In our previous article, we saw how staked Crypto Assets in Layer 1 are a new type of digital bonds. These digital bonds entitle the holder the right to produce work to the network and receive as compensation some periodic payments, usually through new issuance. In this article, we are going to see what this means for Ether, the native asset of the Ethereum blockchain, as the network makes the transition this year to Proof-of-Stake.
Categorization of Asset Classes
Let us start with a categorization of asset classes provided by Robert Greer in 1997, which is widely used in traditional finance. In this model, all assets can be classified in one of three “super asset classes”: Capital assets, Consumable / Transformable assets or Store of Value assets.
Capital assets, such as bonds and stocks, generate revenue to their owners and are typically valued as the net present value of future cash flows. Transformable / consumable assets are typically commodities or energy products that are destroyed or transformed when consumed. Store of Value assets such as gold can’t be consumed nor generate cash flows, but have an economic value usually through a social consensus.
Crypto assets that are staked are a new form of a digital capital asset. The transition to Proof-of-Stake will convert Ether, the asset, into a capital asset. The current yield for this capital asset is 7.4 % per year, although some models project much higher returns, such as the one of Justin Drake, Ethereum core developer.
But this is only one aspect. Ether could be the first asset in history to have the qualities of all three asset classes, simultaneously. A capital asset, a Store of Value, and a commodity. This model, known as the “triple point asset” was coined by D. Hoffmann of the Bankless Community and describes one of the most interesting emerging properties of Ether.
Ether as a Triple Point Asset
Let’s examine its “triple point” qualities in more detail:
1. In its capital asset form, Ether is
- a share in Ethereum. In this respect, it behaves similarly 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, it 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, it 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 platform’s native token.
2. In its commodity form, Ether is
- a commodity used to pay transaction fees to the Ethereum network. In the Ethereum network, transaction fees are priced in a unit called gas. The metaphor with traditional gas is evident.
Gas prices are measured in Gwei, a sub unit 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 (v.gr. 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. As the asset used to pay for transaction fees and blockspace in the Ethereum blockchain, Ether has characteristics of a consumable / transformable asset, sort of a digital commodity.
3. In its Store of Value form, Ether is
- an alternative store of value to traditional financial assets or commodities like gold or silver. Moreover, Ether, is the reserve asset of the Ethereum economy and especially of DeFi. At times of writing, 10.1M ETH, worth USD 88b, is backing the DeFi economy. This is staked Ether in Store of Value form.
The “triple point asset” theory is a fundamental model to understand the emerging properties of Ether, the asset. More generally, it helps us understand the implications of Staking as one of the fundamental blocks in the new digital economy arising before our eyes.