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Welcome to Crypto Long & Short! This week, Christopher Perkins of CoinFund argues for a standardized staking rate on the Ethereum network and explains a few of the many use cases that would ensue. Then, Alex Tapscott, author of Web3: Charting the Internet’s Next Economic and Cultural Frontier, makes the case for buying ether in the event of a spot bitcoin ETF approval. As always, get the latest crypto news and data from CoinDeskMarkets.com. – Stephen Alpher |
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Five Reasons Why the World Needs a Standardized Ethereum Staking Rate |
Staking rates are to crypto what interest rates are to traditional finance. Ethereum’s transition a year ago to proof-of-stake with “The Merge” was an incredible accomplishment for its ecosystem that delivered obvious enhancements to network security and reduced its energy footprint by 99.95%. This shift, which made it so validators are rewarded with both protocol emissions and priority transaction fees, also unlocked something perhaps less obvious but absolutely groundbreaking for Ethereum: the introduction of a native interest rate. Staking ether (ETH), the ecosystem’s native token, now pays an interest rate. This forms a sort of bedrock layer – similar to the role interest rates play in traditional finance – that could power a new, global staking economy. For this to work, though, there must be a reference rate, so investors know what the benchmark is at any given time – a reliable number derived by observing the mean, annualized returns across a comprehensive validator population. A standardized staking rate built on social consensus will serve as a foundational pillar of the crypto economy. It will catalyze new financial instruments and capabilities and unlock a new wave of consumer and institutional adoption. Here are five reasons why the world needs a standardized staking rate: |
| Benchmarking: Standardized interest rates are foundational across global finance. They serve as reference rates and performance indicators, and enable derivatives that serve as risk assessment tools. A standardized benchmark would help market participants clearly identify relative performance to Ethereum’s benchmark rate. Like an exchange-traded fund (ETF), which integrates efficiently into traditional financial securities infrastructure, a standardized staking rate benchmark would neatly fit into traditional systems – just like any other fiat reference rate. It would be a big deal for institutions. Today, institutional staking providers pay clients variable, bespoke, annual percentage yields (APYs) or floating rates. Offering yield returns relative to a common reference rate would give end users greater transparency and confidence about the floating returns they are set to receive. Real Yield: Ethereum’s real yield competes nicely with its traditional finance peers. Over the last year, changes to the protocol shifted the supply mechanics for Ethereum, making it potentially deflationary. As a result, when looking at the staking rate through a real yield lens, it can compete with its fiat peers. In time, investors seeking to maximize risk-adjusted yield will need to seriously consider deploying capital for the real-yield opportunities across Ethereum’s staking economy. Total Return Products. When it comes to exchange-traded products (ETPs) and other structured instruments, market participants do not want to limit their market exposure to ETH; they prefer products that deliver total return ETH, which includes the staking rate. While liquid staking tokens may deliver variable rates for crypto native market participants, a standardized staking rate could unlock a new class of financial products (synthetic or otherwise) that deliver ETH plus staking, a total return that would have strong institutional appeal. The holy grail of ETH ETFs will be the one that also pays the staking yield, and a standardized benchmark for that yield is essential for this offering. Risk Management. A standardized staking rate will enable market makers to create a forward yield curve and offer liquidity across a vast array of derivatives products, including swaps, futures and options that can be used for hedging and other risk management use cases. In traditional financial markets, interest rates alone underpin $500 trillion in notional swaps exposure, and derivatives such as these enable stakers to hedge against the volatility of the benchmark while also allowing market participants (on the other side of the trade) to hedge against future rising gas costs or seek real yield. Derivatives will also allow institutional staking providers to offer fixed-yield rate products, which are few and far between in crypto but widely available in traditional finance. Markets grounded by hedgers tend to drive liquidity, and a standardized staking benchmark will serve as a foundational building block for a new class of derivatives markets. Valuations. Using a discount rate to calculate a valuation is a common method in finance and investment analysis, especially when evaluating the worth of an investment, business or financial instrument. A standardized staking benchmark that serves as a foundation for a discount curve will help inform valuations across the Ethereum economy. This would not be possible without native staking rates. |
Ethereum’s transition to proof-of-stake introduced native interest rates to the ecosystem for the first time. Industry adoption of a standardized benchmark has nearly infinite use cases and will be an important step in the evolution and maturity of crypto markets. Like traditional markets, interest rates can potentially drive crypto native markets forward and unlock a new wave of global adoption. |
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With All Eyes on a Spot Bitcoin ETF Approval, Don’t Sleep on ETH (or ETHE) |
A federal judge last month severely undermined the U.S. Securities and Exchange Commission’s (SEC) decision to reject converting the Grayscale Bitcoin Trust (GBTC) into a more alluring exchange-traded fund. The decision has many analysts now pricing in approval of a spot bitcoin ETF sooner rather than later. Analysts at Bloomberg put the odds of approval this year at 75%. Market prices show this optimism, too, and not just for Grayscale’s bitcoin product. The Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE) had traded at massive discounts to NAV – industry jargon for the value of all the bitcoin and ether, respectively, that they hold. But they’ve narrowed significantly. GBTC went from trading at a 46% discount to only 21%, while ETHE went from 59% to 29%. So, with everyone penciling in a bitcoin ETF as a matter of when and not if, bullish investors should just buy GBTC, and wait for a final approval, right? The theory goes that the discount will all but evaporate (as open-ended ETFs typically only trade at narrow differences to NAV), and as a bonus the underlying asset (bitcoin) might catch a bid – win/win. Perhaps. But the bigger opportunity could be Grayscale’s Ethereum Trust. My view is if a U.S. spot bitcoin ETF gets approved, there should be little argument for holding up a spot ether ETF. And Grayscale itself has said it plans to convert ETHE and other products to ETFs. I wouldn’t hold your breath when it comes to SOL, ATOM or any other smaller crypto asset, but we have first-hand knowledge that ETH ETFs work. In fact, ethereum ETFs launched within weeks of the first bitcoin ETF. Regulators in Canada were comfortable with the product because there is a regulated futures market for ETH, allowing market makers to hedge risk while creating and redeeming units. I suspect that following a BTC approval, an ETH approval would not be far behind. ETHE’s discount is greater than GBTC’s, meaning a far greater arbitrage opportunity. Also, ETH markets are less liquid than BTC, so the incremental buying from an ETF could have a more material impact on price. And, in my view, ETH has better upside as the leading platform for Web3 development. Futures ETFs have badly underperformed spot markets. Spot ETFs don’t have this problem. They’re a safe, sensible solution for investors and like many, I expect they’ll be approved. Just don’t take your eye off ETH (and ETHE). |
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From CoinDesk Managing Editor Stephen Alpher, here is some news worth reading: |
| PRESSURE ON GENSLER: Speaking of a spot bitcoin ETF, SEC Chairman Gary Gensler – widely reported as the person standing in the way of approval – is headed back to Capital Hill on Wednesday to testify before the House Financial Services Committee. Ahead of his appearance, a bipartisan group of four from that committee sent Gensler a letter urging him to stop blocking a spot product. Reps. Mike Flood (R-Neb.), Tom Emmer (R-Minn.), Wiley Nickel (D-N.C.) and Ritchie Torres (D-N.Y.) argued a spot bitcoin ETF is “indistinguishable” from the numerous futures ETFs for which the agency has already given its blessing. “The SEC's current posture is untenable moving forward," they wrote. SAYLOR ADDS: MicroStrategy (MSTR) on Monday announced the purchase of another 5,445 bitcoins between August 1 and September 24. The buys cost just over $147 million, or an average price of $27,053 per bitcoin and the company now holds 158,245 bitcoins worth more than $4 billion. Not that he needs more reasons to be bullish, but MicroStrategy Executive Chairman Michael Saylor – the man behind his company’s massive bet on bitcoin – earlier this month lauded the Financial Accounting Standards Board's (FASB) decision to allow companies to use fair-value accounting for bitcoin held on the balance sheet. The move, said Saylor, “eliminates a major impediment to corporate adoption of bitcoin as a treasury asset.” |
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State of Crypto: Policy & Regulation |
It is now more important than ever to set industry standards and align on practical short-term and long-term objectives through pointed conversations with the best legal minds and Washington D.C.’s most important decision makers.
Join us at State of Crypto: Policy and Regulation on October 24 in Washington D.C. for an unprecedented opportunity to evaluate, dissect and ultimately shape crypto regulatory frameworks that support a vibrant, secure and healthy future for the digital economy. Save 10% with code CLS10. Learn more and register. |
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