Proof of Stake

ETH Futures ETF Frenzy

BitOoda Ethereum Market Research, 8/3/23

Vivek Raman
Key Takeaway #1

Key Takeaway #2

Key Takeaway #3

Key Takeaway #4

While ETH continued to see muted price volatility through the end of July and the first week of August, activity in the Ethereum space was elevated – both on the positive and negative side. First, the negative side – focusing on ETH DeFi:

The Ethereum ecosystem consists of an economy of app protocols (similar to companies) that are built on Ethereum. These protocols can be for NFTs, games, or the most innovative – but also the most controversial – application, namely decentralized finance (DeFi).

The point of the decentralized finance app economy is to replace much of the human-based financial interaction with computer programs. Ultimately, this could increase efficiency, reduce transaction fees, and cut costs. The DeFi economy has resulted in three main  types of “primitives,” or applications that are building blocks for other DeFi programs. These “primitives” are (1) trading protocols like Uniswap, (2) lending protocols like Aave, and (3) stablecoin protocols like USDC. The benefit of these DeFi apps is open access to sophisticated financial tools for all users and the ability to automate money to do complex financial transactions.

Although we’ll do a detailed dive into the Ethereum DeFi ecosystem later, DeFi was in the spotlight this past week when it experienced a major hack for one of its core trading primitives called Curve. Curve, one of the original swapping apps used primarily to trade stablecoins and other highly-correlated assets, experienced a major hack due to a compiler bug – a vulnerability that has been present for years but was just found. As a result, several Curve liquidity pools were hacked, resulting in the theft of funds and a drop in Curve’s token CRV. This is the double-edged sword of having open-source, permissionless app protocols. On one hand, the system becomes more resilient over time as vulnerabilities are fixed. On the other hand, there is a constant risk of hacks due to the open nature of the code. This amplifies the need for a clear regulatory framework for DeFi, as hacks involving money are more dangerous than hacks of other tech platforms.

Moving away from this debacle (which, ultimately, had minimal impact on ETH price since ETH’s economy is much larger than just DeFi), the seeds were planted this week for the same catalyst that could potentially boost Bitcoin: the re-filings of ETH Futures ETFs. This could be a paradigm shift for the institutionalization of ETH as an asset.

It is important to note that the ETF filings call for a futures-based ETH ETF rather than a spot ETF, the ETF journey has nonetheless started. Indeed, the first Bitcoin ETF approved (BITO) was a futures-based BTC ETF that set the stage for the spot ETF applications. While it is probably early for the market to start being excited about a spot ETH ETF, the opening move may have been made with these filings over the past week.

Why is an ETF so important? Digital assets, despite being digital, involve self-custody. Self-custody, while having benefits such as strong property rights, is a big responsibility, especially at this stage of the technology. Self-custody should become easier in the future, but for now, both retail and institutional users generally do not want to deal with custody. The introduction of ETF products for major crypto assets removes the custody barrier for most users and consolidates custody with the ETF issuer (via its custodian partner). This could allow users and institutions to hold exposure to crypto assets without dealing with custody, which could spark broader adoption.

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While ETH continued to see muted price volatility through the end of July and the first week of August, activity in the Ethereum space was elevated – both on the positive and negative side. First, the negative side – focusing on ETH DeFi:

The Ethereum ecosystem consists of an economy of app protocols (similar to companies) that are built on Ethereum. These protocols can be for NFTs, games, or the most innovative – but also the most controversial – application, namely decentralized finance (DeFi).

The point of the decentralized finance app economy is to replace much of the human-based financial interaction with computer programs. Ultimately, this could increase efficiency, reduce transaction fees, and cut costs. The DeFi economy has resulted in three main  types of “primitives,” or applications that are building blocks for other DeFi programs. These “primitives” are (1) trading protocols like Uniswap, (2) lending protocols like Aave, and (3) stablecoin protocols like USDC. The benefit of these DeFi apps is open access to sophisticated financial tools for all users and the ability to automate money to do complex financial transactions.

Although we’ll do a detailed dive into the Ethereum DeFi ecosystem later, DeFi was in the spotlight this past week when it experienced a major hack for one of its core trading primitives called Curve. Curve, one of the original swapping apps used primarily to trade stablecoins and other highly-correlated assets, experienced a major hack due to a compiler bug – a vulnerability that has been present for years but was just found. As a result, several Curve liquidity pools were hacked, resulting in the theft of funds and a drop in Curve’s token CRV. This is the double-edged sword of having open-source, permissionless app protocols. On one hand, the system becomes more resilient over time as vulnerabilities are fixed. On the other hand, there is a constant risk of hacks due to the open nature of the code. This amplifies the need for a clear regulatory framework for DeFi, as hacks involving money are more dangerous than hacks of other tech platforms.

Moving away from this debacle (which, ultimately, had minimal impact on ETH price since ETH’s economy is much larger than just DeFi), the seeds were planted this week for the same catalyst that could potentially boost Bitcoin: the re-filings of ETH Futures ETFs. This could be a paradigm shift for the institutionalization of ETH as an asset.

It is important to note that the ETF filings call for a futures-based ETH ETF rather than a spot ETF, the ETF journey has nonetheless started. Indeed, the first Bitcoin ETF approved (BITO) was a futures-based BTC ETF that set the stage for the spot ETF applications. While it is probably early for the market to start being excited about a spot ETH ETF, the opening move may have been made with these filings over the past week.

Why is an ETF so important? Digital assets, despite being digital, involve self-custody. Self-custody, while having benefits such as strong property rights, is a big responsibility, especially at this stage of the technology. Self-custody should become easier in the future, but for now, both retail and institutional users generally do not want to deal with custody. The introduction of ETF products for major crypto assets removes the custody barrier for most users and consolidates custody with the ETF issuer (via its custodian partner). This could allow users and institutions to hold exposure to crypto assets without dealing with custody, which could spark broader adoption.

ETF Filers

  • Several ETH futures-based ETFs were filed earlier this year – these were all registered under the 1940 Act (like the BTC futures ETF). These were withdrawn 1-2 weeks later, presumably because SEC approval was unlikely.
  • However, all previous parties plus a few new ones (Proshares, Volatility Shares) filed or re-filed applications for futures-based ETH ETFs this past week. While it is possible these are procedural filings that could be withdrawn again, it is notable that these re-filings happened around the same time as the BTC spot ETF filings were submitted.
  • Although the jury is still out on whether ETH is classified as a commodity or security in the US, one can argue that if a BTC futures ETF is approved, an ETH futures ETF has merit to be approved as well, since ETH futures are listed on CME. Ultimately, this could be the first step toward a spot ETH ETF.
Figure: ETH Filings
Source: Bloomberg

ETH Economic Snapshot

  • Checking in on Ethereum metrics for the week: onchain activity remains at bear market levels (despite the flurry of activity around the Curve hack this week). Annualized fees are still trending low.
  • Meanwhile, the amount of staked ETH continues to steadily increase. There are still 76k ETH (over 2.4mm ETH) in the staking inflow queue, with a wait time of just over 1 month. The number of validators in the exit queue is (finally) above zero, currently sitting at 106 (3,392 ETH), which should take 1 hour for the entire exit queue to be processed.
  • Staking yields, as a result, continue to trend downward. Staking is a function of amount of ETH staked (yield goes down as more ETH is staked) and fees (which are currently low). Nevertheless, ETH was slightly deflationary week over week as the monetary policy remains robust.
Figure: ETH Economic Dashboard
Source: BitOoda Estimates

Disclosures

Purpose

This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.

Analyst Certification

Vivek Raman, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Conflicts of Interest

This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.

General Disclosures

Any information (“Information”) provided by BitOoda Holdings, Inc., BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or through http://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge.  BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such. BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services.  BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.

The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision.  The Information is not a recommendation to engage in any transaction.  The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment.  The past performance of any instruments, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. 

All derivatives brokerage is conducted by Ooda Commodities, LLC a member of NFA and subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.

BitOoda Technologies, LLC is a member of FINRA.

“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.

Copyright 2023 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.

While ETH continued to see muted price volatility through the end of July and the first week of August, activity in the Ethereum space was elevated – both on the positive and negative side. First, the negative side – focusing on ETH DeFi:

The Ethereum ecosystem consists of an economy of app protocols (similar to companies) that are built on Ethereum. These protocols can be for NFTs, games, or the most innovative – but also the most controversial – application, namely decentralized finance (DeFi).

The point of the decentralized finance app economy is to replace much of the human-based financial interaction with computer programs. Ultimately, this could increase efficiency, reduce transaction fees, and cut costs. The DeFi economy has resulted in three main  types of “primitives,” or applications that are building blocks for other DeFi programs. These “primitives” are (1) trading protocols like Uniswap, (2) lending protocols like Aave, and (3) stablecoin protocols like USDC. The benefit of these DeFi apps is open access to sophisticated financial tools for all users and the ability to automate money to do complex financial transactions.

Although we’ll do a detailed dive into the Ethereum DeFi ecosystem later, DeFi was in the spotlight this past week when it experienced a major hack for one of its core trading primitives called Curve. Curve, one of the original swapping apps used primarily to trade stablecoins and other highly-correlated assets, experienced a major hack due to a compiler bug – a vulnerability that has been present for years but was just found. As a result, several Curve liquidity pools were hacked, resulting in the theft of funds and a drop in Curve’s token CRV. This is the double-edged sword of having open-source, permissionless app protocols. On one hand, the system becomes more resilient over time as vulnerabilities are fixed. On the other hand, there is a constant risk of hacks due to the open nature of the code. This amplifies the need for a clear regulatory framework for DeFi, as hacks involving money are more dangerous than hacks of other tech platforms.

Moving away from this debacle (which, ultimately, had minimal impact on ETH price since ETH’s economy is much larger than just DeFi), the seeds were planted this week for the same catalyst that could potentially boost Bitcoin: the re-filings of ETH Futures ETFs. This could be a paradigm shift for the institutionalization of ETH as an asset.

It is important to note that the ETF filings call for a futures-based ETH ETF rather than a spot ETF, the ETF journey has nonetheless started. Indeed, the first Bitcoin ETF approved (BITO) was a futures-based BTC ETF that set the stage for the spot ETF applications. While it is probably early for the market to start being excited about a spot ETH ETF, the opening move may have been made with these filings over the past week.

Why is an ETF so important? Digital assets, despite being digital, involve self-custody. Self-custody, while having benefits such as strong property rights, is a big responsibility, especially at this stage of the technology. Self-custody should become easier in the future, but for now, both retail and institutional users generally do not want to deal with custody. The introduction of ETF products for major crypto assets removes the custody barrier for most users and consolidates custody with the ETF issuer (via its custodian partner). This could allow users and institutions to hold exposure to crypto assets without dealing with custody, which could spark broader adoption.

ETF Filers

  • Several ETH futures-based ETFs were filed earlier this year – these were all registered under the 1940 Act (like the BTC futures ETF). These were withdrawn 1-2 weeks later, presumably because SEC approval was unlikely.
  • However, all previous parties plus a few new ones (Proshares, Volatility Shares) filed or re-filed applications for futures-based ETH ETFs this past week. While it is possible these are procedural filings that could be withdrawn again, it is notable that these re-filings happened around the same time as the BTC spot ETF filings were submitted.
  • Although the jury is still out on whether ETH is classified as a commodity or security in the US, one can argue that if a BTC futures ETF is approved, an ETH futures ETF has merit to be approved as well, since ETH futures are listed on CME. Ultimately, this could be the first step toward a spot ETH ETF.
Figure: ETH Filings
Source: Bloomberg

ETH Economic Snapshot

  • Checking in on Ethereum metrics for the week: onchain activity remains at bear market levels (despite the flurry of activity around the Curve hack this week). Annualized fees are still trending low.
  • Meanwhile, the amount of staked ETH continues to steadily increase. There are still 76k ETH (over 2.4mm ETH) in the staking inflow queue, with a wait time of just over 1 month. The number of validators in the exit queue is (finally) above zero, currently sitting at 106 (3,392 ETH), which should take 1 hour for the entire exit queue to be processed.
  • Staking yields, as a result, continue to trend downward. Staking is a function of amount of ETH staked (yield goes down as more ETH is staked) and fees (which are currently low). Nevertheless, ETH was slightly deflationary week over week as the monetary policy remains robust.
Figure: ETH Economic Dashboard
Source: BitOoda Estimates

Disclosures

Purpose

This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.

Analyst Certification

Vivek Raman, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Conflicts of Interest

This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.

General Disclosures

Any information (“Information”) provided by BitOoda Holdings, Inc., BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or through http://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge.  BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such. BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services.  BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.

The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision.  The Information is not a recommendation to engage in any transaction.  The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment.  The past performance of any instruments, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. 

All derivatives brokerage is conducted by Ooda Commodities, LLC a member of NFA and subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.

BitOoda Technologies, LLC is a member of FINRA.

“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.

Copyright 2023 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.

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