In 2021, Ether Capital, a publicly traded company in Canada, became
the first to stake $50 million in Ethereum’s Beacon Chain, the
proof-of-stake blockchain that supports Ethereum. Since that time,
the company has doubled down on its ETH bet. Related Reading:
Ethereum On-Chain Data Point To Clear Skies Ahead Of The Shanghai
Upgrade With the upcoming Shapella upgrade, we sat down with Ether
Capital’s CEO Brian Mosoff to discuss this event, the challenges,
and the future of Ethereum as a global financial asset. This is
what he told us. Q: We spoke over a year ago about Ethereum 2.0,
its adoption, and the new challenges for the ETH ecosystem. What
has changed since that time? Is Ether Capital still bullish on
Ethereum? A: There were two big events in 2022 when I think back on
the year. One is the decline in asset price across all blockchains,
as well as the unfortunate blowups of some of the industry’s most
thought-to-be respected players (BlockFi, Three Arrows Capital,
FTX) and perhaps the loss of confidence that came with that from
institutional investors. These were investors that at one point
were considering building a position in the asset class and were
finally growing comfortable with the ecosystem. That’s one thing.
And the second big thing was the Merge. The Merge, of course, was
one of the biggest events in Ethereum’s history — the transition
away from proof of work, hardware electricity mining, towards proof
of stake, using the native token as a form of collateral to help
secure the network. And that was an update that took years of
research and collaboration across industry participants,
researchers, developers, and academics. It was unclear when the
Merge would take place and if it would even be successful. And for
those who stayed up all night watching that event, of which there
were many, it was a non-event, technically speaking, which of
course was the best outcome that could have happened. Meaning no
one noticed that the network switched. Anyone using the blockchain
had no hiccups. Everything went as smoothly as planned, and that’s
fantastic. The Merge also brought a new level of confidence to
Ethereum that naysayers, who were bearish on Ethereum or unsure of
Ethereum’s future and ability to upgrade it, put all those fears to
bed. Those were the biggest things that happened in 2022. Is Ether
Capital still bullish on Ethereum? One hundred percent. We’re more
bullish now than ever before. The Merge — the transition from
proof of work to proof of stake — proves that Ethereum is
going to remain the dominant smart contract platform. It’s still
outpacing all the Layer-1 competitors in terms of daily fees. And
now what you have is Layer-2s that are becoming their own mature
ecosystems that offer scalability solutions in the short-term for
those who want to use Ethereum but are being priced out of their
activities at the base layer. So, you’re seeing take up and things
like Optimism and the future that’s being painted through things
like the Superchain, which is really exciting. I’ve always
personally and professionally believed that Ethereum is the smart
contract platform. It is going to be the future of all this
activity. And for the last number of years, we’ve seen headlines
about Ethereum killers and how they’re going to be cheaper and
faster. And that value proposition is eroding rapidly, especially
in the latter half of 2022 as Layer-2s have really ramped up. We’ve
seen outages or downtime with blockchains like Solana, and we’re
just not seeing developers moving into those ecosystems. They’re
staying on Ethereum or they’re building on the Layer-2s, and that
just points more and more towards Ethereum as the best-in-class
blockchain with a secure base layer vs. other activity taking place
elsewhere. But you know, the future to us is going to be that
you’re going to have ETH as collateral for all sorts of activity
and nothing is really going to compete with that. So, execution can
move on to Layer-2s, we’re going to start to see more rollups and
ZK emerge — and this is all pointing towards Ethereum at the center
of all this activity. There’s still millions-of-dollars in daily
transaction fees being paid at the base layer. Nothing is even
coming close in terms of a competitor blockchain or a Layer-2.
Nothing’s coming close to the activity that’s taking place on
Ethereum. Overall, we’re very bullish, excited for the future, and
now that we’ll have liquidity on staked ETH, all things point
towards an Ethereum future. Q: The upcoming Shapella upgrade was
called the “first major tune-up since the Merge” by your team; why
do you think this is such a significant event? Do you believe more
investors will be drawn to it? And what are the ramifications for
ETH as a financial asset? A: Retail investors and solo
stakers have been able to participate in staking to date and
perhaps some have wanted liquidity on their ETH, perhaps not. But
generally, the participation has come from individuals rather than
institutions. Ether Capital has been able to stake, we’re a public
company and structured as a corporation, so we have a fair amount
of flexibility over how we manage our treasury. I think that
Shapella will mean that a new class of investors will be able to
participate in Ethereum and staking, and that’s because the lack of
liquidity was a missing puzzle piece for any type of structured
product that would be offered to a different set of investors. For
those investors who don’t want to hold the asset directly, instead,
they want to buy some structured product through their traditional
brokerage account. How have they been able to do that? That has
been tricky, and this is the last piece of the puzzle I think, for
them. The first was seeing the transition from proof of work to
proof of stake and having certainty around that upgrade being
successful and nothing going terribly wrong on the launch pad. And
we’ve checked that box. Now what we need is liquidity where if you
wanted to build a structured product, you could do so. And you
know, closed funds, ETFs (Exchange Traded Funds), whether the
liquidity is daily, monthly, quarterly, that’ll be up to who the
structured product manufacturers will be. But this is an important
piece of the puzzle from a regulatory standpoint. I don’t think
there are questions around if the upgrade will be successful the
same way those questions were asked when the transition from proof
of work to proof of stake was about to take place. This is going to
be more about checking off this last box to ensure that liquidity
becomes available on staked ETH even though it might take some time
to be worked out from custodians and staking providers. And there
could be a bottleneck, if let’s say a large amount of staked ETH is
attempting to be withdrawn. You know whether that can happen in a
short time period like a few hours or within a 24-hour period.
That’s not clear yet. We haven’t seen how much of the $35 billion
that’s currently staked is going to be withdrawn. But that
bottleneck, if there is one, that will clear up pretty quickly. The
ecosystem will also put in place whatever technology is needed for
structured product manufacturers to monitor the staking activity
and figure out how to move between staking an undertaking with as
little friction as possible, so that is a big thing for the
ecosystem. I do think that more investors will be drawn in once
Shapella occurs. If you could hold Ethereum with a low time
preference and generate this yield while helping secure the
network, that’s a very strong value proposition. Historically, the
only way institutions got exposure was through equity in picks and
shovels, private companies like FTX or Celsius Network that
operated in the space. Attention is starting to shift to token
exposure because investors realize there’s less counterparty risk
and they can generate a return through activities like staking. I’m
constantly reminding investors that the assets at the base layer
(i.e., ether and bitcoin), are there to remove as much agency as
possible in rent extraction. And despite centralized businesses
failing, it’s unlikely that the protocols themselves are going to
fail. Investors may shift their strategy a bit and recognize again,
the ecosystem is here to stay. The asset class is not going away.
But maybe the way to play it isn’t in private investment. It’s
actually just finding an exposure point; an access point to the
assets themselves. And if you can make that productive along the
way, that’s even better. Q: There is much uncertainty about the
short term as some ETH stakers could dump their assets into the
market. What’s your view on this scenario and the long-term
scenario? Are people holding their ETH? What is Ether Capital doing
on both timeframes? A: Of course, no one has a crystal ball on how
many ETH stakers are planning to sell the moment that they get
liquidity. I don’t think it matters that much. I think that this is
just noise that will go away, even if there is some short-term
selling. I think very quickly the price would rebound because
people are seeing the opportunity around a best-in-class smart
contract platform and the ability to generate yield. That’s a very
strong value proposition, especially against the current macro
environment. I also think that most of the stakers who have chosen
to lock up their ETH are aware that there was a lack of liquidity
and they’re long-term believers in the ecosystem. They weren’t
participants who were looking to trade in-and-out of the asset.
Anyone who wants to trade in-and-out of the asset is probably doing
so and looking for returns higher than 4% to 6%, which is roughly
what you get on staked ETH. There are people who have, in my view,
no plans to sell their ETH position any time soon. Also, I’d ask
those people what they plan to do with the funds if they choose to
sell. Are they going to go buy U.S. dollars or are they going to go
convert it into Bitcoin or another token? That seems unlikely to
me. The best bet here is still low time preference, long-time
horizon on ETH. Stake it and be patient and ride out the
volatility, ride out the FUD. That’s where Ether Capital stands.
We’re currently staking 36,000 ETH out of our treasury and we’d
like to do more and to do more would require confidence that we
would have liquidity should we ever need it. And that to us is
really exciting. I believe that long-term more ETH is going to get
staked, not that there’s a big sell off here. Q: We already had The
Merge, now Shapella; what’s next for ETH? More importantly, what’s
next for this cryptocurrency as it evolves into a financial asset?
With high-interest rates, banks collapsing, and high inflation,
will investors flock to the Ethereum ecosystem to generate yield?
What are you most excited about ETH and the ecosystem on financial
terms? A: One thing I want to draw attention to are questions that
we are asked a fair amount of the time by investors. If the yield
is lower on ETH than what you can get through some traditional
money market fund, why would investors pay attention to it? Why
stake ETH instead of just going and buying something else that pays
out a 5% to 6% dividend? And to me, it’s kind of an obvious answer.
Those who buy ETH and stake the asset believe in the value
proposition of ETH as a settlement layer for various assets and
activities. Then on top of that exposure, they’re going to generate
a yield. For anyone who’s ignoring the long-term potential of
Ethereum, or the future of what a blockchain can be and is just
looking at that 4% to 6% yield, I don’t think that they’re going to
thread the needle on this opportunity. They’re going to say, that
doesn’t make any sense for me, that people who have bought into a
blockchain future, an Ethereum future, who can ride out the
volatility, who are not momentum traders, will be ones who are
excited by this. So, what’s next for ETH? Well, it’s going to be
about more scalability. The base layer has been about that
transition from proof of work to proof of stake. Now it’s closing
the loop on the liquidity around how your staking position can be
managed, but that doesn’t necessarily address scaling. To me, the
most exciting thing is to see Layer-2s emerge with various pieces
of technology to enable scalability, to enable privacy inside of
transactions. That’s something I’m very personally passionate
about. Unfortunately, I’m not a developer so I can’t contribute any
code to it, but I do think that privacy tech is very important as
well as scalability. I’m excited for that to emerge over the next
few years. I’m also excited — this isn’t a ‘what’s next for ETH’ —
it’s more the ecosystem, I think we’re entering a phase where the
uncertainty around which blockchain is going to win is starting to
dissipate and it’s becoming clearer that the number one and number
two assets by market cap are bitcoin and ether. If you want to be
cheeky, you can make an argument that they (Bitcoin and Ethereum)
are some of the worst pieces of technology, or the slowest tech,
out there. But they’re sticky assets. They have hit that inflection
point where they’ve crossed the point of no return, where the
developers in those ecosystems aren’t leaving. You know, Bitcoin is
not getting supplanted by Litecoin or anything else. It has
cornered the store of value, shoulder tap checks on central banking
policy, escape valve for macro. Bitcoin cornered that and I think
Ethereum has cornered the smart contract, DeFi, metaverse, NFT
activity. And I’m excited to see a wider society who doesn’t eat,
sleep, and breathe this stuff or live on Crypto Twitter finally
come around to investing in assets that they can have certainty
will be around in the next 5 to 10 years. On top of that, less
speculation and feeling that they’ve missed out. The first 100 or
200 million people who have bought into the asset class, who
already believe in bitcoin and ether, already know why those things
exist. The question is when does the rest of the world wake up? And
I think that that’s coming, and the next cycle is going to be less
speculative. I hope it’s less speculative. I hope that there’s less
froth, scams, and “flavor of the month” assets while these
scalability and privacy pieces of technology begin to emerge around
the ecosystem. My last comment is about U.S. banks collapsing and
all this pointing back to why crypto exists. These are politically
neutral, globally managed and developing technologies and the
internet of money. Bitcoin was born January 3/09 with the headline
in the Genesis block “Chancellor on the brink of second bailout for
banks” written in the London Times, and that headline still holds
true with where we’re at today. You’re watching central banks try
and backstop the failure of regional banks and realize that the
world is waking up to a system, a monetary system of fractional
reserve banking, though it enables a lot of good, also comes with a
lot of downsides. And we’re seeing that system fracture and so
people will turn their attention back towards this space. Q:
Growing concerns about tightening regulations could hurt the
industry; why bet on ETH still in this environment? How does a
public company betting on ETH prepare for a scenario where
regulators come after crypto? There are many, but what do you
believe is the biggest challenge facing the industry regarding
regulation, and how is Ether Capital working to address it? A: I
think clarity is going to be a good thing, whether it’s the exact
framework that the industry wants, remains to be seen. Will ETH be
overseen by the CFTC or the SEC? That’s for lawyers to battle it
out in court. But that won’t really affect the Ethereum ecosystem
too much. It’s going to be more about the access points and how you
monitor the participation at the retail level of who can buy the
asset, what type of disclosures are appropriate. But I think if we
can put to bed this idea that governments are going to ban the
asset class, that would be a good thing for the industry. I do
think that some governments are going to start to feel very
threatened by these assets and attempt to ban them. But you can’t
ban things at the protocol level. So again, you can just ban or
regulate the access points, but the protocols themselves will do
fine. You know, if there’s short term downward price pressure
because of statements by the SEC or action from the government in
specific jurisdictions, that’ll be unfortunate. But I have a friend
who once said betting against these open blockchains is like
betting against the civil rights movement in the 60s, and I think
that’s accurate. My frustration with the banking system is when
people say, you know we can’t have these open systems, it’s not
good for anyone, I turn to them and say, we have this very
bifurcated financial system. It’s two-tiered, you have accredited
investors and non-accredited investors, and everyone is frustrated
by this. Retail investors are frustrated that the rich keep getting
richer, that they have access to all the private deals and that
they can only participate at some point down the line when those
companies go public. The hedge funds and the venture capitalists
have made their 10 to 1000 X returns. If we’re ever going to get
away from that system into something better, what is that going to
look like? And to me, crypto is that hope for humanity in the
future to have a more equitable group of participants. Q: How does
a public company betting on ETH prepare for a scenario where
regulators come after crypto? A: Because we [Ether Capital] don’t
face retail directly in the sense we don’t hold an individual’s
ether on their behalf, we don’t stake it on their behalf, the
regulatory conversation is a little bit removed from us other than
we’re champions of the industry and want it to do well. It seems
like this question is about ETH specifically, or smart contract
platforms vs. bitcoin, and I think we’re heading into a point of
time where there may be some questions from ether naysayers who
say, “ether is going to be a security and that’s going to destroy
it,” but I don’t think that’s true. I think the bigger question is
going to be around governments and how they feel about these
assets, digital bearer assets being outside of their control, and
does it threaten their sovereignty. Bitcoin will get pulled into
that conversation, very much so. Same with Ethereum. That is the
thing for everyone to be paying attention to. That is the
conversation. That’s the elephant in the room that in some ways the
industry has always wanted — to challenge central banking policy.
At the same time, we are 13 or 14 years into digital bearer assets
existing, I don’t think we realize yet how bloody this fight may be
or how intense and subversive it’s going to be. I think that is
going to be what transpires across the entire ecosystem and will
trickle into self-hosted wallets. Questions around how much people
are allowed to transact on their own, are governments going to try
and put maximum fiat amounts on what can be transferred into a
self-hosted wallet? Again, it’s not going to matter if it’s
Bitcoin, ETH or if it’s going to be the entire industry. Do people
have the right to transact outside of state control? That
conversation to me is the most important and fascinating one that
will play out over the coming few years and throughout the decade.
The irony is that as the price appreciation of bitcoin and ether
continue, that conversation will boil to a head much sooner than
people realize if governments and regulators feel their sovereignty
being threatened. Then the question becomes how is the capital
working to address it? I mean, we’re one of the founding members of
the Canadian Web3 Council and I’m the president of the board. I
spend a lot of time doing education outreach, advocacy work both in
Canada and a little bit in the U.S. when I’m there. I think it’s
important that industry veterans, ones who understand the nuances
and complexities of the asset class, are in rooms during these
types of conversations with politicians, regulators, and making
sure that they’re being thoughtful about the ideas that they’re
wanting to push on the industry. It’s easy to look at things like
Tornado Cash and quickly say “no one should be using Tornado Cash
unless they’re a criminal or trying to launder money.” It’s easy to
come to that conclusion, but people in the industry will say, well,
hold on. Let’s be a little bit more thoughtful about it. You know,
when you send someone $5, do you attach your last three years of
banking statements along with the transaction? Or when you walk
into a store and pay for a coffee, do you attach to that recipient
all your financial history? Do you expose yourself in that way? And
of course, the answer is no. There’s a good reason to want to have
privacy. The question will be, how do we build technology that
enables appropriate use of that privacy while still achieving the
objectives of some of these government agencies that want to make
sure you know the wrong people aren’t using it to their own
advantage? That’s what’s tricky. It’s not easy but being in the
room to make sure that there’s balanced approaches being taken by
these government agencies is very, very important. And I spend a
fair amount of my time on that and will continue to do so for the
foreseeable future. I also enjoy it. Q: With the ongoing banking
crisis in the U.S., how do you see Ethereum and Decentralized
Finance (DeFi) as potential solutions or alternatives to
traditional banking systems? A: I think a lot of people who
understand DeFi and the value proposition are quick to point out
that the problem with the meltdown of FTX, Voyager and all the
others in addition to the current banking system, are problems with
centralized control where users don’t have purview into what’s
happening inside that black box. If DeFi offers a solution to that,
it has a different approach. It uses technology and transparency to
mitigate a lot of that risk. Unfortunately, I think many regulators
look at those alternatives and view the tech as being so far out of
their grasp for them to see how it can be a solution to the
ecosystems that they’re familiar with. As a result, they’re
resistant to that world encroaching on their territory. Would that
be nice if we could just tokenize securities and say, “You know, we
don’t need clearinghouses anymore, we don’t need the DTCC to exist
anymore, we can just use this as a settlement layer”? Maybe, but
that feels very far away. And so DeFi, I think will be insular for
now, self-referential between all these assets floating around, all
the crypto digitally native assets. But I think you’re going to
start to see banks figure out how to test private versions of
Ethereum. On that note, how do you test private versions of Defi?
I’ll be the first one to say that KYC in DeFi is called CeFi
(laughs), but I think that it’s a good first step because if they
learn how to use a wallet, if they learn how to fork the code and
run a private version of Ethereum, over time they will move into
the open, permissionless system. To sum it up, any participation on
their part in the short term, even if it’s using the technology but
in a way that makes them comfortable, is a good thing. Rome wasn’t
built in a day. We can have the crypto natives on one side doing
their self-referential activity in all these DeFi protocols. And
long-term, if financial institutions that we’re familiar with want
to participate on-chain and they maybe use some zero knowledge to
preserve their activities, that’s great. The whole point of
blockchains is that anyone can participate, and it doesn’t
distinguish between who the users are. I also think it’s very
important that people recognize blockchains are only going to work
if they are credibly neutral. The second that you start creating a
multi-tiered set of transactions (i.e., this one came from a
regulated financial institution and that’s an end user) the value
proposition will change because you’re going to break fungibility,
and fungibility is critical to the global participation of these
assets. That the protocol doesn’t distinguish between end users and
only cares that a transaction is valid or invalid. Nothing more,
nothing less. No more gating and no more bifurcation based on a set
of criteria according to the political whims of a specific
jurisdiction. That is very important to the success of any
blockchain. Related Reading: Bitcoin Market Shows Signs Of
Euphoria, Will $30,000 Be Lost? I’m excited about the future. I do
think that there’s a bumpy road ahead, but anyone who’s been around
this space long enough knows this has always been a bumpy ride. It
will continue to be a bumpy ride, but that’s okay. We’re here for
the long term and we’re here for a better future.
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