Ark Invest Research Report: Staking Ethereum = "Treasury Bonds" in the Crypto Economy

Original Title: Why Ether Stands Out Among Digital Assets

Source: Ark Invest

Compiled by: 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) seem to be gaining momentum with similar potential. In fact, ETH is becoming an institutional-grade asset with yield potential.

As the only truly yield-generating digital asset, ETH appears to possess unique and distinct characteristics that make it a "benchmark" in the digital asset space. ETH has played a critical role in both private and public financial markets, influencing the monetary policy of related digital networks and applications, and measuring the health of the broader digital asset ecosystem. With a market capitalization of approximately $315 billion and millions of active users each month, as shown in the figure below, the Ethereum network is realizing meaningful economic value.

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

The staking yield of ETH has already influenced other smart contract ledgers, distinguishing it from other digital assets outside of Bitcoin.

Similarly, U.S. Treasury bonds play a key role in the traditional economy, serving multiple functions: setting benchmark interest rates, acting as a high-quality store of value during uncertain times, and influencing market expectations regarding future economic conditions.

Our research indicates that as an asset, ETH is beginning to develop characteristics similar to U.S. Treasury bonds in the digital asset space. The yield-generating potential of ETH—and its widespread use as collateral in digital asset trading—are becoming its two most unique and important qualities.

Investors can earn ETH yields by staking ETH to secure the Ethereum ledger. In other words, technically, this yield is not the native yield of the ETH asset. Liquid staking derivatives such as Lido, Rocket Pool, or Frax provide a way to tokenize staked ETH and its yield. Liquid staking allows users to stake their ETH while maintaining liquidity by receiving derivative tokens that represent their staked ETH. Another method called "solo staking" allows for more direct control over staked assets and potentially higher returns, but it locks up the ETH.

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

• How does ETH generate yield?
• How does miner extractable value (MEV) yield predict economic cycles?
• Does ETH possess bond-like characteristics?
• Do staking and re-staking enhance ETH's ability as programmable collateral? If so, how?
• Will ETH's staking yield become a reference yield in the crypto economy? If so, in what sense?
• What are the comprehensive attributes of ETH in the standard classification of traditional assets?

1. How Does ETH Generate Yield?

"Proof of Stake" (PoS) is a relatively new "consensus algorithm" that is more energy-efficient than "Proof of Work" (PoW). Why? In PoS, the consensus algorithm selects "validators" based on the number of coins they hold and are willing to "stake" as collateral—equivalent to "miners" in PoW—to create new blocks and validate transactions. The more staked coins there are, the higher the probability of being selected to build and validate the next block. Therefore, PoS systems do not require massive computational mining power but instead require validators to make significant investments in the network—if they validate fraudulent transactions or violate core protocol rules, they may lose their stake. Validator staking can deter fraud, just as the electricity costs paid by Bitcoin miners to participate in the network can deter fraud. Both ensure that each participant acts with economic rationality and integrity.

When the Ethereum network upgraded to Ethereum 2.0, its protocol transitioned from Proof of Work to Proof of Stake. The latest monetary policy update, EIP-1559, introduced a novel fee market structure. Both changes altered how ETH generates and distributes yield.

ETH yield is based on three factors:

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

Let’s take a closer look at each component of the yield.

Issuance

As of September 2024, the Ethereum network adds approximately 940,000 ETH annually, which, based on today’s staking ratio, translates to an annualized yield (APY) of about 2.8%. The staking ratio will vary over time based on the amount of ETH staked. If more validators stake, the staking ratio increases, thereby lowering the issuance yield, as the issuance yield is averaged among participating validators based on their weighted stakes. Importantly, the Ethereum network guarantees a minimum annual issuance rate of 1.5%, which requires 100% of ETH to be staked in the unlikely event that there are no transactions on the blockchain. All validators who secure the network through consensus and transaction processing will 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 processing transactions within blocks.

When users want to send a transaction, they must pay a base fee and can optionally pay tips. The base fee dynamically adjusts based on network congestion, increasing when the network is busier. If users want to speed up their transaction, priority fees or tips are optional. In practice, priority fees are a cost that varies with network usage and congestion levels.

MEV

In addition to issuance and tips, validators also earn "miner extractable value" (MEV) rewards, or additional profits gained by including, excluding, or reordering transactions in the blocks they generate.

MEV is akin to "payment for order flow" (PFOF) in traditional markets—where high-frequency market makers and traders pay validators extra income to prioritize their transaction flow. Like tips, the yield is volatile as it depends on the supply and demand for block space and exploits less-informed traders on the network. Importantly, MEV rewards are only available to validators running MEV clients (e.g., MEV Boost).

Base Fee

Crucially, the base fee (again, the standard cost of sending a transaction) does not affect yield. Instead, it is "burned," providing no direct cash flow to stakers. As part of the EIP 1559 upgrade, the base fee mechanism makes fees more predictable, enhancing user-friendliness on the Ethereum network.

Only the base fee and issuance can alter the total supply of ETH. The ETH tokens paid as base fees will be permanently removed from the total supply. If the base fee is sufficiently high (greater than 23 gwei in the current market) and the amount "burned" exceeds the network's issuance (940,000 ETH annually), the outstanding total supply of ETH will decrease over time, leading to protocol deflation. Conversely, if the network's issuance exceeds the burned base fee, inflation will occur.

These two dynamics support a deflationary trend in ETH supply. First, Ethereum's Proof of Stake (PoS) mechanism allows validators to reduce 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.

Second, as the premier smart contract platform, the Ethereum network operates with a limit of 14 transactions per second at its core. Thanks to rigorously tested code, Ethereum has attracted the most active developers, the widest range of 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 acted as a net deflationary asset, averaging a supply reduction of 0.106% per year. If Ethereum had continued to operate on PoW without EIP 1559, the network's supply would have inflated by 3.2% annually, as shown below.

Source: Ultra Sound Money. Data retrieved as of August 15, 2024. Comparison of inflation rates for ETH (PoS) vs. ETH (PoW) vs. BTC (PoW) since the merge.

2. How Does Miner Extractable Value (MEV) Yield Predict Economic Cycles?

As mentioned above, miner extractable value (MEV) yield is part of ETH staking yield. In this section, we will delve into MEV, focusing on how it is generated and how it predicts economic activity and market cycles.

MEV is analogous to payment for order flow (PFOF) in traditional finance, occurring when market makers and high-frequency trading firms pay validators extra fees to bypass the standard Ethereum "Mempool" queue, thereby prioritizing their transaction bundles. Similarly, in traditional finance, firms like Citadel Securities pay platforms such as Robinhood, TD Ameritrade, Charles Schwab, and Fidelity to direct customer order flow in their favor. In fact, MEV originated during the 2017 ETH ICO boom as a basic form of priority "bribery." During the ICO era, participants and investors buying tokens for certain projects had to deposit ETH into smart contracts in exchange for the project's native tokens. As they became increasingly popular, token offerings became oversubscribed and operated on a first-come, first-served basis. 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 a higher price for less-informed orders than for informed orders. Just as PFOF payments are indicators of overspending and risk appetite in the retail stock space, MEV plays a similar role in predicting downturns in the Ethereum ecosystem and economic cycles, 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 reference only.

While MEV on Ethereum generates revenue comparable to that from PFOF in the stock market, the percentage of MEV relative to the total market capitalization of ETH and ERC-20 tokens is significantly higher than that of the U.S. stock market. Since the merge, the proportionate extraction of $790 million annually accounts for 0.20% of ETH's $315 billion market cap. The total market cap of ETH and ERC-20 tokens is approximately $500 billion, with the extracted revenue percentage dropping to 0.15%, still 27 times higher than the 0.0056% of PFOF revenue ($2.891 billion) relative to the $50 trillion U.S. stock market. In its early development stages, Ethereum's order routing mechanism was more expensive than traditional financial order routing mechanisms, but it is noteworthy that Ethereum supports a wider variety of order types through smart contracts—such as flash loans, staking, swaps—and other interactions with decentralized applications.

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

According to historical PFOF patterns in traditional finance, increases in PFOF revenue correlate with rising retail activity involving less-informed traders, while decreases in PFOF indicate the opposite.

For example, during the period from 2021 to 2022, as interest rates rose 16-fold, Robinhood's PFOF revenue fell by 40% from $974 million to $587 million, signaling the onset of a bear market. The same is true for MEV; from July 2021 to October 2021, the block space used by high-frequency trading firms and MEV bots decreased fivefold before the severe cryptocurrency bear market of 2022, as shown below.

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

Our research indicates that much of the MEV in the coming year may be extracted and redistributed on Layer 2. Layer 2 refers to secondary protocols built on top of Ethereum. They enhance scalability and efficiency by processing transactions off the main chain while leveraging its security, shortening transaction times and reducing fees.

In the next two years, we expect over 90% of total transactions to occur on Layer 2. To cater to price-sensitive retail investors, Layer 2 should dominate ETH trading activity, capturing a higher proportion of MEV as sorters (or Layer 2 validators) become further decentralized.

Currently, the dominant Layer 2 networks, Arbitrum and Optimism, operate with a single sorter, meaning block space is not auctioned to the highest bidder. Instead, transactions are sorted on a first-come, first-served basis, and block searchers or builders cannot reorder them.

As a result, certain forms of MEV (maximum extractable value) are impossible, indicating that MEV is significantly lower than it would be in a more advanced state with multiple decentralized sorters and more mature MEV infrastructure.

MEV yield is a subset of the overall yield of ETH and is becoming a reliable indicator of activity and economic cycles on the Ethereum blockchain. Compared to traditional finance, MEV is predominantly retail-driven, with a higher proportion of less-informed capital flows, making MEV a measure of activity and economic health that impacts ETH's yield in cycles and provides a framework for assessing Layer 1 ledgers.

3. Does ETH Have Bond-like Characteristics?

Fixed income assets (especially bonds) have existed for centuries and are among the most important financial drivers of the economy. Bonds represent loans provided by investors to borrowers (typically corporations or governments). Our research indicates that while not equivalent to sovereign bonds, staked ETH (stETH) exhibits characteristics similar to sovereign bonds, and these similarities are worth exploring.

The most significant similarities and differences between staked ETH and sovereign bonds are as follows:

• Bond Components: Sovereign Bonds vs. Staked ETH
• Issuer: A country's government vs. the Ethereum network
• Principal: Bond face value vs. amount of staked ETH
• Interest/Coupon: Regular interest payments (typically semi-annually or annually) vs. programmatically paid staking rewards
• Maturity: Fixed term, principal paid at maturity vs. indefinite (ETH remains staked until unstaked)
• Liquidity: Bonds traded in the market vs. traded on centralized and decentralized exchanges
• Collateral: Full faith and credit of the issuing government vs. the value and network security of ETH

Note: Regarding the maturity aspect, staked ETH can be unstaked at any time, after which the initially staked amount (referred to as "principal") can be recovered along with any earnings accrued during that period.

When we discuss the comparison between staked ETH and 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 staked ETH and sovereign bonds.

Credit Risk

• Sovereign Bonds: When a government issues debt denominated in local currency, there is a possibility of default, although this risk is lower for stable economies.
• Staked ETH: The Ethereum network cannot default on staked ETH because, technically, it is not a debt. Staking rewards are derived programmatically from on-chain activity and network issuance, meaning that yields will fluctuate based on network performance, activity levels, and staking rates.

Inflation Risk

• Sovereign Bonds: Inflation of the local currency erodes the value of bond returns, diminishing purchasing power.
• Staked ETH: If the issuance rate of new ETH significantly exceeds the burn rate of base fees, there is inflation risk, leading to an increase in supply and a reduction in net yield, diluting the value of interest payments.

Interest Rate Risk

• Sovereign Bonds: Changes in interest rates affect bond prices, with rising rates typically leading to falling bond prices.
• Staked ETH: While Ethereum itself does not issue multiple bonds (various staking yields with different maturities), changes in yield expectations from other Layer 1 smart contract platforms may affect the perceived value and attractiveness of staked ETH.

Currency Depreciation Risk

• Sovereign Bonds: Depreciation of the local currency relative to other currencies can significantly reduce the value of interest payments and principal when converted to other currencies.
• Staked ETH: The value of ETH relative to other major cryptocurrencies and fiat currencies may fluctuate, impacting the actual value of staking yields and principal relative to other assets.

Political and Legal Risk

• Sovereign Bonds: Changes in government or regulatory regimes may affect bond repayment and could lead to changes in fiscal policy and/or debt restructuring.
• Staked ETH: This analogy is less direct. Staked ETH carries additional risks related to network security and governance. If validators act improperly or collude, staked ETH may be slashed as a penalty, potentially leading to a loss of principal. Regulatory changes affecting the broader cryptocurrency market may also impact the value and security of staked ETH.

Volatility Risk

• Sovereign Bonds: Sovereign bonds are generally viewed as low-risk, low-volatility investments. However, during periods of economic instability or political turmoil, the volatility of bonds may increase significantly.
• Staked ETH: Staked ETH is highly volatile as it is still in its nascent stage. Volatility affects staking yields and the value of principal.

Modeling staked ETH as sovereign bonds 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 impacts may differ significantly. Additionally, staking ETH introduces unique risks related to network security, validator behavior, and smart contract errors, which do not have direct analogs in traditional sovereign bonds.

Similar to calculating the present value of sovereign bonds, one can attempt to simulate the present value of so-called "staked ETH bonds." This formula would add the present value of each reinvested coupon to the present value of the bond's face value at maturity. By modeling coupon interest against staking ETH yields and discount rates against the risk-free rate of U.S. Treasury bonds, one can derive the present price of staked ETH bonds.

Nonetheless, one of the most important distinctions between sovereign bonds and "staked ETH bonds" is that the yield on staked ETH changes daily. Therefore, modeling "staked ETH bonds" requires calculating the average yield over the maturity period. Furthermore, unlike traditional sovereign bonds, staked ETH can be unstaked or "redeemed" at any time, allowing for the principal to be reclaimed at any moment.

Currently, ETH does not have a yield curve, meaning there is no relationship between staking yields and the maturity of the staked asset. However, according to our research, the ETH yield curve may change in the coming years, increasing its similarity to sovereign bonds, with varying maturities and terms for staked ETH.

4. Do Staking and Re-staking Enhance ETH's Position as Programmable Collateral?

Liquid staking derivatives (LSD) are protocols designed to simplify the staking process for users lacking technical expertise. LSD collaborates with trusted node operators to manage staking operations on behalf of users. Users staking ETH through leading LSD provider Lido receive stETH. stETH is a synthetic version of their staked ETH, functioning similarly to tokenized deposit receipts. The stETH token automatically adjusts to reflect staking rewards (3.2% APY) and can be converted to ETH on centralized and decentralized exchanges. The token or deposit receipt can then be used for lending, obtaining leverage, re-staking, and many other financial activities within the digital asset space, especially in Ethereum-based applications/protocols.

stETH is the yield 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 the premium collateral in the Ethereum economy. Currently, the total supply of stETH used as DeFi collateral is approximately 2.7 million, accounting for about 31% of the total stETH supply, as shown below.

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

There are over 80,000 stETH in liquidity pools on leading DEXs (decentralized exchanges) such as Curve, Uniswap, Balancer, and Aerodrome. stETH is a yield asset that is becoming the preferred collateral due to its capital efficiency for users, liquidity providers, and market makers. Currently, the preferred collateral on AaveV3, 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 cryptocurrency-backed stablecoins, as shown below. Our research indicates that stETH and other liquid staking derivatives are becoming the preferred premium collateral for financial activities within the Ethereum ecosystem.

Note: The left Y-axis of this third-party chart measures the number of stETH, not the dollar amount of stETH. Source: Dune ("Comparison of stETH Collateral with Other Collaterals" as of August 15, 2024).

But what if users want to earn higher yields from their staked ETH while providing more utility as collateral?

This is precisely what Eigenlayer—a re-staking protocol—can achieve. To date, Eigenlayer has accumulated $13 billion in tokenized ETH deposits, accounting for 50% of Lido's TVL and about 4% of the total supply of ETH, as shown below. Liquid staking derivative tokens representing staked ETH on the Ethereum network can be re-staked on the Eigenlayer platform, allowing other protocols to enhance their network security for a specified period, akin to leasing security services.

Note: Each abbreviation shown at the top of the chart refers to the protocol associated with different ETH liquid staking tokens. Source: The Block as of August 15, 2024.

Some protocols may have tokens with too much volatility to provide reliable network security, potentially facing liquidity shortages and/or needing to enhance their security, both of which can be addressed through dual-token staking or leasing their entire securities with more stable collateral (such as ETH). Re-staking protocols like EigenLayer reward re-stakers similarly to how the Ethereum network compensates validators for their services.

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

The success of EigenLayer indicates a strong interest from users and institutions in utilizing their held ETH in more complex ways. By introducing new use cases, EigenLayer allows participants to retain their held ETH 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 across various platforms.

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

5. Will ETH's Staking Yield Become an Endogenous Benchmark in the Crypto Economy?

So far, we have described staked ETH in some respects as a sovereign bond-like asset and characterized ETH and its liquid staking derivatives as premium liquid collateral in DeFi, supporting many widely used applications. In this part of the article, we focus on another unique feature of ETH staking yield: its impact on investments in the crypto economy, which our research suggests can be compared to the role of Treasury bonds and federal benchmark rates in the traditional economy.

Today, staking yields influence public and private investments in the digital asset space, much like high-quality liquid assets (HQLA) do in traditional finance. First, ETH yields seem 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, more volatile assets? Importantly, unlike ETH, the yields of other assets often dilute cash flows. In other words, if investors hold and do not stake any other Layer-1 tokens, network inflation will dilute them.

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

ETH's staking yield also raises the opportunity cost of holding and borrowing stablecoins. As its native yield rises and becomes a benchmark, the activity, MEV fees, and overall demand for ETH put pressure on multiple DeFi protocols. MakerDAO, Aave, and Compound are three such protocols.

MakerDAO is a protocol for managing 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 functions of the MakerDAO protocol is the DAI Savings Rate (DSR), which allows DAI holders to earn interest by locking their DAI in a special smart contract. After DAI faced significant selling pressure and a reduction in circulating supply, MakerDAO governance decided to raise the DSR rate from 5% to 15%.

In money markets like Aave or Compound, where conditions are determined by supply and demand, the returns for supplying/borrowing stablecoins have increased significantly. The APY for fiat-backed stablecoins ranges from 5% to over 15%, depending on market conditions. This interest rate reflects investors' willingness to borrow stablecoins while providing ETH or stETH as collateral without selling.

Additionally, protocols like Ethena Labs (which offers a stablecoin backed by spot stETH positions and perpetual futures short positions as collateral) have attracted many stETH holders. Why? The yield offered by Ethena's stablecoin is significantly higher than that of DeFi alternatives, not to mention the ordinary staking yield of ETH.

The yields from staking ETH also influence 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 typically mean higher user acquisition costs, as potential investors and liquidity providers are more likely to stake ETH for more stable returns rather than riskier returns associated with new or less mature yield farming opportunities.

Investors allocating funds to early digital assets are all asking the same question: based on risk and liquidity adjustments, does this project offer better investment returns than simply holding and staking ETH over the investment period? We can explore this question with a hypothetical example. How much better must a typical closed-end fund (with an average harvest period of 7 years for tech startups) perform than ETH to break even after compounding?

If the ETH yield is 4% compounded over 7 years, then even without considering price appreciation, the closed-end fund must outperform ETH by over 31%.

In other words, early investors in the digital asset space often consider this: based on risk and liquidity adjustments, do the projects they are evaluating provide higher returns than simply holding and staking ETH over the investment period? For instance, consider a typical 7-year fund, often referred to as a harvest period, during which investments are expected to mature and provide liquidity. If the same capital were invested in ETH and staked at an average yield of 4%, the project's performance would need to exceed ETH by at least 31% to compensate for the compounded yield effect. In a bull market characterized by oversubscribed private rounds, declining valuation attractiveness, and unfavorable attribution conditions, competition from staking ETH will become even more intense.

6. What Are the Comprehensive Attributes of ETH?

The success of spot Bitcoin ETFs may be attributed to Bitcoin's appreciation potential and relative stability compared to other stores of value, particularly fiat currencies. The arbitrary decisions made by monetary authorities (sometimes capricious and inconsistent) have played a significant role in the long-term depreciation of fiat currencies. In contrast, Bitcoin is "rules-based," with its supply mathematically capped at 21 million coins. Thus, Bitcoin is becoming a strong alternative to fiat currencies, representing a category of digital assets akin to digital gold.

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

Robert Greer's paper "What Exactly is an Asset Class?" categorizes assets into three types:

Capital Assets: Assets that are productive and add value to holders in the form of cash flow, such as stocks, bonds, or real estate.

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

Store of Value: Assets that cannot be consumed or converted into other assets or goods but can retain value over a long period.

In this article, we have illustrated the similarities between ETH yields and the yields of debt-like instruments, particularly sovereign bonds. We have demonstrated that ETH staking yields serve as a measure of smart contract activity and economic cycles in the digital asset space, akin to the federal benchmark rate in traditional finance.

Moreover, like any other Layer 1 asset, ETH is a consumable asset used to pay for transactions to be included in the Ethereum network's ledger. This process involves exchanging assets to pay validators for storing and computing data. We have also highlighted the ability of staked ETH to serve as high-quality liquid assets in DeFi, supporting the most popular applications and stablecoins (such as DAI and USDe).

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

While the Bankless team promotes ETH as a "three-point asset," according to Robert Greer's classification, it embodies characteristics of three different asset classes. However, we believe Bitcoin has already become and will continue to be a very reliable store of value. That said, we also believe ETH is paving the way for a new hybrid asset. While it exhibits store of value attributes in the smart contract economy, what distinguishes ETH from any other digital asset is that it is a programmable asset capable of generating cash flow, serving as premium collateral in financial applications.

ETH and staked ETH are highly liquid and widely traded across many exchanges. Their liquidity ensures they can be easily liquidated and converted into other assets and/or used in various DeFi protocols. Although ETH is more volatile than government bonds or real estate, it is one of the most mature, valuable, and widely used cryptocurrencies in the world. With the launch of spot ETH ETFs, the acceptance of ETH may increase, potentially reducing its volatility.

Currently, ETH and its liquid staking derivatives are used as collateral in various DeFi protocols, not only for securing loans but also for participating in liquidity pools, generating yields, and issuing stablecoins. While ETH may not fit neatly into a single asset class, its multifaceted attributes highlight the allure of its unique asset profile, making it highly attractive for those looking to participate in the rapidly growing global smart contract economy.