Ethereum 2 and the triple point asset model
In the XVII Century, the Dutch Empire was the pre-eminent economic empire and the richest power in the western world. Different technologies helped them spread their hegemony throughout the globe. The Dutch had a very advanced shipbuilding technology that allowed them to navigate great distances and trade with the whole world. They also had superb military technology that permitted them to defend against rival powers (especially the British) and conquer remote areas.
But they had another important technology, an economic-financial one. They innovated in resource allocation mechanisms to finance their endeavors and conquests and limit the liability of the merchants. They enabled to collectively lend money and buy ownership in profitable projects, a novelty in those times. Under the Dutch empire, the first listed public company was incorporated: the Dutch East India Company, created in 1602. This was a real institutional revolution as it granted legal personhood, separation of ownership and management, transferable shares, and importantly, limited liability. It was the birth of a new asset class: the stock.
Dutch East India Company is considered a predecessor of modern-day corporations. Shares were traded in the first stock exchange in the world based in Amsterdam and paid with the world’s first reserve currency: the Dutch Guilder. All these financial investment innovations attracted investors and made Amsterdam the leading financial center of its time. Due to these innovations, many regard the Dutch as the inventors of capitalism.
Fast forward 400 years: the largest public smart contract blockchain, the Ethereum network, which supports a digital economy worth at times of writing USD 370b (currently the third largest “bank “in the world, after Bitcoin and JP Morgan) makes the transition to a new consensus mechanism: Proof — of - Stake. A staked asset is, as we saw in the previous article, a capital asset, an asset expected to generate value over time and valued on the basis of net present value of its expected returns.
The transition of Ethereum to Proof-of-Stake converts Ether, the asset, into a capital asset. But it turns more interesting: Ether will be the first asset in the history to have the qualities of all three asset classes, simultaneously: Capital Asset, a Store of Value, and a Commodity (aka “triple point asset”). The birth of a new asset class?
Let’s examine its “triple point” qualities with more detail:
- In its capital asset form, staked Ether is
- a share in Ethereum. In this respect, behaves similar to stocks. Staked Ether has a perpetual nature, such as equities. It also provides a claim on Ethereum’s future transaction fees. Although staked Ether does not provide voting rights, many other staking assets in DeFi provide governance (political rights) just as traditional equities do.
- a claim on Ethereum fees. In this respect, behaves similarly to bonds. Ethereum is a bond issuer and Stakers are bondholders. The difference with traditional bonds is that Stakers can redeem Ether back “ on command” (no maturity), similar to an embedded option to a bond. In particular, Ether acquires sovereign bond qualities, as the platform is solvent by design and has no default risk.
- the right to produce work. In this respect, behaves like a contractor license bond. In exchange for staking, Stakers receive a license for providing consensus. and security. the rewards are being paid in the native token.
This aspect turns staked Ether into an equity-like instrument that pays out dividends into perpetuity.
2. In its commodity form, staked Ether is
- a commodity used to pay transaction fees to the Ethereum network. In the Ethereum network, transaction fees are know as gas. The metaphor with traditional gas is evident.
Gas prices are measured in Gwei, a subunit of Ether. Gwei is short for gigawei, or 1,000,000,000 wei. Wei, as the smallest (base) unit of ether, is like what cents are to the dollar and satoshi are to bitcoin. 1 gwei = 0.000000001 ether.
Every transaction with the Ethereum network (send a token or interact with a smart contract) costs gas and is priced in Gwei. After the introduction of EIP — 1559 (scheduled for July of 2021), these fees will be “burned” just as it happens with traditional gas or oil. After the introduction of EIP - 1559, Ether will turn into a consumable / transformable asset (a commodity).
3. In its Store-Of-Value form, staked Ether
- an alternative store of value to traditional financial assets such as bonds and stocks or commodities such as gold or silver. Moreover, Ether, is the reserve asset of the Ethereum economy and especially of DeFi. At times of writing, 10.6M ETH, worth USD 72b, is backing the DeFi economy. This is staked Ether in Store- of - Value form.
Blockchain technology enables us unprecedented innovation in capital allocation, financing, debt, and collective ownership. I believe this will lead to a substantial leap in human welfare, just like happened in the Netherlands at the beginning of the XVII century. But, with a substantial difference: the new financial center will not be a city, but a public blockchain. The new reserve currency will not be the legal tender of the reigning empire, but a digital, permissionless, censorship resistant currency. Quite exciting moment to be alive!
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