risks, giving people, not people actually, big capital like endowments, pension funds, stable without any risk where every risk is hedged. And that will bring like, I think multi-billion dollar worth of balance. Worth of liquidity. Yeah, to your point, that's one of the maybe small criticism is that today's ETH staking yield is less than the current treasury yields. And that's been sort of a slight negative in the current market. But yeah, I think eventually in the bull market, those yields will probably return and real yields will have to come down eventually. But also, what we're discounting right now, we're just looking at staking yields right now. Because again, like the on-chain activity has been lowest historically. Once the on-chain activity is active again, there are so many opportunities where liquid staking protocols would make more money. One is, for example, I mean, MEV is gonna be big. Then restaking, even though restaking has a lot of risks, I have talked about before in other spaces before in my articles. But eventually that will also create some additional yield. And then probably services like RPCs. So eventually I think the blended yield of liquid staking, right now the liquid staking, the only thing that liquid staking offers is composability. In DeFi, some yields are higher, but the base level yield is not. Eventually, I feel like the base level yield itself, and without pure DeFi, that itself will be considerably higher than if you run your node at your home. Yeah, and then I wanted to address some, maybe also the technical or smart contract risks for some of these liquid staking protocols. And for Claystack, you guys are right now distributing your governance tokens, but I imagine the path for full decentralization will be more of a progress over time in a roadmap. Right. And so is that something you guys think about in terms of making the protocol immutable one day, or going to full on-chain governance? Is that in the roadmaps? You're right, like governments cannot, the path to decentralization is progressive, rather than happening on day one. But as long as it has been taught very well in the beginning itself, then only it is possible. For example, in some protocols, the decentralization was never a focus. And now with public pressure, it's being worked on, but then it becomes extremely difficult. So we have that in our mind from day one itself. Yeah. But in terms of making protocol immutable, that I don't know if I can even answer right now. Because to me, it just seems very weird. There have been very, very few protocols who have immutable architecture. I think probably the ones that come on top of my mind is like Uniswap in every architecture, and Liquidity, and then like all the folks of Liquidity. But the challenge with that approach is, liquid staking is a bit unique, in the sense that as Ethereum upgrades happen, most of the dApps don't get affected. But liquid staking, new opportunities just come up. Like for example, if the max effective balance increases to 2048, if the number of validators are capped, or in a different manner. So those things change or gives new opportunities massively and like our goal is to break the boundaries of current technology like anyhow and do it again and again. So I don't know maybe like someday where we can say okay now the V1 of the architecture is immutable and we'll work on V2 but then that defeats the immutability part in the good second. Yeah so that's a tough one. Yeah for sure definitely a tough decision to make especially for earlier protocols when they're you know still fine-tuning their designs and encoding. You know as we as we approach sort of the final parts here just be curious to know what's next for Claystack? What are some of the key launches that users should be aware of in the coming months? So like our laser focus goal is to increase the use cases for CSE so you will see a liquidity pool very soon and then we have been like already speaking to so many LSD5 projects and like some have different requirements for integrations some have different timelines for integrations but it's all in plan. So in the coming months you will see like a lot of places where CSE will be accepted and that's the goal and then like the phase two where we will we will onboard like new validators or like once the VFP module is live then it becomes like completely permissionless anyone can come and run validator node as long as we have some performance data. Awesome that's super cool and exciting and you know for some of these DeFi integrations and partnerships will you be incentivizing those with the Clay token as well? Yes like for sure that's something that we really want to do and we are probably the only one where it's not just the user who will get incentives and ours will also get incentives to integrate CSE. So yeah if you for an example if you deposit ETH you get CSE you are like helping us like diversify the governments by having Clay points and then right now if you move your ETH and even then you lose some of the boosted points but then we'll whitelist all the integrations where if you deposit like let's say you deposit liquidity and LP pool for CSE and ETH so there you'll earn additional incentives so yes all the integrations at this stage will be incentive. Awesome awesome yeah cool and so for people who want to learn more you know just to catch up on what Claystack's been doing where they're where they're going where should they get started where do you want to interact them? The easiest way is like going to app.claystack.com and choose it here and see we have a reward center inbuilt where it's very self-explanatory to how much points you're earning what is the boosted point status this week and then if you want to keep following like the updates then Twitter is the best place which is claystack underscore HQ and if you want to interact with us then we always welcome new members like on our discord which you can again find from claystack.com yeah come say hi if you have any questions always there to answer. Great well thanks so much for taking your time Mohak we definitely learned a lot and I'm sure there's going to be a lot of excitement ahead of the CSE launch I'll definitely be keeping an eye out for some of those DeFi yields when they first launch Thanks David it was a pleasure. All right thanks everyone have a good day This show was brought to you by Exponential. 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