Staked ETH Withdrawals: What You Can Expect

Ashley Stanhope, Director of Communications, Ether Capital
& Benjamin Thalman, Senior Protocol Specialist, Figment

Ethereum is about to undergo its first major tuneup since the Merge took place in September 2022. The Shanghai/Cappella upgrade, currently slated for April 2023, will allow stakers the ability to finally withdraw their staked ETH and corresponding staking rewards. We can anticipate many stakers are anxiously waiting to access their assets, so we answered FAQs about what you can expect.

How will staked ETH withdrawals be processed?

As of today, there are 17+ million staked ETH (US$26 billion) and more than 518,000 validators securing transactions on Ethereum. This number has been steadily increasing ever since the Beacon Chain launched in December 2020. Since then, all staked ETH has been indefinitely locked in the protocol. Looking under the hood, Cappella is the Consensus Layer (CL) upgrade that will make staked ETH withdrawals possible. It will implement EIP-4895, a new system-level operation, that will push staked ETH from the CL to the Execution Layer (EL), allowing withdrawals to enter into the Ethereum Virtual Machine (EVM). There will be no gas costs associated with withdrawals since they are identified as a new type of object in an Ethereum block rather than user or smart contract-initiated transactions. 

Source: Galaxy Research

Do I need to input a special address to access my staked ETH?

A validator is required to provide a withdrawal address to receive staked ETH. It’s important to note that each validator can only be assigned a single withdrawal address, and once an address is submitted to the CL, it’s final. The process cannot be modified or reversed, so those who stake should verify ownership and accuracy of their address before submitting. If users provided an ETH1 withdrawal address when initially setting up their staking deposit, then no further action is required on their part. However, the majority of stakers did not provide a withdrawal address on initial deposits (most likely used BLS keys) and might need to update their withdrawal credentials to the new format (0x01) in order to receive their Staked ETH and rewards. The Zhejiang Testnet Launchpad has instructions on how to do this for testnet.

How will staking rewards be paid out?

Reward payments are automatically processed for active validator accounts with a maxed out balance of 32 ETH. Any rewards that surpass the validator’s 32 ETH deposit does not add to the validator’s stake weight. Therefore, reward payments are withdrawn every few days with no action required on the validator’s part. Stakers who do not have an ETH1 withdrawal address will be required to update their BLS keys to the appropriate ETH1 address to access CL rewards. Stakers have been able to access EL rewards (block execution fees, MEV) in their ETH1 addresses ever since the Merge via the fee recipient address set on their validators. 

Are there different types of withdrawal requests? 

There are two main types of withdrawals expected — full withdrawals and partial withdrawals.

Full withdrawals involve stakers removing their 32 ETH from the network and giving up their validator status. In addition to providing a withdrawal address, users looking to remove their full balance and no longer participate in validating transactions, must sign and broadcast a “voluntary exit” message using their validator keys. This process initiates a validator’s exit from staking and adds the validator to the “exit queue”. Once the process is complete, the account is no longer responsible for performing validator duties and will be marked as fully “withdrawable.”

Partial withdrawals refers to removing anything over and above 32 ETH (often staking rewards). These withdrawals are able to bypass the exit queue (when a validator removes their full 32 ETH) and go straight to the withdrawal queue. For partial withdrawals, ETH is automatically transferred to the corresponding withdrawal address. There’s also a limit on how much staked ETH can be withdrawn per day (see below).

How long will withdrawals take?

There are a few different circumstances that will determine how long it takes for a staker to receive their staked ETH and/or rewards. 

Full withdrawals require a validator to first exit the set and give up the right to perform validator duties. As mentioned above, there are steps involved before their ETH can be withdrawn, which can take more than 24-hours to complete. 

It is worth noting that, currently, the maximum number of validators that can exit the active set per day is 1,800 or 57,600 ETH. This number fluctuates depending on the total amount of Staked ETH to ensure the protocol remains stable. Another reason for the limitations is to stave off attackers from using their stake to act in a malicious manner and withdraw ETH before they can be slashed. 

When it comes to actually receiving the staked ETH, only 16 withdrawals (both full and partial) can be put into a block, which happens about every 12 seconds. The reason why partial withdrawals take less time to reach a user’s address is because they are automatic and there’s no need for a validator to exit the set to receive them.

The process for both types of withdrawals could take anywhere between two and four days in the beginning, depending on how many stakers are required to update their withdrawal credentials.

It’s an exciting time for Ethereum as it enters its next phase of growth. Future enhancements to the protocol will aim to improve scalability, including EIP-4844 (proto-danksharding), an upgrade that sets the stage for sharding in 2024. This is all part of Ethereum’s transition to become a more secure and scalable blockchain that can support a wide-range of user and developer activity.


Six Things We Learned At Devcon VI

Crypto and Web3 enthusiasts congregated in Bogotá, Colombia, last week for Devcon VI — arguably one of the most important conferences in the industry.

Shayan Eskandari, CTO of Ether Capital, at Devcon VI    Ashley Stanhope, Director of Communications, Ether Capital at Devcon VI    Vitalik Buterin, co-founder of Ethereum, at Devcon VI

Ether Capital CTO Shayan Eskandari and Director of Communications Ashley Stanhope went to connect with the Ethereum community and hear about the latest developments in the space. The conference returned after a three year hiatus due to the pandemic, so there was a lot of catching up to do. Here are six things we took away from Devcon VI:

  1. The staking landscape

 Lido speaks at Devcon VI about the bull case for liquid staking    Panel at Devcon VI about supporting solo and independent stakers

Now that the dust has settled following the Merge, many of the talks focused on the different ways to stake ether (ETH) and earn rewards. The switch to Proof of Stake (PoS) levelled the playing field by allowing more people to participate in validating transactions and securing the network.

Lido’s co-founder Vasiliy Shapovalov made a case for staking with a liquid provider explaining there’s no minimum requirement to stake and users can rehypothecate their assets to participate in DeFi and other on-chain activities. Lido and alternative liquidity providers like Rocket Pool offer an ERC20 staking token (essentially an IOU) on a 1:1 basis for every ETH a user deposits. However, there are a couple things to consider when it comes to liquid staking. 

The risk of centralization

Concentration of staking validators

More than 65% of Ethereum nodes are hosted on centralized servers and Lido has the lion’s share of staked ETH deposits (29%). There is growing concern that centralization harms the network by making it less resilient and introduces single points of failure. Stakers also do not have control over infrastructure so they are subject to slashing penalties if something goes wrong with a liquid staking provider’s validators.

Other options include using a service provider like an exchange or staking independently. Both have their pros and cons. Staking with an exchange requires you to stake ETH and keep it locked up until the Shanghai upgrade takes effect (expected in the next six to 12 months). Service providers are easy to use, but they do take a percentage of your staking rewards (i.e. Coinbase takes a 25% cut). 

Solo or independent staking is important to the decentralization of the ecosystem, something we atEther Capital strongly believe in and support, but it requires technical knowhow and a proper infrastructure setup. Although users are able to keep all of their rewards, a hard upfront cost of 32 ETH is required in addition to consistent software upgrades and a reliable Internet connection. Solo stakers can also be targets for denial of service (DoS) attacks, which is why many people opt to go with staking service providers.

Here’s a link to a panel that took place during the conference on small and independent stakers that’s worth checking out.

2. Breaking down ETH supply since genesis  

Christine Kim from Galaxy speaks at Devcon VI about ETH supply since genesis

One of the more difficult things to grasp is exactly how much circulating supply of ETH there is. For years investors have said that Ethereum’s native token does not hold up as a store of value because unlike bitcoin there is no finite supply. When it comes to BTC there will only ever be 21 million in existence, but Ethereum has always been a mystery. During one of the talks, Christine Kim, Research Associate at Galaxy Digital, took us back to the early days of Ethereum’s ICO and explained how much ETH has been in circulation since the network launched in 2015:

  • Approximately 120 million ETH has been created on Ethereum since genesis (the first block to be added to the blockchain).
  • 12 million ETH (10% of total supply) went to early project contributors and founders before the network launched (also known as a pre-mine). A portion of this also went to Ethereum Foundation, which holds approximately 0.3 per cent of total ETH supply as of March 31, 2022.

Kim also touched on the reduction of ETH issuance since the network shifted to PoS. She emphasized the biggest winners of PoS are large ETH holders who are in the best position to profit now that the Merge upgrade is complete. “If you’re not staking your ETH, you’re essentially getting diluted,” Kim said.

Considering only 12% of total ETH supply is staked on Ethereum, developments need to take place at the protocol level for confidence to grow. Kim believes we’ll likely see staking deposits increase once the Shanghai upgrade is enacted.

3. What’s up with MEV post-Merge?

Talk about PBS  Phil Daian, founder of Flashbots, speaks at Devcon VI

Maximal Extractable Value (MEV) is a hotly debated subject because of the concerns around censorship and the fact end users can be vulnerable to things like sandwich attacks or frontrunning. MEV refers to miners or validators orchestrating which transactions to include in blocks to maximize profit based on the more expensive transactions that are in the mempool (where all pending transactions exist before they are verified).

Under Ethereum Proof of Work, MEV was controlled by an opaque, smaller group of people known as miners. They not only validated transactions, but proposed (built) blocks that were added to the blockchain. The benefit of MEV under PoS is that it takes Ethereum one step closer to network modularity by introducing the Proposer-Builder Separation (PBS).

The PBS helps decentralize the process by introducing a new group of participants called “builders” who submit an ordered list of transactions that become the main payload of the block. The proposer’s job (i.e. validator) is only to accept the block with the highest bid. The idea is that the proposer (and everyone else) does not learn the contents of any block body until after they select the header of the block that wins the auction. This eliminates the possibility of validators cherry picking transactions based on the more expensive transactions to receive a higher reward. To find out more about PBS, make sure you check out the Updates on Proposer-Builder Separation talk — it was a good one.

4. Zero-knowledge proofs: What are they and why do we care?

Vitalik Buterin talks about ZK Proofs at Devcon VI  Talk about security characteristics in ZK Proofs

Scalability is paramount if Ethereum is to go from processing 13 transactions per second to 13,000. Enter zero-knowledge proofs (ZK proofs) — a way for users to prove or submit information including transactions that become verified without having to disclose private information or have it be revealed to the verifier. ZK proofs also compress data off-chain to take pressure off mainnet and improve throughput.

The concept is popular among cryptographers and was first introduced in a 1985 paper, “The Knowledge Complexity of Interactive Proof Systems.” Fast forward to 2022, ZK proofs are front and centre as companies and developers try coming up with new ways to scale Ethereum. Vitalik Buterin, co-founder of Ethereum, also believes that in the next 10 years, ZK SNARKs (a type of ZK proof) will be as important as blockchain.

We recommend checking out “ZK Proof Performance and Security Metrics” to learn about the different types of proofs and how they operate.

5. The state of regulation

Devcon VI talk on advocating for regulation    Talk at Devcon VI about crypto regulation

One of the biggest concerns to those in the industry is legal clarity when it comes to DeFi and how regulation could have a far-reaching impact. Connor Spelliscy, co-founder of the Canadian Web3 Council, spoke about why advocacy matters in shaping new policies and frameworks that can help guide the market. Western governments are accelerating the pace at which they are regulating crypto and Spelliscy said within the next three months, we could see a bill passed in the United States that could ban much of DeFi.

It’s important for developers to keep regulation in the back of their mind during the R&D phase of their projects or risk a bifurcation of the space, something we emphasized during our talk at ETHNewYork. It results in time and effort being placed on products that have legal ramifications and could eventually be deemed offside.

6. Things to consider when building a DeFi product 

Talk about product design in DeFi

Developing a DeFi product isn’t so different from the Web2 world. A roadmap is essential and teams need to not only focus on R&D but commit to an experimentation process, according to Alim Khamisa, Product Manager at Element Finance.

A pipeline of research can guide the development of a decentralized application (dApp) or lead to new products and/or services. Total Value Locked (TVL) is a common metric when evaluating dApps, but Khamisa said it shouldn’t be the only source.  Like in the traditional world, anonymized data collection and feedback can be vital to product development in DeFi.

Keeping up with the pace of change

If you feel a bit lost, don’t worry — you’re not alone! The industry moves at lightning speed, and we want to help. Please reach out to us if you have any questions about Ethereum or staking. You can also sign up for our corporate updates and newsletter where we cover the latest industry news and developments. While we can’t provide specific investment advice, we are here to help guide you in the right direction. 


Everything You Need to Know About the Merge

It has been one of the most talked about events in crypto for years now. The moment when Ethereum changes the way it validates transactions resulting in a more secure, eco-friendly and soon-to-be scalable blockchain. Here’s the breakdown on the critical upgrade that has been dubbed “the Merge” and what investors need to know:

What is the Merge?

Ethereum currently operates under a Proof of Work (PoW) consensus mechanism, which means individuals, also known as miners, operate powerful computers worldwide and compete to solve cryptographic puzzles. The first miner to propose a solution creates a new block filled with transactions that gets added to the blockchain. Once the Merge takes effect, Ethereum will abandon PoW and opt for a Proof-of-Stake (PoS) consensus mechanism. As a result, ether holders become validators and stake (lock up) their assets as collateral in exchange for the ability to verify transactions.

Are there two separate chains?

The short answer is yes. There is the PoW chain where all activity currently takes place and a PoS chain that was launched in late 2020 that only has staked ETH deposits. In order to successfully merge the PoS chain with the PoW one, it needs to be done in stages and requires lots of testing and research. More than US$37.5 billion in ETH has been deposited on the PoS chain since December 2020 — a sign of faith that ETH holders are bullish on the Merge that’s expected to take place in a matter of weeks. Validators can also expect to withdraw their staked ETH in a future upgrade that will be implemented roughly six to 12 months following the Merge.


Why the delay?

We believe the target date for the Merge is less important than developers taking time to get it right. Ethereum is a ~US$200 billion protocol at the time of writing, with a thriving economy of users and builders. Some other blockchains have had the advantage of using PoS from the beginning, where Ethereum is about to undergo arguably one of the most complex transformations in the history of crypto. Years of research and testing have gone into making this possible without sacrificing security and user experience. There will be no downtime during the transition to PoS — and as Tim Beiko from the Ethereum Foundation recently told us — it will happen in a matter of 12 seconds.

What does it mean for ETHC shareholders and ETH investors?

The switch to PoS changes Ethereum’s monetary policy that will ultimately benefit investors in two primary ways.

First, Ethereum will be secured with capital rather than energy. For validators’ contributions to the network, they are rewarded in newly-minted ether. This transforms ether into a yield-generating instrument that will democratize the validation process allowing more people to participate by staking their assets. The current APY is ~4.06%, which will vary at times post-Merge depending on many factors including network usage.

Second, there’s expected to be a 90% reduction of ether issuance. This is because there’s no longer a need to compensate miners for the significant overhead cost involved in running their computers (i.e. electricity bills). Under PoW, there’s approximately 13,000 ETH issued per day to Ethereum miners vs. the expected 1,600 ETH that will be issued to validators under PoS. Validators will still receive an attractive return by staking their assets, but since there are fewer hardware requirements under PoS, the network is able to reduce issuance.

The switch to PoS will also cut energy usage on Ethereum by 99.95%, making it much more attractive to users and investors with environmental, social and governance (ESG) issues top of mind. Under the current PoW model, the energy consumption of Ethereum (~112 TWh/yr) is comparable to that of the Netherlands, with a carbon emission similar to Singapore (53 MT/yr). Running a validator can be done on a modern desktop computer and adds up to an estimated ~2.6 MWh per year.

Source: Ethereum Foundation

What does Ether Capital think about the Merge?

To sum it up, we are very bullish on Ethereum’s switch to PoS and believe there’s significant upside for both ETHC shareholders and ETH holders.

When we started Ether Capital in 2018, we bet that Ethereum would be one of the greatest assets of our generation; something we still believe to be the case. The move to PoS will further solidify Ethereum’s position as a global clearing house and settlement layer for a wide-range of activity.

This is an inflection point for the entire industry and we expect more institutional capital to enter the space that has been sitting on the sidelines. This factors into our decision as a company to focus on staking more of our ETH and building infrastructure to support Ethereum’s robust ecosystem. Our shareholders will also benefit from having direct access to cutting-edge developments taking place on the network with a board and management team made up of traditional finance executives, crypto natives and venture capitalists to guide the decision making process.

As we mentioned above, another key benefit of the Merge is that long-term ETH holders will be able to put their assets to work by staking. Despite currently needing 32 ETH and sufficient technical knowledge to run an Ethereum validator, ETH holders can join a staking pool and capture a yield without having to fork out US$52,000 (calculated at today’s price).

ETH will also become a deflationary asset post-Merge as issuance drops significantly. Bitcoin’s 21 million supply cap has long been a selling feature for the cryptocurrency that investors have put their weight behind because of supply transparency. With a drop in ether issuance, increased staking deposits and a portion of transaction fees being destroyed (introduced in an Ethereum upgrade called EIP-1559 that was implemented last year) we could see upward pressure on the price of ETH. Some analysts also predict we are not far off from the “flippening”, when Ethereum surpasses Bitcoin in terms of market capitalization.

The eco-friendly curb appeal that Ethereum will soon offer under PoS is also likely to lead to more institutional and retail adoption, especially by those with strong ESG mandates. Not to mention, security enhancements as a result of the Merge will help prevent attacks that spam and crash the network — something Ethereum’s co-founder Vitalik Buterin highlighted during a crypto conference in Paris in July. This alone could lead to more use cases and developer activity based on the security properties of Ethereum once the Merge is enacted.

Competing PoS blockchains will also have the added challenge of trying to find new ways to steal the spotlight away from Ethereum that end users and developers have already decided is the platform of choice. With the addition of roll-ups and other scaling solutions that could lower the cost of transactions, it makes it more difficult for rival Layer-1 blockchains to maintain their value propositions.

What comes next?

Continual upgrades including staked ETH withdrawals and scalability will be the primary focus for Ethereum developers over the next several months. The community has a knack for adopting peculiar terms for projects or events that take place in the cryptosphere. The “Surge”, “Verge”, “Purge” and “Splurge” are future upgrades and part of Ethereum’s long and complex roadmap to Ethereum 2.0 — an enhanced blockchain that will have a secure base layer and the functionality to support a wide-range of activity. Infrastructure quality and security are two things that Ethereum developers have never compromised on.

If you’re looking for more written content on the Merge and other topics related to Ether Capital or Ethereum, we recommend you sign up for our newsletter! (we promise not to spam you)

This blog post has also been published on our Medium page that you can access here:

Ether Capital Turns Four

Today marks Ether Capital’s fourth anniversary as a public company, something we are extremely proud of.

In 2018, we made our debut as the first Canadian company to give investors direct exposure to Ethereum. Still today, we remain the leading access point to Ethereum and Web3 infrastructure and are one of the largest holders of ether (ETH) in the capital markets.

Over the past few years, we’ve seen billions of dollars in capital pour into the sector, giving rise to new crypto-related businesses and verticals. While there’s lots to look forward to in the months ahead, we wanted to take this opportunity to reflect on our accomplishments over the past four years and what sets Ether Capital apart from others in the space.

Ethereum reshaping our financial landscape

From day one, we have always believed that Ethereum is a once-in-a-generation asset that will disrupt the world of finance. Despite most of the attention being focused on Bitcoin when we started the company, we did not stray from our conviction that Ethereum would become a global clearing house and settlement layer for a wide-range of activities. Its programmable base layer and open-source infrastructure is what led to the fascinating discovery of non-fungible tokens (NFTs), decentralized finance (DeFi) and the metaverse that captured mainstream attention in 2021. Our investment thesis has always revolved around projects, technologies, protocols and businesses that leverage the Ethereum ecosystem. This is why we often tip our hat to the development community building the key infrastructure that’s instrumental to the industry’s success. This will be the plumbing and foundation for the next generation of the internet known as Web3.

Unique structure

Ether Capital is made up of leading venture capitalists, crypto natives and traditional finance executives who have insight into the latest developments in the space, and the wherewithal to introduce this cutting-edge innovation to traditional investors. Different from closed funds or ETFs, our corporate structure allows us to participate in crypto-related activities like staking, while having the knowledge to identify critical infrastructure that will help fuel mainstream adoption. Earlier this year, we made two strategic management hires and brought on Jillian Friedman as our Chief Operating Officer and Ian McPherson as our new President & Chief Financial Officer. In addition to the strong team we already had in place, both Jillian and Ian will give us the firepower we need to grow our business and seek out new opportunities in the fast-growing industry.

Staking pioneers

In December 2021, we became the first public company in the world to stake a significant amount of ether (10,240 ETH) to generate meaningful revenue. In February 2022, we doubled our initial investment and staked an additional 10,240 ETH at a yield calculated at ~5%. In less than four months, we have surpassed $1 million in staking rewards simply by locking up our assets to validate the network in an eco-friendly way. It’s widely anticipated that more institutional investors will stake their assets in 2022 either before or after the Merge, and Ether Capital is proud to be leading the way on this front.

Shaping Canadian regulation

As a fully-regulated company that operates in the space, we understand the industry’s unique complexities and what it takes to properly regulate the sector. Working alongside policymakers, we were one of the first organizations to create direct access points for Canadian investors to get exposure to digital assets. In 2021, we successfully launched the world’s first spot Bitcoin ETF alongside Purpose Investments that amassed $1 billion a few weeks after it began trading, making it one of the fastest-growing ETFs of all time. Shortly after BTCC’s launch, we assisted Purpose with its Ether ETF, proving traditional investors can get direct exposure to ether without having to navigate the space in a crypto-native way. We also recently became founding members of the Canadian Web3 Council — a new industry association featuring Canada’s top cryptocurrency and Web3 companies — that’s dedicated to helping government officials develop a national strategy for digital assets. While there are still many challenges ahead, we’re optimistic Ether Capital’s recognition in the space and productive relationship with regulators will afford us a seat at the table to help shape meaningful policies that guide the industry for generations to come.

The road ahead

Bootstrapping a business takes guts and our unwavering commitment to Ethereum has allowed us to become trailblazers in an industry we are so passionate about. But our work is far from over and we have much to do in the coming months as we focus on our next phase of growth. For now, we want to take this opportunity to thank our shareholders, our board, supporters and everyone who believed in us along the way. Remember, it’s the network effect (aka you) which defines Ethereum’s success.


The original version of this article was published on Medium:

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:

Is Ethereum a Better Store of Value than Bitcoin?

In this post, we’ll explain why we believe that Ethereum’s native token, Ether, is likely to become a better store of value than Bitcoin.

You might be wondering — how is this possible?

Bitcoin and its Hard Cap Monetary Policy

Bitcoin has traditionally captured the store of value narrative more than any other digital asset. And this makes sense, as scarcity is baked into its codebase. First, there is a hard cap of 21 million tokens that will ever be issued. Second, every four years there is a “halving” event in which Bitcoin’s issuance per block (aka its inflation rate) goes down by 50%.

Why does inflation need to happen in the first place? Simply put, inflation is required to keep the Bitcoin blockchain secure. Inflation rewards are earned by Bitcoin “miners” to compensate them for the energy and expense of putting transactions on the blockchain in an honest fashion.

With its declining inflation rate, Bitcoin’s monetary policy is similar to that of gold, the physical world’s apex store of value asset. As more gold is mined, it becomes costlier to find and extract which reduces new supply (i.e., inflation). Similarly, as Bitcoin gets closer to the 21 million limit, the lower its inflation rate will be. Bitcoin is cryptocurrency’s answer to a “hard” asset like gold.

Bitcoin’s investment thesis as a store of value asset is supported by its market cap (currently under $1 trillion) being multiples less than gold’s and the fact that Bitcoin as a digital asset is more useful than gold in payments and settlement.

Ethereum — a Stronger Monetary Policy?

When Ethereum first launched, its native token Ether (“ETH”) didn’t have a hard cap. The inflation per block paid to miners was 5 ETH and there was no “halving” event baked into Ethereum’s code.

The Ethereum community decided that a blockchain with more security via fixed block rewards was preferable to a blockchain with a store of value monetary policy. Many in the digital asset space said ETH could never be a store of value as a result. Fast forward to today and Ethereum’s block reward is now 2 ETH per block and there is still no hard cap.

Since Ether is required to pay for transactions on the Ethereum blockchain, demand for transactions has led to gains in Ether prices. The total market cap of Ether is now over $300 billion, but Ether has never been accorded that elusive store of value narrative like Bitcoin.

In our view, this is about to change dramatically with two upgrades to the network expected to go live later this year. These are:

  1. Proof of Stake: Ethereum is switching from energy intensive “mining” to a mechanism whereby holders of Ether (aka “stakers”) are in charge of putting transactions on the blockchain. Staking is much cheaper than mining as a result of the reduced energy expenditure. This leads to a drastically reduced inflation rate, which is expected to be under 1% per year.
  2. Fee Burn: This is a mechanism whereby transaction fees on the Ethereum network will be burned in a fashion akin to a share buyback. In other words, instead of transaction fees going into the pockets of miners, they are burned. This increases the scarcity of Ether for the benefit of all holders of Ether.

So how does this all play out and how can we compare Bitcoin’s monetary policy with Ethereum’s monetary policy post-staking and post-fee burn?

One interesting outcome could be that Ethereum’s inflation rate might turn negative. In other words, the amount of Ether burned from transaction fees could exceed the amount of Ether issued to stakers. This scenario is laid out in the chart below, where Bitcoin’s hard cap is shown next to Ether’s (potentially) decreasing supply.

If Bitcoin is sound money due to its 21 million token hard-cap, Ether is ultrasound money due to its (potentially) decreasing supply.

We at Ether Capital are extremely bullish on Ether due to the upgraded monetary policy we expect to see later this year. If you’re interested in learning more about this topic, check out our podcast with Ethereum researcher Justin Drake (Apple Podcasts or Spotify).

And if you have any questions or comments, reach out to us on Twitter @ethcap or email us at [email protected]

The original version of this article was published on Medium:

The Ethereum Toll Road

By Benjamin Roberts, Co-CIO of Ether Capital

When we started Ether Capital (NEO:ETHC) three years ago, we talked about Ethereum as a kind of digital toll road of the future; a place where anyone could build and use interoperable financial infrastructure and pay a small fee to the Ethereum network for securing it.

In our analogy, smart contract developers and users were cars, and the public Ethereum blockchain was the toll road. The analogy is a useful one because Ethereum, like a toll road, is privately owned public infrastructure, available for anyone to use as long as they’re willing to pay a small fee for access.

Since the beginning of the year, Ethereum usage has increased significantly. From the rapid adoption of stable-coins and decentralized exchanges to the tremendous growth of ‘defi’, demand for the Ethereum toll road has seen ‘toll fees’ collected by Ethereum miners increase to a staggering US$3 million per day as of this writing.

As Ethereum transitions to Proof of Stake over the next few years, ETH holders like Ether Capital will replace Ethereum’s miners as both transaction validators and beneficiaries of ‘toll road’ fees.

Since Ether Capital is listed on the NEO exchange in Canada, I thought it might be fun to compare Ethereum to a ‘real life’ toll road, the 407 expressway on the northern edge of Toronto.

I lived near the 407 highway as it was being constructed in the late 90s. At that time it was surrounded by farmland and underdeveloped areas and many people questioned whether it would ever collect enough tolls to justify the cost of construction.

In 2019, SNC-Lavalin, a global engineering firm, sold 10% of its stake in the highway for C$3.25 billion, valuing the 407 highway at C$32 billion, more than 20x the C$1.5 billion cost of construction. In the preceding year the 407 generated revenues equating to approximately C$3 million per day.

What happened? From 1997 to 2020, Toronto’s population increased from 4 to 6 million, and as real estate values skyrocketed in the city and people moved further north, the toll highway became part of the city’s critical infrastructure.

An analogous demographic shift is underway on Ethereum. A platform whose utility was being questioned just three years ago is collecting US$3 million in fees per day as of this writing (source:, and the Ethereum networks market cap of US$43 billion, is currently comparable to the 2019 valuation of the 407 toll highway.

While the total addressable market and potential revenue growth of a physical toll highway is bounded by its geographic location, the digital and global nature of Ethereum put its total addressable market in the trillions, and the rate of fee growth (from US$48,000 per day on January 2020 to US$3 million per day in August) is nothing short of astounding.

Ethereum network usage, and the price of ETH as a commodity will continue to be volatile, but the optionality it represents on ownership of the world’s financial superhighway make it both an incredible bet, and a fascinating experiment to take part in.

The original version of this article was published on Medium:

Introducing Ether Capital

By Benjamin Roberts, Co-CIO of Ether Capital

Today there exists a massive gulf between traditional financial markets and the Ethereum ecosystem. Just over one year ago, Som Seif and I began to conceptualize an entity that could bridge these two worlds.

Som is a visionary in the Canadian finance industry. He pioneered ETFs in Canada with Claymore Investments (acquired by BlackRock) and has an ongoing mission to drive innovation in this otherwise conservative sector of the Canadian economy.

Knowing this, I was very excited (and only a little nervous) when he suggested that we launch a public company that would acquire Ether, the computational commodity of the Ethereum blockchain.

Ethereum is an attempt to generalize and extend the concepts first proposed by Satoshi Nakamoto. While Bitcoin proposes that we can achieve better money by reaching consensus around the state of a distributed ledger, Ethereum attempts to let the whole world reach consensus around the state of a single virtual computer, a ‘world computer’.

Ethereum enables users to enter into financial contracts called ‘smart contracts’ with their money. Much like the internet in the late 1990s, Ethereum is currently being used by a handful of early adopters. Like the pioneers who understood the early web, there are many of us that have begun to contemplate the far-reaching implications of this technology.

Ethereum began in Canada. It’s the brainchild of Russian-Canadian Vitalik Buterin who dropped out of the University of Waterloo and then built and launched the platform with the help of members of the Toronto Bitcoin community.

Today, the Ethereum ecosystem has flourished outside Canada. Seeking regulatory certainty, the founders of Ethereum moved the project to Switzerland in 2014, and since then, the largest concentrations of Ethereum developers have emerged throughout Europe and Asia.

Ethereum fundamentally bridges the worlds of technology and finance. Its smart contracts require an oil-like commodity to pay for the execution of code. It creates strong use-cases for Machine Learning. It requires an understanding and flexible regulator who will engage in a dialogue with the community. Toronto, with its powerful financial presence and growing machine learning ecosystem, has a unique opportunity to capture the value of Ethereum’s inevitable impact on the world.

For these reasons and more, we’re launching Ether Capital as a public entity on the Toronto-based NEO exchange. The corporation will begin as a straightforward way for institutions and individuals to get exposure to Ether, the commodity that powers the Ethereum network. As the pool of assets grows and the organization scales and matures, we envision that Ether Capital will begin to use a small percentage of its Ether holdings to initiate a virtuous cycle of investments that will simultaneously add value to our balance sheet, the Ethereum protocol, and the Ether commodity.

We have already taken significant steps towards achieving this vision. We’ve spent time talking to the Ontario Securities Commission about the significance of this opportunity and our unique position in the marketplace. We’ve constructed a world class board of directors that span the Ethereum and Finance communities. We’ve raised 45 million CAD during a road show where we had an opportunity to explain Ethereum to dozens of portfolio and fund managers in London, New York, Toronto, Montreal, and Vancouver.

Ether Capital has already experienced a great deal of success, but we have no illusions about the challenges we will face and the journey ahead. The technology is new, the assets are volatile, the regulatory landscape is uncertain, and the market is full of unknowns. I think we will succeed, but whatever the outcome, I’m thrilled that we’ve set this in motion. The future may be uncertain, but the opportunity is real and the technology is too important to ignore.

Benjamin Roberts is the CEO of Citizen Hex and Co-Chief Investment Officer of Ether Capital. Ben has spent the last 10 years working in technology, with the last 5 years focused specifically on cryptocurrency. In 2017 Citizen Hex closed a seed round from Version One Ventures, OMERS Ventures, Purpose Investments, and 3 Angels Capital.

The original version of this article was published on Medium: