Fireside Chat: Alluvial CEO Mara Schmiedt at Variant LP Day 2023

A conversation between Variant General Partner Jesse Walden and Alluvial's CEO Mara Schmiedt

This Fireside Chat was originally recorded at at Variant LP Day 2023. You can watch the full video here. The following is a transcript of the conversation between Jesse Walden and Mara Schmiedt. The transcript has been edited for clarity.

Jesse: As you just heard, Mara is the CEO and Co-Founder of Aluvial, which is a development company behind the Liquid Collective. So, to start, it'd be great to hear your background, where you're coming from, how did you get involved in crypto in the first place, and how did you end up starting Aluvial?

Mara: Awesome, it's great to be here. Thank you, Jesse. So, a little bit of background: I've been working full-time in the space, since 2016-2017. I spent a lot of my time in the space contributing to the development of various protocols and solutions with a pretty heavy focus point on the migration of blockchains to proof of stake. And so [I] helped Consensus build out some of its international offices out of the UK and across Europe.

I spent a lot of time working with the Ethereum Foundation between 2019 and 2020 to support the rollout of Ethereum 2.0, so the migration of Ethereum from proof of work to proof of stake, and then helped lead the business and sales team within Bison Trails, one of the early and leading blockchain infrastructure companies that later got acquired by Coinbase in February 2021. So, loads of time spent in supporting the security and development and adoption of staking in the industry.

At Coinbase, actually, can you double-click on that? What were you doing inside of Coinbase after the Bison Trails acquisition?

Yeah, so following the acquisition of Bison Trails, Coinbase launched what became known as Coinbase Cloud. So, Coinbase's developer and enterprise-focused software arm focusing on staking infrastructure, payments, and other capabilities. I was the Head of Sales for that department, until we started Alluvial.

Great, so, you know, in the course of all that, you were way out in front, publishing research on staking. So, couldn't think of anyone better, really, to educate the audience here. I guess maybe a show of hands, like, how many people in the audience are familiar with the term liquid staking token, LST? Okay, that's actually a pretty good amount, but not everyone and that’s fair. So maybe just we'll start with staking generally, and then, you know, explain sort of what's going on in the world of staking: what is it, and then we can get into liquid staking specifically, and what's happening in that subset of the world, and how it's going to evolve. So, yeah, let's start with staking at a high level.

That sounds great, and I love to see all the hands in the room. So in a really simplified way, staking is really locking up tokens to contribute and support security in public blockchains. Some of the most prominent blockchains using this type of consensus mechanism or security mechanism are protocols like Ethereum, Solana, and others, that have either migrated or launched with this consensus mechanism in the last couple of years.

Staking itself is really an enablement or contribution to blockchain security. So, in a really simple way, liquid staking is a technology that has developed, I want to say, in the earlier parts of 2020. And really, the way that you can think about liquid staking is it's a receipt, that proves that you've staked your token on a blockchain network.

So, in a really simple way, you can almost think of this as something similar that you would see in the commodity space when you get a warehouse receipt, for example, for storing corn in a silo. And so, very similarly, you know, liquid staking is an onchain receipt or a digital receipt that proves that you have staked your tokens on a blockchain network, and you know, you can use those receipts in the ecosystem for other purposes.

Great, and so maybe we could talk a little bit, yeah, there's a slide here, sort of illustrate what's been going on in the staking world, and do you want to walk us through sort of what the landscape looks like right now?

Absolutely. Staking is actually the most consistent growing part of the blockchain ecosystem over the last two and a half to three years. Despite market downturns, we've actually seen participation in staking grow very consistently. And within that, liquid staking is actually the fastest-growing segment, and you can actually see that really nicely on the graph up behind me.

And so, the way that you can think about this is, you know, staking participation in a mature market is like accessing the risk-free rate, or the risk-free rate equivalent, of participating and securing blockchain networks in the ecosystem. And so, liquid staking within that has grown tremendously over the last couple of years. We've seen great solutions launch into the market that users have been really excited about using, and we can talk a little bit more about, about why that's the case, and why people are excited to use this technology.

Right, so I mean, speaking a little bit to our thesis as investors. In short, it's that at maturity, the market will come to view liquid staking tokens as just sort of fundamentally the better thing to hold versus the underlying asset, right? So, the market will prefer a liquid staking receipt of staked ETH versus ETH, right? And so, you know, that's our view, but I would love for Mara, for you to explain, you know, why do you believe that? Clearly, you must, if you're building this.

For sure. So let's use a simplified example for Ethereum specifically. So Ethereum today acts as a store of value, it acts as a capital asset, and it acts as a consumable asset. And so, you use Ethereum to pay for gas fees or bridging into L2 or other capabilities. And so, the way we think about this is actually the participation in staking today is constrained by two factors.

When we talk about traditional staking, you're locking up your tokens, they're locked up, you can't do anything else with them, right? And so, you could expect that the market equilibrium really hits a scale when either the rewards that you earn from participating in staking are outpaced by other opportunities that, you know, you can contribute your capital to, whether that's lending or other capabilities, as well as the general need in the market to use Ethereum as a consumable asset, so to pay for gas, to pay for transactions, to use it as a form of money or payment in the ecosystem.

Liquid staking actually makes that cap, that constraint, redundant. Liquid staking is an opportunity to both participate in securing blockchain networks but also have a receipt that actually gives users both liquidity as well as the option to use their staked Ethereum or other staked tokens for other capabilities and utility in the network. So, eventually, you could imagine a world where the capitalized market or the total utilization market for staking is much closer to the total market cap of the proof of stake blockchains that they support, right?

And today, as we just saw in that graph, the market's growing a lot, but it's, I would say, you know, it's early adopters, it's enthusiasts in large part who've gotten involved and started staking early, which makes sense. What does the landscape look like in terms of institutions coming online, and, in short, how do we get to that world you just described where the dominant mode of Ether or any other stakable asset is that you know, it is staked in majority?

For sure. So there's the first element, which is, you know, what are the users that we see in the space today? And a lot of the early adopters and what I would call, you know, the liquid staking market, have been crypto-native retail users, that have been eager to experiment and test out different products.

Really, today, I look at the space or the products that are available to different customer segments as a spectrum. On the left-hand side, you have decentralized, fully permissionless solutions that are direct-to-consumer. So, these are solutions like Lido or Stakewise or Rocket Pool, where a user can, you know, plug in their MetaMask or their non-custodial Ledger, they can use a dapp or interface to deposit their ETH, and they get a receipt in return. Most of these solutions today are not designed to support the needs of businesses and enterprises and institutions at scale. We can talk about that in a little bit more detail in a second.

On the right-hand side of the spectrum, you have enterprise-grade service and staking providers. The Figments and the Blockdaemons of the world that have built really robust security postures and capabilities to support the needs of institutions and enterprises in the market. Unfortunately, a lot of these products are today only supporting traditional staking solutions. You do not benefit from having a receipt or liquidity or utility in the market.

And so, one of the things, in opportunities that we saw, was combining the best of those two worlds: building a solution that would be able to meet the needs of enterprises and institutions with a heavy focus on compliance, security, and scalable commercials, while at the same time focusing on building the utility and the network effects that can ultimately turn a liquid staking token into the utilization layer on top of Ethereum.

So, you mentioned there are a number of staking operators out there, Blockdaemon and the like, who are built for, you know, institutional-grade staking, but they run the services in a sort of single-player mode, and what we want as a firm, and I think what other institutional clients want, is diversity. And that is one benefit of the sort of network you guys have built with the Liquid Collective.

It's also a feature of projects like Lido, but as you mentioned, you know, the early movers who've built these networks that have kind of diversity of staking operators under the hood have kind of maybe skimmed the surface on some of the other requirements that an institution needs. And anyway, so maybe we can double-click on what some of those things are, right? What, what has been purpose-built about the Liquid Collective to meet the needs of institutions like us?

For sure and maybe a little origin story to accompany that. So the Liquid Collective is really a decentralized protocol and community of contributors, integration partners, and others, that are supporting the development of an enterprise-grade standard for liquid staking in the market. Liquid Collective and Aluvial, as a software development company behind the protocol, actually originated in a really interesting and less typical way for most ventures that you would probably come across.

So as I mentioned, I used to work at Coinbase. Liquid staking became a priority within Coinbase actually quite a while ago, as the company recognized the potential of liquid staking and opening up new opportunities, market segments, and revenue streams.

At the time, we were working with a lot of partners in the space, and we saw an opportunity to actually bring market leaders together to build a solution that could meaningfully scale and that could be adopted as a standard across the ecosystem. So, Matt Leisinger, my Co-Founder and our CPO, who's in the audience today, was actually at the time leading staking products within Figment. We had very meaningful conversations with other industry partners, including Kraken at the time, and we recognized that we all had a common need for a solution that just did not exist.

When you are a publicly registered company like Coinbase, or you are, an enterprise or institutional-grade provider, you are cognizant that your customers have unique needs, right? We talked a little bit about sort of the sliding spectrum or scale of solutions that are available in the market today. And as we looked within these businesses to existing products, and liquid staking solutions and protocols like Lido and Rocket Pool, we noticed that none of these solutions actually support sanctions compliance and all the exciting stuff that your compliance departments, you know, really expect from you when you think about servicing your users and being in compliance with jurisdictional regulation and requirements.

We also found it really challenging within those businesses to figure out how to articulate counterparty risk, understanding who the node operators are that are running inside of these pools, what security posture or policies they follow, which jurisdictions they're registered in, you know, the system in general felt really opaque, and it was not clear how we would be able to account for that counterparty risk inside of these solutions.

And last but not least, there wasn't really a way to make money. A lot of these products today are consumer-facing, and so they're not really built to provide businesses a great integration experience or a set of APIs or commercial incentives to really do that in any meaningful way.

And so, instead of saying, you know, let's all build our own products, we actually leaned on some of the learnings we saw from successful collaborations in the ecosystem, like USDC is one of the stablecoins that really emerged with that model, and we partnered together. And so that's how Aluvial and Liquid Collective came to be, initially through founding partners, including Coinbase, Kraken, and Figment.

One of one of the things that, that sort anecdote I love is I think you guys all have read the book "One From Many" by Dee Hock, who's the founder of Visa. Today Visa is one of the largest companies in the world, lesser known that it kind of originated with a ownership structure that's not unlike that of the Liquid Collective.

And of course, this is very aligned with our thesis on making users owners. I think, you know, you guys have had a lot of success bringing Liquid Collective to market with third-party partners. Maybe could you talk a little bit about, you know, the process of getting these folks involved, the ownership structure, why that's important, in a little more detail?

For sure. I think Visa is a really interesting example and one that has guided a lot of our decisions, organizational philosophies, and values within the organization. If you think about it, Visa really acted as an enabling organization across different types of financial services providers to build, you know, the world's largest payment processing network and in many ways brought together competing businesses and other collaborators to establish that standard, to build that buy-in, and to scale that in a meaningful way.

When looking at the benefits of building a liquid staking solution, we spoke about a couple of the considerations here. So, you want to optimize for having widespread utility. What that means concretely is being able to use your liquid staking receipts across the entire market. Centralized platforms being able to accept a liquid staking token as collateral with prime brokers, but at the same time, being able to use them across DeFi protocols, lending solutions, or other capabilities.

And so, for us, Visa was very inspirational in the way that we brought together the organization. We recognized that building utility and liquidity in the market would require cross-platform interoperability. And so, making sure that many different types of platforms can integrate the solution felt really important.

We recognized that this is a market that supports really strong network effects, and so the more utility you build, the more demand for your product there is going to be. You create a flywheel by bringing different types of user segments and platforms together and servicing great user experiences.

And last but not least, and I think this is a conversation that will be relevant throughout the day, you know, building support for regulatory or compliance-related advocacy, especially in a market where we've brought together a lot of participants to help articulate some of the policy positions and compliance considerations across different jurisdictions. And so, we felt like this distributed, decentralized model would be the most effective way to accomplish those goals.

Yeah, that's great. And I think it hearkens back to the first sort of chat today, with Uniswap Labs and Foundation, right? This idea that, you know, you can have this underlying protocol with many stakeholders that can be sort of a tide to raise all boats, and then you have profitable businesses building on top. In your case, it's companies like Coinbase who are offering what, you know, the underlying protocol to their end users. They're able to step into the flow of value as, you know at the product layer because they're creating value for their end users, and separately, the protocol is creating a ton of value for them, right?

So, I think that's a common theme throughout the space, and that we've heard today, and, you know, it makes a lot of sense. It's also a theme that's, I would say, not totally clear, you know, in the market, and people often conflate the companies and the protocols, but in this case, I think it's a very clear delineation that makes a ton of sense.

For sure. We kind of heard it with Uniswap Labs and Uniswap Foundation. For us, it's really, we have a base-level protocol, and a set of APIs that plug into loads of platforms that can offer amazing experiences to their customers.

I kind of like to think about this as like the web3 equivalent to B2B2C in which case we're actually protocol to platform to user, and those user groups can be quite wide-ranging depending on the experiences and capabilities that these platforms provide.

Yeah, I like that. Let's break it down in terms of customers. Like, where is growth coming from? What are the different kind of user personas here, and sort of how do they break down in terms of their needs?

For sure. I'll caveat that our initial focus has really been on building the rails. For us, the rails are being able to have the protocol supported by a number of leading custody venues, MPC providers, self-custodial wallets, and supporting plugins and integrations across a number of institutional venues. And so, I would say the majority of the current customer types that we're working to support include institutional players such as hedge funds, traditional venture funds, and corporate venture funds, as well as now the structured product market that is emerging across both ETPs and ETFs.

Right, and yeah, I'd say with hedge funds in particular, I mean, so you touched on liquidity, right? Liquidity is the primary feature of a liquid staking token. There are other benefits as well, but maybe if you, if you play out sort of, I don't know, where we're going to be in a few years after the launch of ETFs, which of these segments do you think is going to be fastest to grow in the sort of near to medium term, and then long term, you know, how do you see the balance between these different personas?

For sure. I would probably say different types of institutional segments will optimize for different outcomes or different principles, or things that they care about mostly. Today, a lot of the early adopters are what I would consider crypto-native funds or long holding ETH participants, that first and foremost care about security and principal protection. And, you know maybe you can chime in on your perspective on [what] that side of the market is.

Yeah, well, I mean, you said it. I think, like, you know, for us, we're a venture fund. We are shooting for venture outcomes. So, you know, what staking gives us is a nice yield on the venture asset that we're holding, right, for the long term, and we're shooting, you know, in the case of ETH, we think ETH can, you know, can be, you return many multiples from where it currently is. That's the big prize.

And so, as you said, what we're most concerned about is holding on to the big prize for the long term. Security is most important, but we think the market is now mature to the point where we can optimize for that goal of long-term, you know, keeping eyes on the prize while earning yield, and so we should do that.

So, that's how we approach it, definitely sort of a security-first posture. I think there are other participants in the market today, crypto-native hedge funds, that, you know, they're trading, day trading, and, you know, long-term security is less important because they're, you know, they've got the stuff in, I don't know, hot wallets, and they care more about liquidity, right? So, I think that, you know, given liquidity as a primary feature, they've been early adopters as you say, but over time, I would expect that mix is going to change.

For sure, and I think we're starting to see that happen already, where, we sort of see new institutional entrants that actually cannot participate in staking traditionally today, because liquidity is quite an important factor for them, and so hedge funds are a really good example of a customer group that has appetite for a product that is both security and compliance-focused like our solution, to execute, you know, various trading strategies.

One of the most interesting and exciting things, I think that the ecosystem has spoken a lot about, is sort of the emerging structured product space, and as you think or extrapolate this out, just the maturation of the web3 financial industry more holistically. When you think about the ETP and ETF market, we just see a very natural fit for this type of product, right? Having redemption obligations makes it really difficult to use a traditional staking solution where, you know, sometimes entry and exit queues can take from multiple days to multiple weeks, and sometimes even multiple months.

Actually, maybe let's unpack that for the audience, like, why is that? Why are you, I think in the case of ETH, it's like weeks, right, to stake and unstake your ETH. Why is that the case, and then come back to why does it matter for the ETFs and structured products?

For sure. So, Ethereum is a really good example because it's a very complex and quite dynamic system. As we spoke about earlier, staking really has one primary function, which is providing security and integrity to blockchain networks. And so, when you think about Ethereum, Ethereum maximizes or optimizes for its security budget.

And so, one of the things that Ethereum has implemented is what is called a churn limit, and the churn limit controls, it's a parameter that controls how much ETH can enter and exit the network at any given point in time, or more concretely, how many validators can enter or exit the network at any given point in time.

It's a dynamic variable. As a result of this sort of restriction, which is basically a protection on destabilizing the system with too many entrants entering or too many participants exiting the network, the result has been that sometimes these activation queues—so, you know, staking your ETH and starting to earn reward—can take many, many weeks which is obviously very challenging if you're building a product or a solution that is trying to optimize for a good customer experience, or if you have certain redemption obligations, and the same thing is true for the exit queue.

So, sometimes the exit queue can take, you know, a day, sometimes the exit queue can take a lot longer, depending on who's coming in and out of the network, and it's really something that's quite difficult to estimate.

And so, liquid staking, I think, in many ways, just leapfrogs that complexity. If you are, for example, an exchange and you're trying to create a great user experience for your customer, locking up their ETH and not really knowing when they get it back, [is] probably not the best experience.

But when we talk about some of the institutional segments, like, you know, the structured product market, structured product providers have an obligation to fulfill customer redemptions over a certain timeframe, T+1 or T+2, and so you can't really guarantee those redemption timeframes if you're using a staking solution that is traditional, that won't let you access your ETH once you've staked it, as a product in the solution.

Right, and that comes back to the core thesis, why, at maturity, we expect liquid staking tokens to be the dominant form of holding, you know, any stakable asset. Okay, so let's talk about the biggest challenges, right? This is, you know, everything to date that we've discussed so far sounded rosy. What are the biggest challenges that you guys are facing to make this a success?

So what are some of the biggest challenges? I would say, probably first and foremost, just the regulatory landscape I think that we're operating inside of. We are a global solution, and so we support market participants across the world, but a lot of our partners are US-based companies, right?

We've taken a very proactive position on supporting the policy discourse in the ecosystem. We've invested quite heavily into some of the advocacy work that we've done with participants such as the Proof of Stake Alliance, Willkie Farr, [and] Fenwick. We had many GCs across the ecosystem participate in working groups that published the first legal positions on liquid staking in the context of federal securities and commodities laws, as well as the tax consideration and tax treatment, of liquid staking, across those jurisdictions.

So, that's one of the focus areas for us. We obviously encourage the discourse across the entire ecosystem. We believe that that is the strongest way to, you know, consider and move that conversation forward.

So let's also just take a look ahead at the exciting things on the roadmap. What are the big milestones coming up for the company that you're most excited about?

For sure. So, I would say today, our core strengths or value propositions are the things that we are excited to continue doubling down on. So, the first one is security. Our customers all care about it. As an enterprise-grade solution, for us, it's very important that we continue doubling down on our security posture.

For us, that concretely means continuing to invest in great solutioning and audits. We actually just completed our seventh audit which is a lot for a protocol that's only been in the market for a couple of months.

We are really excited to continue building out market-leading security standards and performance SLAs with the node operators that are in our active set today, including Figment, Coinbase Cloud, and Staked, but we're also excited to welcome new entrants on the basis of the requirements that we're setting forth and of course, open-sourcing that work so that we can raise the bar for the community and ecosystem more holistically.

And then, last but not least, we obviously always consider how we can mitigate some of the security risk, when you think about smart contract vulnerabilities and other things. We're working very closely with market-leading auditors to support that.

The second one is compliance. So, we have a global compliance policy. We have a really interesting model, and so, actually, every single platform that integrates or supports the protocol has to go through KYC, AML, [and] sanction screenings on their policies for their customers, and so we're excited to continue evolving the global standards that we're setting forth.

And then last but not least, our commercial structure and the product that we're building. So, we want to make it really, really seamless for people to be able to integrate our capabilities. Today, we have a number of different APIs that support integration, accounting, [and] reporting. We want to make it a really seamless experience, not just for our platforms, but also the users that they're servicing.

All right, thanks so much, Mara, for being here. This is great, and yeah, hope you guys, if you're not staking, are more excited about it now. Thank you.

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