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.
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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.
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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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