Time in the Market
               Not Timing the Market

THE ETH YIELD CURVE SUMMIT: BASECAMP TO PEAK

Ethereum (ETH), the second-largest cryptocurrency by market capitalization, is more than just a cryptocurrency; it’s a foundational platform for DeFi (Decentralized Finance) applications. If these terms are unfamiliar, I recommend exploring the Ethereum White Paper for a better understanding.

I’m often surprised when people invest in Ethereum without fully understanding its potential. While many view Ethereum as a promising investment due to its potential for future growth, it’s important to note that its value extends beyond mere financial gain.

Several use cases for holding ETH is well acknowledged, but what recently captured investors’ attention is the prospect of STAKING ETH to earn yield. This practice and Ethereum’s crucial role in the crypto space could significantly influence the financial industry by establishing a unique (almost) risk-free rate in Crypto, defining yield curves, and introducing new structured products. Please note that the price of ETH and the choice of staking platform can contribute to risk, so always conduct your research thoroughly.

When someone tells me they own ETH, I naturally gauge their understanding. If they know all the points below, I can confidently identify them as seasoned crypto enthusiasts. However, if they grasp most topics but overlook the fourth, they’re nearly a comprehensive crypto investor. Anything less, and they’re likely still learning.

ETH holders generally fall into four categories:

Trading Collateral: Some users hold ETH as collateral on exchanges for trading futures or options. In this context, the staking rate is not of primary concern as these traders actively utilize their ETH to generate profits.

DeFi Collateral: Another group uses ETH as collateral in DeFi applications. Again, the staking rate could be more significant in this use case.

Gas Fees: Some users hold ETH in wallets to pay for transaction fees or ‘gas’ on the Ethereum network.

Passive Investment: Lastly, some hold ETH passively as an investment. Traditionally, these investors have earned zero yields on their ETH. However, STAKING can now earn between 4% – 7%, depending on the network’s staking participation and other variables. This shift from making nothing to achieving something is quite significant.

ETH STAKING is emerging as an (almost) “Risk-Free Rate” in Crypto. From an asset management perspective, earning something is always better than earning nothing. This principle underlies much of the financial industry. Despite its inherent risks, ETH staking presents an attractive alternative to the passive yield of making nothing.

Comparing ‘ETH staking’ rates to yields from traditional assets like treasuries can be misleading. Investors are unlikely to exchange a stable asset for a volatile one like ETH solely for the yield. Instead, the comparison should be between earning zero gains passively and earning something through staking.

The impact of staking on ETH is expected to be substantial. Currently, most proof-of-stake networks have 50%-70% of their supply staked. ETH ( with a relatively low ) 15% STAKED has significant room for growth, possibly rising to 50%-60% in the future.

This growth and an increasingly mature market could solidify ETH as the standard of yield in Crypto. Yields from other crypto opportunities might be compared against ETH staking yields, establishing an industry benchmark. This paradigm could enhance the understanding of yield variations in different DeFi applications, providing a more nuanced comprehension of returns in the crypto market.

Over the past year, the crypto lending market has undergone substantial changes, with centralized lending platforms like Blockfi and Celsius experiencing difficulties. However, DeFi lending platforms like Aave, Compound, and Maker continue to prosper. The introduction of an ETH yield curve can further refine this sector. A yield curve reflects the difference in rates for borrowing over varying durations, enabling more complex lending strategies like duration mismatches.

ETH STAKING could be the catalyst for creating structured products and facilitating rate arbitrage. We’ve seen similar trends in traditional markets with credit default swaps in the early 2000s, which started as niche products but surged in popularity. It might be soon that we witness the creation of various structured products and derivatives revolving around Ethereum interest rates.

Looking Ahead:

The growing interest and progress in this field suggest we are on the brink of a significant evolution in the digital assets industry. ETH staking could form the cornerstone of a fully-developed financial market within a few years. The existence of an ETH yield curve and the progression of structured products, opens opportunities for advanced financial instruments similar to those observed in the European and Asian derivative markets in the ’90s.

An exciting possibility is the creation of defined-risk products or guaranteed funds, using yield and options to craft products with specific risk-return profiles. We might see the result of 80% or 90% guaranteed funds or accelerator funds, which enhance returns while effectively managing risk.

This development recalls the evolution of credit default swaps from 2005 to 2008. Initially, they were relatively unknown and considered niche. However, by 2009, they were widely traded, and their pricing and evaluation were widely understood. We could see a similar trajectory with Ethereum interest rates and associated structured products.

This evolution is already drawing considerable attention, with more investors and institutions expressing interest in these structured products and derivatives built around Ethereum interest rates. Many are even establishing dedicated desks to leverage this growing trend, recognizing the potential for substantial margins.

So be mindful, ETH staking is more than just a novel way to earn yield. It carries the transformative potential for the broader financial landscape. As Ethereum continues to underpin DeFi applications, the introduction of ETH yield curves and the subsequent development of structured products around Ethereum interest rates could position it as the risk-free rate in Crypto, setting the stage for the next epoch of the crypto-financial market.

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