May 28, 2024 - Economy

Ether ETFs could deliver benefits down the chain

Illustration of a person watering an extremely tall beanstalk with glowing blocks growing all up and down it.

Illustration: Aïda Amer/Axios

Ether ETFs might be extra good for investors who place long bets another way — by staking the token to validate the Ethereum chain.

Why it matters: Staking services, a way to get yield on ether, are not part of any of the proposed ETF funds, which many industry participants say will improve returns for those staking on chain.

Context: Transactions on the Ethereum blockchain are verified by thousands of independent computers around the world as part of the blockchain's proof-of-stake mechanism.

  • Stakers commit ether as collateral for the validators in exchange for yield, which is generated from part of the fresh ether a validator earns for satisfactorily completing verification of a block.

State of play: About 16% of all ether is staked to securing the network.

The big picture: If lots of ether gets locked up in ETFs but doesn't get staked, that should have a couple of direct impacts for stakers:

  • First, less supply on the market resulting from a new crop of demand — investors who will only buy regulated products — should put upward pressure on ETH price.
  • Increasing ETH value should make staking more attractive, but the ETFs will have removed loose ETH from the market, making it harder to find more to stake (additional upward pressure).

That upward pressure would accrue to ether ETF holders as well, but only those staking will get more ETH.

  • "I saw that too," Sam Kazemian, of Frax Finance, which offers a stablecoin with value backed, in part, by ether staking, told Axios over Telegram.
  • "More ETH not staked in validators ... means more staking yield for onchain crypto natives."

In fact, one ETF pro suggested doubling down on existing stakers by shorting the new ETFs and longing existing stakers, calling it "a perfectly hedged yield trade."

Reality check: "It's not so straightforward," Adcv, the pseudonymous co-founder of Steakhouse Financial, told Axios, disagreeing that the picture in the crystal ball is quite that clear.

  • Steakhouse helps crypto projects with large treasuries manage those holdings. There are too many variables, he argues, to know for sure what impact ETFs will have on staking economics.

Researchers at the Ethereum Foundation think there's already more than enough staking going on to secure the network, and they'd like to decrease the appeal of adding more ether to the security budget.

Zoom out: "I can sympathize with the view that ether ETFs, advertised as such, should not have staking built in," Adcv tells Axios over Telegram.

  • Staking as we know it can make redemption guarantees for ETF issuers tricky. So, he argues, it's probably better to wait until all of this is better understood before staking ETFs — which exist elsewhere in the world — are offered in the U.S.
  • Yes, but: We don't know for sure the reason the SEC struck down staking.

The bottom line: There's a chance that the first draft of these regulated products, ironically, is making the unregulated route extra attractive.

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