Ark Invest Research Report: Staking Ethereum = U.S. Treasury Bonds in the Crypto Economy

Source: Ark Invest

Original translation: BitpushNews Mary Liu

introduction

As Bitcoin solidifies its position as a reliable digital store of value and the only asset with a rules-based monetary policy, Ethereum (the network) and Ether (ETH) (the asset) appear to be gaining momentum with similar potential. In fact, ETH is on its way to becoming an institutional-grade asset with yield potential.

As the only digital asset that truly generates income, ETH appears to have unique and distinctive characteristics that make it a reference indicator within the digital asset space. ETH already plays a key role in private and public financial markets, influencing the monetary policy of related digital networks and applications, and measuring the health of the broad digital asset ecosystem. With a market capitalization of approximately $315 billion and millions of active users per month, the Ethereum network is achieving meaningful economic value, as shown in the figure below.

Source: ARK Investment Management LLC, data as of August 15, 2024.

ETH’s staking yield has already influenced other smart contract ledgers, making it different from other digital assets besides Bitcoin.

Likewise, U.S. Treasury securities play a key role in the traditional economy in a variety of ways: setting benchmark interest rates, serving as a quality store of value during uncertain times, and influencing market expectations of future economic conditions.

Our research shows that as an asset, ETH is beginning to develop similar properties to U.S. Treasury bills in the digital asset space. ETH’s potential to generate yield — and its widespread use as collateral in digital asset transactions — are emerging as two of its most unique and important qualities.

Investors can earn returns on ETH by staking ETH to protect the Ethereum ledger. In other words, technically, this return is not the native return of the ETH asset. Liquidity staking derivatives such as Lido, Rocket Pool or Frax provide a way to tokenize staked ETH and its returns. Liquidity staking allows users to stake their ETH while maintaining liquidity by receiving derivative tokens representing their staked ETH. Another method called sole staking allows more direct control of the staked assets and obtains higher returns, but locks up ETH.

The goal of this article is to identify and define the unique characteristics of ETH. What is so special about ETH? How does it stand out in the broader universe of assets? We aim to answer the following questions:

• How does ETH generate income?

• How does the miner extractable value (MEV) yield predict economic cycles?

• Does ETH have bond-like properties?

• Does staking and re-staking enhance ETH’s ability to serve as programmable collateral? If so, how?

• Will ETH’s staking yield become a reference yield for the crypto economy? If so, in what sense?

• In the standard classification of traditional assets, what are the comprehensive attributes of ETH?

1. How does ETH generate income?

Proof of Stake (PoS) is a fairly new consensus algorithm that is more energy-efficient than Proof of Work (PoW). Why? In PoS, the consensus algorithm selects validators - equivalent to miners in PoW - to create new blocks and verify transactions based on the number of coins they hold and the number of coins they are willing to stake as collateral. The more coins staked, the higher the probability of being selected to build and verify the next block. Therefore, instead of requiring a lot of computing mining power, the PoS system requires validators to make a large investment in the network - if they verify fraudulent transactions or violate core protocol rules, they may lose these stakes. Validator stakes can deter fraud, as can the electricity costs that Bitcoin miners pay to participate in the network. Both ensure that each participant acts with economic rationality and integrity.

When the Ethereum network upgraded to Ethereum 2.0, its protocol shifted from proof-of-work to proof-of-stake. The implementation of Ethereum’s latest monetary policy update, EIP-1559, introduced a novel fee market structure. Both changes alter the way ETH generates and distributes revenue.

ETH yield is based on the following three factors:

Issuance (≈ 2.8% APR) + Tips (<0.5% APR) + MEV (<0.5% APR)

Lets look at each component of earnings in more detail.

Issue

As of September 2024, the Ethereum network is adding approximately 940,000 ETH per year, which is equivalent to an annualized yield (APY) of approximately 2.8% at todays staking ratio. The staking ratio changes over time based on the amount of ETH staked. The higher the staking ratio, the lower the issuance yield, as it is distributed equally among the participating validators based on their weighted stakes. Importantly, the Ethereum network guarantees a minimum annual issuance rate of 1.5%, and in the unlikely event that 100% of ETH is required to be staked and there are no transactions on the blockchain, all validators who secure the network by reaching consensus and processing transactions receive issuance.

Tips

“Tips” are optional fees introduced by the London upgrade and EIP-1559 that users can include in Ethereum transactions. Tips are “priority fees” because they incentivize validators to prioritize transactions within a block.

When a user wants to send a transaction, they must pay a base fee and can choose to pay a tip. The base fee is dynamically adjusted based on network congestion, and the fee increases when the network is busier. Priority fees or tips are optional if the user wants to speed up the transaction. In fact, the priority fee is a cost that changes with the usage and congestion of the network.

MEV

In addition to issuance and tips, validators also collect “miner extractable value” (MEV) rewards, or additional profit earned from including, excluding, or reordering transactions in the blocks they generate.

MEV is the equivalent of “payment for order flow” (PFOF) in traditional markets - additional income paid by high-frequency market makers and traders to validators to prioritize their trade flow. Like tips, the yield is volatile because it depends on the supply and demand of block space and takes advantage of less informed traders trading on the network. Importantly, MEV rewards are only available to validators running MEV clients (such as MEV Boost).

Basic Fee

Importantly, the base fee (again, the standard cost of sending a transaction) does not impact yield. Instead, it is burned and does not provide direct cash flow to stakers. As part of the EIP 1559 upgrade, the base fee mechanism makes fees more predictable and the Ethereum network more user-friendly.

Only basefees and issuance can change the total supply of ETH. ETH tokens that users pay for basefees are permanently removed from the total supply. If the basefee is high enough (greater than 23 gwei in current markets) and the amount of burns exceeds network issuance (940,000 ETH per year), the total supply of ETH outstanding will decline over time, making the protocol deflationary. Conversely, if network issuance is higher than basefees burned, the network will be inflationary.

Two dynamics support the deflationary trend of ETH supply. First, Ethereum’s Proof of Stake (PoS) mechanism enables validators to reduce the operating expenses (Opex) and capital expenditures (Capex) associated with running network servers. In other words, the energy and data center costs associated with PoW and ASIC machines do not exist in PoS.

Secondly, as the leading smart contract platform, the Ethereum network operates at a limit of 14 transactions per second at the bottom layer. Thanks to its rigorously tested code, Ethereum has attracted the most active developers, the widest applications, and the highest settlement value in just nine years of development.

Since transitioning to PoS and implementing EIP 1559 on September 15, 2022, the Ethereum network has been acting as a net deflationary asset, reducing supply by an average of 0.106% per year. If Ethereum continued to operate at PoW, without EIP 1559, the networks supply would inflate by 3.2% per year, as shown below.

Source: Ultra Sound Money. Data obtained on August 15, 2024. Comparison of inflation rates of ETH (PoS) vs. ETH (PoW) vs. BTC (PoW) since the merger.

2. How does the miner extractable value (MEV) yield predict economic cycles?

As mentioned above, Miner Extractable Value (MEV) revenue is a portion of ETH staking revenue. In this section, we will take a deeper look at MEV, with a particular focus on how it is generated and how it predicts economic activity and market cycles.

MEV is the equivalent of payment for order flow (PFOF) in traditional finance, which occurs when market makers and high-frequency trading firms pay validators extra fees to bypass the standard Ethereum Mempool queue, thereby giving priority to their trading packages. Similarly, in the traditional financial world, companies like Citadel Securities pay fees to platforms such as Robinhood, TD Ameritrade, Charles Schwab, and Fidelity to steer customer order flow in their direction. In fact, MEV was born during the ETH ICO boom in 2017 as a basic form of priority bribe. In the ICO era, participants and investors who purchased tokens of certain projects had to deposit ETH into smart contracts in exchange for the native token of the project. As they became more and more popular, token issuance became oversubscribed and operated on a first-come, first-served basis. In order to be among the first to deposit ETH into these smart contracts, participants bribed validators off-chain.

Like PFOF, MEV often reflects retail trading activity, as market makers are willing to pay more for less-informed orders than for informed orders. Just as PFOF payouts are a measure of overspending and risk appetite in the retail equity space, MEV plays a similar role in predicting recessions and economic cycles in the Ethereum ecosystem, as shown below.

Source: ARK Investment Management LLC, 2024, based on data from Daytradingz.com and MEV-Explore v1 as of June 9, 2024. For informational purposes only.

While MEV on Ethereum is comparable to the revenue generated by PFOF on the stock market, MEV as a percentage of the total market cap of ETH and ERC-20 tokens is much higher than that of the U.S. stock market. Since the merger, the $790 million in revenue extracted annually on a pro rata basis represents 0.20% of ETHs $315 billion market cap. With a total market cap of ETH and ERC-20 tokens of approximately $500 billion, the percentage of revenue extracted drops to 0.15%, which is still 27 times higher than PFOFs $2.891 billion in revenue, which represents 0.0056% of the $50 trillion market cap of the U.S. stock market. In its early development stages, Ethereums order routing mechanisms are more expensive than those in traditional finance, but it is worth noting that Ethereum supports a wider range of order types through smart contracts - such as flash loans, staking, swaps - and other interactions with decentralized applications.

Additionally, in traditional finance, other fees and profit centers (brokerage fees, exchange fees, and hedge fund profits) are the primary source of PFOF revenue. These costs are not transparent but are critical to the overall cost structure of traditional financial transactions.

According to historical PFOF patterns in traditional finance, an increase in PFOF revenue is associated with increased retail activity involving less informed traders, while a decrease in PFOF suggests the opposite.

For example, between 2021 and 2022, Robinhood’s PFOF revenue fell 40% from $974 million to $587 million as interest rates rose 16-fold, signaling the start of the bear market. The same is true for MEV, where block space used by high-frequency trading firms and MEV bots fell fivefold from July to October 2021, ahead of the severe 2022 crypto bear market, as shown below.

Source: ARK Investment Management LLC, 2024, based on data from Explore.flashbots.net as of August 15, 2024.

Our research shows that the majority of MEV in the coming year may be extracted and redistributed on Layer 2. Layer 2 is a secondary protocol built on top of Ethereum. They improve scalability and efficiency by processing transactions outside the main chain while leveraging its security, shortening transaction times and reducing transaction fees.

Over the next two years, we expect over 90% of total transactions to occur on Layer 2. Catering to more price-sensitive retail investors, Layer 2 should dominate ETH trading activity, earning a higher percentage of revenue from MEV, which will be greater as sorters (or validators for Layer 2) become more decentralized.

Today, the dominant Layer 2 networks Arbitrum and Optimism both run with a single sorter, which means that block space is not auctioned off to the highest bidder. Instead, transactions are sorted on a first-come, first-served basis, and cannot be reordered by block searchers or builders.

Therefore, some forms of MEV (maximum extractable value) are not possible, indicating that MEV is significantly lower than in more advanced states with multiple decentralized sequencers and a more mature MEV infrastructure.

MEV yield is a subset of ETHs overall yield, and it is becoming a reliable indicator of activity and economic cycles on the Ethereum blockchain. Compared with traditional finance, MEV is dominated by retail transactions, and the proportion of insufficiently informed capital flows is higher. MEV is a measure of activity and economic health, which affects ETHs yield in the cycle and provides a framework for evaluating layer 1 ledgers.

3. Does ETH have bond-like properties?

Fixed income assets, especially bonds, have been around for hundreds of years and are one of the most important financial drivers of the economy. Bonds represent loans made by investors to borrowers, usually companies or governments. Our research shows that, while not equivalent to sovereign bonds, stETH has similar characteristics to sovereign bonds, and these similarities are worth exploring.

The most important similarities and differences between staking ETH and sovereign bonds are as follows:

• Bond composition: sovereign bonds vs. ETH pledge

• Issuer: A country’s government vs. the Ethereum network

• Principal: Bond face value VS pledged ETH amount

• Interest/Coupon: Periodic interest payments (usually half a year or a year) vs. programmatic payment of staking rewards

• Maturity: Fixed term, principal paid upon maturity vs. unlimited (ETH remains staked until unstaked)

• Liquidity: Trading in the Bond Market vs. Trading on Centralized and Decentralized Exchanges

• Collateral: Full trust and credit of the issuing government vs. the value and network security of ETH

Note: For the expired portion, the pledged ETH can be unstaked at any time, after which the initial pledged amount (called the “principal”) can be recovered in addition to the earnings gained during this period.

When we discuss the comparison of staking ETH to sovereign bonds below, we emphasize that their differences are as important as their similarities. We believe that their risk profiles represent the most significant difference between staking ETH and sovereign bonds.

Credit Risk

Sovereign bonds: When a government issues debt denominated in the local currency, there is a possibility that the government will default, although this possibility is less for stable economies.

Staked ETH: The Ethereum network cannot default on staked ETH because it is not technically a debt. Staking returns are programmatically derived from on-chain activity and network issuance, which means that returns fluctuate based on network performance, activity levels, and staking rates.

Inflation risk

Sovereign bonds: Inflation in the local currency can erode the value of bond returns, reducing purchasing power.

Staked ETH: If the issuance rate of new ETH significantly exceeds the destruction rate of base fees, there is inflation risk, causing the supply to increase, thereby reducing net returns and diluting the value of interest payments.

Interest rate risk

Sovereign bonds: Changes in interest rates affect bond prices, with rising interest rates generally causing bond prices to fall.

Staking ETH: While Ethereum itself will not issue multiple bonds (multiple staking yields with different maturities), changes in yield expectations on other layer 1 smart contract platforms may affect the perceived value and attractiveness of staking ETH.

Currency depreciation risk

Sovereign bonds: A depreciation of the local currency relative to other currencies can result in a significant reduction in the value of interest payments and principal when converted into other currencies.

Staking ETH: The value of ETH relative to other major cryptocurrencies and fiat currencies may fluctuate, affecting the actual value of the staking yield and principal relative to other assets.

Political and legal risks

Sovereign bonds: Changes in government or regulatory regimes could affect bond repayments and could result in changes in fiscal policy and/or debt restructuring.

Staked ETH: This analogy is less direct. Staked ETH carries additional risks associated with network security and governance. If validators misbehave or collude, the staked ETH may be slashed as a penalty, resulting in potential loss of principal. Regulatory changes that affect the broader cryptocurrency market can also affect the value and security of staked ETH.

Volatility Risk

Sovereign bonds: Sovereign bonds are generally viewed as low-risk, low-volatility investments. However, during times of economic uncertainty or political unrest, bond volatility can increase significantly.

Staking ETH: Staking ETH is more volatile because it is still in its infancy. Volatility will affect the staking income and principal value.

Modeling ETH stake as a sovereign bond requires understanding the differences in their respective risk profiles. While both are subject to inflation, interest rate changes, and currency depreciation, the nature of these risks and their impact can be very different. In addition, ETH stake introduces unique risks related to network security, validator behavior, and smart contract bugs that have no direct analogues in traditional sovereign bonds.

Similar to calculating the present value of sovereign bonds, one can try to model the present value of a so-called collateralized ETH bond. The formula adds the present value of each reinvested coupon to the present value of the par value of the bond at maturity. Then, by modeling the coupon interest with the collateralized ETH yield and the discount rate with the risk-free rate on U.S. Treasuries, one can arrive at the current price of a collateralized ETH bond.

Nevertheless, one of the most important differences between sovereign bonds and collateralized ETH bonds is that the yield on collateralized ETH changes every day. Therefore, modeling collateralized ETH bonds requires calculating the average yield over the maturity period. In addition, unlike traditional sovereign bonds, collateralized ETH can be uncollateralized or redeemed at any time, and the principal can be redeemed at any time.

Currently, ETH has no yield curve, which means there is no relationship between the staking yield and the maturity of the staked asset. However, according to our research, the ETH yield curve may change in the next few years, increasing similarities with sovereign bonds, with ETH staked for different maturities and maturities.

4. Will staking and re-staking strengthen ETH’s position as programmable collateral?

Liquid Staking Derivatives (LSD) is a protocol designed to simplify the staking process for users who lack technical expertise. LSD works with trusted node operators to manage staking operations on behalf of users. Users who stake ETH through Lido, a leading LSD provider, will receive stETH. stETH is a synthetic version of their staked ETH and functions like a tokenized certificate of deposit. stETH tokens are automatically rebalanced to reflect staking rewards (3.2% APY) and can be converted to ETH on centralized and decentralized exchanges. The tokens or certificates of deposit can then be used for lending, obtaining leverage, rehypothecation, and many other financial activities within the digital asset space, especially Ethereum-based applications/protocols.

stETH is a yield-earning version of ETH. Due to its programmability and liquidity, stETH is beginning to replace ETH in many DeFi protocols and applications. In fact, stETH has been replacing ETH as a high-quality collateral in the Ethereum economy. Today, stETH supplied as DeFi collateral totals about 2.7 million, accounting for about 31% of the entire stETH supply, as shown below.

Note: The left Y-axis of this third-party chart is in USD (billions). Each abbreviation shown on the right side of the above chart represents a different asset.

There are over 80,000 stETH in liquidity pools on Curve, Uniswap, Balancer, Aerodrome, and other leading DEXs (decentralized exchanges). stETH is a yield-yielding asset that is becoming the preferred collateral due to the capital efficiency it provides to users, liquidity providers, and market makers. Currently, the preferred collateral on Aave V3, Spark, and MakerDao is 1.3 million stETH, 598,000 stETH, and 420,000 stETH, respectively, which are locked in these protocols and used as collateral for issuing loans or crypto-backed stablecoins, as shown below. Our research shows that stETH and other liquid collateralized derivatives of ETH are becoming the preferred high-quality collateral for financial activities within the Ethereum ecosystem.

Note: The left Y-axis of this third-party chart is measured in stETH, not stETH in USD. Source: Dune (@lido/stETH collateral vs. other collateral) as of August 15, 2024.

But what happens if a user wants to earn higher yields on their staked ETH while providing more utility as collateral?

This is exactly what Eigenlayer, a re-staking protocol, enables. To date, Eigenlayer has accumulated $13 billion in tokenized CDs of ETH, representing 50% of Lido TVL and ~4% of the total ETH supply, as shown below. Liquid collateral derivative tokens representing ETH staked on the Ethereum network can be re-staked on the Eigenlayer platform, enabling other protocols to enhance their network security for a specified period, a process similar to leasing security services.

Some protocols whose tokens are too volatile to provide reliable network security may face liquidity shortages and/or need to enhance their security, both of which can be addressed by double-staking their tokens or leasing their entire securities with more stable collateral (such as ETH). For their security services, re-staking protocols like EigenLayer reward re-stakers, just like the Ethereum network pays validators.

We believe that the advent of re-staking enables investors to better control their risk and return profile, thereby increasing the utility and efficiency of ETH as collateral in DeFi.

The success of EigenLayer demonstrates that users and institutions have a strong interest in leveraging their ETH holdings in more sophisticated ways. By introducing new use cases, EigenLayer allows participants to preserve their ETH holdings while generating additional yield. As they emerge from the launch of EigenLayer — just as stETH emerged from native staking — liquid re-staking tokens are likely to serve as collateral on a variety of platforms.

Whether in liquidity pools, lending platforms, structured products, or crypto-backed stablecoins, yield-bearing ETH in all its forms has the potential to become the programmable collateral of choice for leading applications and products in DeFi — whether deployed on Ethereum Layer 1 or any of the currently available Layer 2s.

5. Will ETH’s staking yield become an endogenous benchmark for the crypto economy?

So far in this article, we have described staked ETH as an asset similar to sovereign bonds in some respects, and described ETH and its liquid staked derivatives as high-quality liquid collateral in DeFi, supporting many widely used applications. In this section of the article, we focus on another unique feature of ETH staking yield: its impact on investment in the cryptoeconomy, which our research shows is comparable to the role of Treasury bills and federal benchmark interest rates in the traditional economy.

Today, staking yields influence public and private investment in the digital asset space, much like high-quality liquid assets (HQLA) do in traditional finance. First, ETH yields appear to exert significant pressure on the native yields of competing Layer-1 smart contracts, forcing other blockchains to offer higher rewards to validators in recognition of their security and long-term commitment, as shown below. If the return on investment is unlikely to be higher, why would investors/validators hold and stake riskier and more volatile assets? Importantly, unlike ETH, yields on other assets tend to dilute cash flows. In other words, if an investor holds and does not stake any other Layer-1 token, network inflation will dilute it.

Source: ARK Investment Management LLC, 2024, based on data from The Staking Explorer as of August 15, 2024.

ETH’s staking yield also increases the opportunity cost of holding and borrowing stablecoins. As its native yield rises and becomes the benchmark, ETH’s activity, MEV fees, and overall demand put multiple DeFi protocols under pressure. MakerDAO, Aave, and Compound are three of these protocols.

MakerDAO is a protocol that manages the issuance and management of the DAI stablecoin. DAI is issued through collateralized debt positions (CDPs) as users lock up collateral such as ETH or other whitelisted assets to mint DAI. One of the core features of the MakerDAO protocol is the DAI Savings Rate (DSR), which allows DAI holders to earn interest by locking their DAI in special smart contracts. After DAI faced significant selling pressure and a decrease in circulating supply, MakerDAO governance decided to increase the DSR rate from 5% to 15%.

In money markets like Aave or Compound, where conditions are determined by supply and demand, the returns on supplying/borrowing stablecoins are significantly higher. Supply APYs for fiat-backed stablecoins range from 5% to over 15%, depending on market conditions. This rate reflects investors willingness to borrow stablecoins while providing ETH or stETH as collateral without having to sell.

Additionally, protocols like Ethena Labs (which offers a stablecoin collateralized by spot arbitrage trades between spot stETH positions and perpetual futures15 short positions) have attracted many stETH holders. Why? Ethena’s stablecoin offers significantly higher yields than DeFi alternatives, not to mention the normal staking yields on ETH.

The yield from ETH staking also impacts liquidity mining opportunities. Teams looking to launch new products or features and attract ETH-denominated capital into their pools must align their incentives with prevailing market conditions. For many teams and protocols, higher staking yields often mean higher user acquisition costs, as potential investors and liquidity providers are more likely to stake ETH for more stable returns rather than the higher risk rewards associated with new or less mature yield farming opportunities.

Investors allocating capital to early-stage digital assets are asking the same question: Will this project provide a better return on investment than staking ETH on a risk- and liquidity-adjusted basis? We can explore this question with a hypothetical example. How much better would a closed-end fund with a typical investment horizon of 7 years (the average harvest period for a tech startup) need to perform than ETH after compounding to break even?

If ETH yields 4% after 7 years of compounding, then the closed-end fund must outperform ETH by more than 31% even without considering price appreciation.

In other words, early investors in the digital asset space often consider this: on a risk- and liquidity-adjusted basis, can the project they are evaluating provide higher returns than simply holding and staking ETH over the investment period? For example, consider a typical 7-year fund, often called the harvest period, during which investments are expected to mature and provide liquidity. If the same funds were invested in ETH and staked, with an average staking yield of 4%, the project would need to outperform ETH by at least 31% to compensate for the compound yield effect. In a bull market with oversubscribed private rounds, less attractive valuations, and unfavorable vesting conditions, competition from staking ETH will become more intense.

6. What are the comprehensive attributes of ETH?

The success of spot Bitcoin ETFs may be due to the appreciation potential and stability of Bitcoin relative to other stores of value, especially fiat currencies. Human decisions by monetary authorities (sometimes arbitrary and inconsistent) have played a major role in devaluing fiat currencies over the long term. In contrast, Bitcoin is rules-based and its supply is mathematically measured and capped at 21 million. As a result, Bitcoin is becoming a powerful alternative to fiat currencies and a digital asset class similar to digital gold.

As a younger asset, ETH has undergone multiple monetary and technological upgrades over the years. In addition, its Turing completeness and cash flow yield make it difficult to describe, define, and frame within the boundaries of traditional asset classes.

Robert Greers paper What Are Asset Classes? divides assets into three categories:

Capital Assets: Assets that are productive and increase in value to the holder in the form of cash flows, such as stocks, bonds, or real estate.

Consumable assets: Assets, such as merchandise, that can be consumed or converted into other assets or goods.

Store of Value: An asset that cannot be consumed or converted into other assets or commodities but retains its value over a long period of time.

In this article, we have illustrated the similarities between ETH yields and yields on debt instruments, especially sovereign bonds. We have demonstrated that ETH staking yields are a measure of smart contract activity and economic cycles in the digital asset space, just like the federal reserve rate in traditional finance.

Additionally, like any other layer 1 asset, ETH is a consumable asset used in the Ethereum network to pay for transactions to be included in the ledger. The process involves exchanging assets to pay validators for storing and computing data. We also highlighted the ability of staking ETH as a high-quality liquid asset in DeFi, which acts like the original collateral to power the most popular applications and stablecoins such as DAI and USDe.

So, what is the best way to categorize and define ETH as an asset?

While the Bankless team promotes ETH as a triple-point asset that simultaneously embodies the characteristics of three different asset classes according to Robert Greers classification, we believe that Bitcoin has and will continue to be a very reliable store of value. That being said, we also believe that ETH is paving the way for a new hybrid asset. While it exhibits store-of-value properties in the smart contract economy, what distinguishes ETH from any other digital asset is that it is a programmable, cash-flow-generating asset that can be used as high-quality collateral in financial applications.

ETH and staked ETH are extremely liquid and widely traded on many exchanges. Their liquidity ensures that they can be easily liquidated and converted into other assets and/or used in various DeFi protocols. While ETH is more volatile than government bonds or real estate, it is one of the most mature, valuable, and widespread cryptocurrencies in the world. With the launch of a spot ETH ETF, ETHs acceptance may increase and its volatility may decrease.

Currently, ETH and its liquidity pledge derivatives have been used as collateral in various DeFi protocols, not only for secured loans, but also for participating in liquidity pools, generating returns, and issuing stablecoins. Although ETH may not fit into a single asset class, its multifaceted attributes highlight the charm of its unique asset, which is very attractive to those who want to participate in the rapidly growing global smart contract economy.