Ether Capital 2.0 and The Road to Staking

On December 15, 2021 we announced that Ether Capital had officially staked $50 million, or 10,240 Ether, onto the Beacon Chain (“Eth2 Staking.”) This marks an inflection point as an organization that will have a meaningful impact on our shareholders and the wider ecosystem.

We believe that Ether Capital is in a unique position to provide public market access to Ethereum and Web3. As we transition from being a passive owner of Ether to an operating business, we’re excited to generate meaningful revenue and expand our team and activities to deliver shareholder value.

The road to Eth2 Staking has been a difficult one for us, which has been magnified by our standing as a publicly traded company in Canada. It’s a path we’ve been committed to since Ether Capital formed in early 2018 and we wanted to take the opportunity to share with you our journey in getting to this moment — what it means, and what’s next for our company.

Ether Capital 1.0: 2018–2021

Ether Capital was born out of a recognition that Ethereum represents one of the greatest investment opportunities in our lifetime and is one of the most important pieces of infrastructure of the Web3 movement. Amidst the bull market in 2017, there was a tremendous amount of hype around cryptocurrencies and it was tough to find the signal from the noise. That’s why Ether Capital was formed — to capture investor attention and help bring quality exposure to this asset class. We were a group of crypto-natives and established members of traditional finance and venture capital who joined forces to create the first access point in the capital markets that could identify this exciting opportunity.

Ether Capital acquired more than 40,000 Ether (“ETH”) and gave retail investors the opportunity to follow us on a very focused narrative, including a long-term thesis around Ethereum and Web3.

Staking has been a fundamental part of our roadmap from the beginning. It gives us an opportunity to generate a yield off of our ETH balance by participating proactively in network validation, security and decentralization. It’s a milestone that we were — and still are — very proud of, as it also means Ethereum has progressed from energy-intensive “mining” to energy-efficient “validating.” Although we faced obstacles like a prolonged bear market in 2019, a smaller asset base, technical setbacks and delays in the Ethereum 2.0 design, we remained committed to the importance of staking activities to benefit our shareholders. By staking, we’re able to generate significant cash flow by validating transactions, which demonstrates our contributions to the network and helps secure the world’s leading smart contract platform.

Ethereum 2.0 officially went live in December 2020, bringing with it the ability to move any existing ETH onto this brand new network and begin generating the yield opportunity our investors had been waiting for. Sounds easy enough, right? Staking, however, came with multiple catches!

  • The ETH deployed into staking would be locked up for an unknown period of time — potentially years — which presented a challenge with respect to our liquidity
  • There was, of course, a real risk of an early-adopter bug in the code which could lead us to lose the staked ETH
  • The biggest complication for an organization such as ours was embedded in the complexity of this new network — a lack of smart contract support as it related to custody
  • Since we’re a public company, we’re subject to stringent rules and controls that govern the Canadian capital markets

Background: Ethereum 2.0, Staking and Phase 0

Before we dive into the complexities above, let’s provide some framing on Ethereum 2.0.

Right now, Ethereum is running a version 1.x of its software that launched in 2015 and has been an extraordinary success in terms of usage and value creation. All applications currently exist on Ethereum 1.x, which is a ~$450 billion network generating more than $50 million in transaction fees per day. You may be wondering about the energy consumption of such a network, especially for the underlying verification algorithm called proof-of-work (i.e., “mining.”) And you are correct, mining is an energy-intensive process. The goal is to transition all applications to a new network infrastructure called Ethereum 2.0. The transition from Ethereum 1.0 to 2.0 is all about replacing proof-of-work with a 99% more energy-efficient consensus called proof-of-stake (i.e., “staking”).

To analogize this, imagine a very large airplane with millions of passengers and billions of dollars of valuable cargo. This airplane is an old model and a new one is being built, which is much bigger, safer and way more fuel efficient. There’s one problem though — the move to a new airplane has to happen mid-flight! That is, you can’t land the existing airplane and swap out all the passengers and cargo. For developers, this carries significant risk and is a huge engineering challenge.

In order to mitigate as much risk as possible, Ethereum’s core developers decided it would be best to roll out this new network in three distinct phases.

We are currently in Phase 0 of Ethereum 2.0, which is the “heartbeat” of this new proof-of-stake blockchain. In this phase, the only functionality lies in the ability to transfer Ether from Ethereum 1.0 (i.e., the existing mainnet) onto Ethereum 2.0 (i.e., beacon-chain) in a one-way direction. In Phase 0, Ether deposited in Ethereum 2.0 can only be used for staking and cannot be transferred. For every 32 Ether deposited into Ethereum 2.0, one validator node participates in Ethereum’s proof-of-stake protocol while earning rewards and is locked until some later point in time (expected to be mid-2022.)

Phase 1 (i.e., the “Merge”) is when Ethereum 1.0 merges into Ethereum 2.0 and includes a scalability upgrade known as “sharding,” which is basically a way to increase blockchain storage and throughput. This phase marks the end of proof-of-work mining on Ethereum. Phase 2 (i.e., shard chains) is way down the road and includes more ambitious scaling and functionality upgrades.

Why Multisignature Wallets Matter

At Ether Capital, we do not rely on a third-party custodian and, since our inception, have always held our ETH in a multisignature wallet secured by a smart contract from Gnosis. This Gnosis solution is a best-in-class product used by much of the industry since the early days and has been heavily stress tested. This specific software was configured for us to have assets only be accessible if a majority of our board of directors confirmed the transaction. As noted above, Ethereum 2.0 is a “wireframe” blockchain that does not support smart contracts (remember, there are no applications or functionality yet on this new network beyond staking.) So we tried to figure out how to participate in this new opportunity, but in a way that was respectful of the multisignature setup.

Would it be appropriate to deploy meaningful capital to staking using a wallet where only one member of our team had control over the private keys? Despite the ease of use, we decided firmly that this was not an appropriate solution for our company.

However, to signal our commitment to staking and the wider Ethereum ecosystem, in December 2020 we deployed a single validator (representing 32 ETH) using a single key wallet, and took steps to secure the private key. For any additional commitment to staking, we resolved this would only be implemented if we were comfortable with the solution and/or it addressed the multisignature smart contract issue. Over the next few quarters, management and technical members of the board researched ways to partner with existing blue-chip custodians or solve the issue in-house.

We researched and analyzed various key generation setups for securing Ethereum 2.0 private keys that would mimic a multisignture process (i.e., BLS signatures with Horcrux.) Ultimately this approach didn’t work either as it was highly technical and wasn’t stress tested enough to risk company funds. We also found that the custodial approach wasn’t available, meaning no large custodian had rolled out an appropriate custodial staking solution for us. At the time, we concluded that the risks of staking far outweighed the rewards.

This summer, however, an update to Ethereum 2.0 was rolled out that allowed an existing Ethereum address to be used for Ethereum 2.0 staking withdrawals. A beacon of hope! Soon after, Shayan Eskandari joined us in our journey as Ether Capital’s Chief Technology Officer. He was previously a smart contract engineer at one of the leading smart contract auditors in the ecosystem, and a blockchain engineer in a prior role.

To participate meaningfully in Ethereum 2.0 staking, we upgraded our previous Gnosis solution to the modern evolution of this multisignature wallet called the “Gnosis Safe.” This infrastructure upgrade not only allowed us to stake our Ether in a future proof and secure manner, but provided more flexibility for participation actively in other areas of crypto, like decentralized finance (aka “DeFi.”) Over the last few months we’ve been in close dialogue with a leading staking provider, Figment Inc., which has helped us work through appropriate steps to stake a meaningful portion of our ETH. All of these steps required heavy documentation, processes around controls and oversight in a public company structure. For many in the crypto ecosystem who are used to self-custody and instant transactions, this might seem overwhelming, but in reality it’s very necessary.

Despite the setbacks, a delayed timeline and many technical dead-ends, we’re excited that we’re finally here! We’ve deployed our first $50 million of Ether into Ethereum 2.0.

What’s Next for Ether Capital?

Now that we’ve delivered on this early promise, our intention is to continue building a staking position on Ethereum 2.0 until we’ve deployed a minimum of 30,000 ETH from our balance sheet over the coming months. As of today’s rate of 5.2%, this would deliver more than $7 million of revenue to the company as we move towards our goal of being one of the biggest ETH accumulators in the capital markets. We intend to make the assets on our balance sheet productive by using our revenue to fund other business opportunities and generate unique IP within the wider ecosystem.

We believe that Ether Capital is in a unique position to provide public market access to Ethereum and Web3. As we transition from being a passive owner of Ether to an operating business, we’re excited to generate meaningful revenue and expand our team and activities to deliver shareholder value.

We would like to thank all of our shareholders, board members and investors who have supported us throughout this journey. We’re proud to be the first public company in the world to stake such a meaningful amount of capital into Ethereum’s proof-of-stake network.

We look forward to the new year and plan to stake more of our capital while participating in network developments.

The original version of this article was published on Medium: