Last year, Bitcoinist reported a $50 million stake in Ethereum’s Beacon Chain from Ether Capital, a publicly-traded company in Canada highly bullish on the Proof-of-Stake iteration of this cryptocurrency. The company has become a major participant in Ethereum’s consensus layer, previously known as ETH 2.0.
Thus, putting in motion a strategy that the company planned for a long time with the objective of staking a majority of their 43,512 ETH. A groundbreaking decision that could be imitated by other companies in the future.
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We sat down with Ether Capital’s CEO Brian Mosoff to talk about the company’s position on Ethereum, why staking could support the new wave of crypto adoption, and the biggest trends for 2022 and beyond. This is what he told us.
Q: The start of the COVID-19 pandemic marked a before and after for the entire world, since then the demand for assets capable of generating yield has increased. Why does Ether Capital decide to bet on Ethereum and allocate such an important portion of its capital via ETH 2.0 staking? What makes ETH different than other assets?
Brian Mosoff: To your point on COVID-19, I agree that it marks an important inflection point for the crypto industry. Prior to the pandemic, crypto was a less established asset class, dominated by tech enthusiasts but largely ignored or pushed aside by regulators and traditional investors. As concerns evolved around inflation and central banking policies, a new group of investors woke up to this idea of algorithmic or software-based monetary policy. The first asset, of course, in this space was Bitcoin – the biggest in terms of brand and market cap. Unlike the 2017 bull run, there’s now much more infrastructure that has been built along with new access points for investors to get exposure to digital assets that historically they weren’t able to. Perhaps they weren’t comfortable with the exchanges, didn’t have access to structured products, or weren’t yet convinced institutions would lend support.
Ethereum, presents an exciting opportunity for investors. First, it’s by far the most used blockchain globally where there’s a ton of interesting activity taking place including decentralized finance (DeFi), NFTs, the metaverse, etc. The amount of capital formation and mindshare is really inspiring and hard to ignore. At Ether Capital, we’re constantly reminding investors that while we consider bitcoin to be an important asset, exposure to the sector as a piece of one’s portfolio should not end there.
Where I believe things get very interesting is when you look at proof-of-stake (PoS). It not only gives investors the opportunity to generate an attractive yield on their holdings but allows them to participate in the validation and security of these systems. It’s the alignment between token holders, users and the validators that excites me the most.
In proof-of-work (PoW), the only ones able to secure the network are those with access to expensive computing hardware and cheap electricity. Mining ends up in very specific jurisdictions and no longer is an activity performed by everyday members of the community. You end up with mining teams who may not be crypto enthusiasts, or are even token holders, but rather individuals who compete to approve transactions and use energy-intensive computing hardware to do so. They are the ones who are rewarded for validating rather those who are long on the native token and everyday users.
In PoS, the commodity at risk is no longer external to the network (electricity and computing power) and instead is one internal to the protocol (the native token, in this case, ETH). This abstracts away the need for computing power and electricity and better aligns token holders, users and validators. Can it still become centralized or offer an advantage to large token holders? Absolutely, but it is no question a step in the right direction to a more democratic process when it comes to network validation.
The reason we’re so excited about ETH specifically is because of adoption. We all know how Ethereum is different than Bitcoin, but when looking at Ethereum vs. other smart contract platforms, here are a few things I like to point out to new investors: Bitcoin was a “zero-to-one” concept (ty Peter Thiel!) Litecoin,
Dogecoin, Mooncoin, Blackcoin (anyone remembers this one?!) were tweaks to the original recipe but couldn’t match what Bitcoin introduced. In 2015, Ethereum enters the picture and is another zero-to-one – but this time it fundamentally changed the potential of what a blockchain could be and a
community rallied around it as the second most important asset in the space. Since then, we’ve seen many attempts to replicate a smart contract platform with tweaks to the initial design, which has introduced some optimization, but Ethereum still remains the dominant smart contract platform in terms of development and support from the crypto community. Sure, there are alternatives out there that are cheap and fast, and will have some activity, but the most exciting innovation is happening in the Ethereum ecosystem. I always tell people who are fixated on spot prices to instead follow the developers who are laying the foundation for something really great.
Q: Why do you say to Proof-of-Stake (PoS) detractors, those that believe it’s a mechanism that will benefit large ETH holders, and push aside the little guy? How will a shift from Proof-of-Work to PoS consensus benefit Ethereum and its ecosystem?
Brian Mosoff: As I’ve said above, I don’t think PoS necessarily solves centralization of validation. It is, however, a step towards a more democratic system since the need for electricity and computing hardware is abstracted away. I believe as the software evolves, the Merge takes place and everyday people are more comfortable staking on their own, they will do so using home equipment. Things like Lido are great examples of initiatives helping people pool their assets to validate outside of centralized exchanges. The decentralized independent ‘mining’ pools if you will.
Q: Last year, Ether Capital became one, if not the only publicly-traded company ever to allocate $50 million in ETH staking, do you think other companies will adopt a similar strategy in the future? Why should a company allocate capital into ETH and not in traditional assets?
Brian Mosoff: I think we’re still a fair bit away from seeing other companies stake ETH, but we can anticipate that eventually, we’ll see more institutional adoption of the asset. Currently, capital markets are fascinated with Bitcoin and will likely dip their toes in the water on that asset before they consider Ethereum. That said, innovations like DeFi and NFTs have turned heads and now institutions with young, eager employees are starting to pay attention to Ethereum, which is a good sign.
Staking ETH is also currently a very difficult task for institutions. Globally recognized custodians have yet to upgrade their custody protocols to handle Eth2 or have yet to fully trial a workflow with a staking provider. We struggled with this for a long time, and in the end, brought in an incredible CTO, Shayan Eskandari, to rebuild our in-house multisig and create a workflow to stake a large amount of ETH in a way that is compliant with our security practices and respectful of our status as a public company. I
cannot emphasize enough how challenging and time-consuming this was, but we’re very proud of the work we did to become the first public company in the world to stake such a significant amount of ETH.
We’re witnessing the birth of the digital bond. Staking ETH is like the risk-free treasury in this new world. What level this yield settles at is just a guess at this point. I think around 4% on the low end but as high as 15% during times of high network activity. Keep in mind, these are highly attractive rates on an asset that investors recognize still has substantial upside. This yield blows away rates available in traditional markets. Participation now hinges on more infrastructure and access points, which will be introduced over time.
Q: The Merge, an event set to combine Ethereum’s execution and consensus layer, is set to make ETH a “productive asset”. What are the implications and potential for ETH and for Ether Capital as a company placing a high bet on this digital asset?
Brian Mosoff: I’m stoked for the Merge. The alpha here is that I don’t think people understand well enough how big of an event this is going to be. The Merge plus Layer-2 solutions rolling out are really going to give alternative Layer-1s a run for their money. There’ll be a monster supply shock when the Merge takes place. People are hesitant to stake ETH currently because they want the liquidity and will forgo the ~5% in staking rewards. Once the Merge takes effect, we’ll see idle ETH get locked up, the same way competing Layer-1 smart contract platforms have 50% to 80% of their tokens staked. That also maybe because there’s simply nothing productive to actually DO on those networks!
Joking aside, I think the current price of ETH is severely discounted. People are either assuming the
Merge i) won’t ever happen, ii) will continue to be delayed, iii) will have a technical glitch that will blow up on launch, or iv) don’t understand the tokenomics of a post-Merge Ethereum world. The reality is, it will definitely take place – when that is, I’m not sure, but it will be a big deal.
Ether Capital has always been a leader in the capital markets focused on Ethereum. We were the first to recognize that this is a once-in-a-generation type of asset and wanted to accumulate as much as possible to get listed, creating an access point for investors who were less crypto native. Now, as staking rolls out, we wanted to again be the first to stake a meaningful amount of ETH. It’s not just about the yield, it’s an ethos we have around the table. We’re focused on the five-year time horizon and beyond. We, at our core, are crypto natives ourselves. We want to help secure and validate this network. We see that Ethereum is turning into the global settlement layer for any asset – stablecoins, DeFi, NFTs, etc. and owning a piece of that infrastructure and making it productive is something we’re very passionate about. Where the price goes in the short-term is anyone’s guess. Our conviction lies in seeing how much excitement there is in the communities building around these protocols and owning that base layer.
Q: Recently, Ether Capital announced a “strategic review of its non-Ether assets” leading it to sell some of its funds in tokens, such as MakerDAO (MKR) and Uniswap (UNI), should this be interpreted as a change in bias towards the DeFi sector? These tokens saw important losses in the past months, do you think DeFi and NFTs will maintain their relevance in 2022?
Brian Mosoff: We are absolutely bullish on the future of DeFi and everything taking place in the space. Right now, we’re focusing heavily on staking more ETH and becoming a net accumulator of it as a core asset. Capital markets are a funny thing – we’re so ahead of our time, it’s often challenging to see the market value us correctly or give us value for our substantial holdings. We’re certainly playing at the cutting-edge for a public company, and with that comes learning and pivoting as we go. Since our inception, we’ve historically traded at a heavy discount to our assets, which brings with it a fair number of challenges, such as raising capital to fund the technology we want to build in-house.
Over the last number of months, we’ve spent a fair amount of time deciding if we’re best to continue to hold our non-ETH assets or focus on our ETH and staking position. Ultimately, revenues from staking can lead to developing unique IP to bring additional enterprise value to shareholders, whereas the non-ETH assets weren’t necessarily appreciated by the market and, in any event, were quite a small part of our portfolio, so we decided to sharpen our focus.
Q: Finally, could you tell us about your vision for Web 3 and how Ethereum could be the core network for the next phase of the internet? Do you think there will be room for a multi-chain Web 3 ecosystem?
Brian Mosoff: Ethereum is currently shaping up to be the base layer for all the fascinating activity that will make up Web3. It has the most usage, innovation, mindshare, community, etc. going for it. What will come of alternative Layer-1’s, I’m not sure. We are seeing some building in alternate ecosystems, but it’s more complex to scale the same features and functionality of Ethereum, as it’s far more than simply copying and pasting applications onto ‘X’ protocol. We’ve also seen several issues with bridging between protocols. A multichain future may exist but presents additional complexity and challenges when hoping to remove third-party trust – the recent Wormhole exploit is a perfect example of this.
I always point out that as Ethereum Layer-2s evolve, the value proposition of competitors may erode. That said, I’m not a maxi, and am following the activity with a keen eye and think there’s some exciting tech and experimentation happening outside of Ethereum as well.
What Web3 will become is anyone’s guess. I’m still having trouble picturing what the metaverse looks like beyond the current hype. I understand NFTs and how communities are forming around specific projects, but how Web3 plays out is still too early to tell. Whatever it is, I’m excited for it.