Composite ETH Staking Rate: A New Standard For Tracking ETH Staking Returns?
GBTC & Grayscale Controversy | CoinFund's Crypto Strategy
GM, this is your Daily Bolt briefing.
In this weekend edition, we’ve provided you with an abridged report on the alleged unethical business practices of Grayscale, the provider of GBTC, who face criticism from some for not implementing a redemption program for those who want out of GBTC.
Also, yesterday we released our Project Breakdown on Kommunitas, a decentralized crowdfunding platform; you can access this report for free, as we’ve made it available for all Revelo Intel members!
Sign up for a Revelo account today and access this exclusive reports like our Kommunitas Breakdown and Timeline, at no cost to you. More on this tomorrow…
And if you’re still interested in further educating yourself on the crypto markets, read our Note of The Day to learn more about the Composite Ethereum Staking Rate (CESR), a metric developed by CoinFund to track ETH’s emissions, which could potentially be used as a reliable and regularly updated rate that ETH derivatives could be built on. ⬇️
Stay alert in the markets.
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1/ What Bitcoin Did Ep. 655 – Grayscale Saga and Redeem GBTC Campaign
Preview: In this episode of What Bitcoin Did, Peter McCormack invites David Bailey to discuss the ongoing saga with Genesis, Grayscale, and DCG, as well as the “Redeem GBTC” campaign that David has been spearheading. Read our notes below to learn more. Click here to listen to the full episode (54 mins).
Read our Note (7 mins) and save 47 mins.
Here are some key takeaways:
Bailey explains that Grayscale Bitcoin Trust (GBTC) is a trust product created by Grayscale, which is owned by DCG. Bailey mentions that Barry Silbert owns DCG. He states that the trust holds cryptocurrency on behalf of its investors, its two biggest trusts are GBTC and ETHE.
Bailey reiterates that shares of these trusts can be traded on the secondary market in your IRA or 401k account.
According to him, Grayscale holds 630,000 Bitcoins through $GBTC, making Grayscale the world’s largest holder of $BTC.
However, he also says that due to some unethical behavior from the management at Grayscale and sketchy dealings between Grayscale and Genesis (another company owned by DCG), shares are trading at a massive discount compared to the spot $BTC price.
He believes that Grayscale is protecting a few wealthy individuals at the expense of many others who have invested smaller amounts.
Bailey believes that Grayscale charges exorbitant fees based on the assets held, not the actual value of the business.
Bailey thinks that there is an incentive to keep people trapped within this trust because it’s the most profitable trust in the world.
Bailey thinks that the root of the issue that plagued Grayscale and its investors is that there is no redemption program, even though it can be implemented immediately.
He explains that instead of implementing a redemption program, Grayscale creates a narrative that they are aggressively pursuing becoming an ETF by suing SEC and dragging out this long process while charging high fees.
Bailey says that he has lost around $3,000,000 on this trade but acknowledges that it could have been worse.
He created a website due to an influx of messages from people affected by Grayscale’s actions.
Bailey says that before all this happened, he had a lot of respect for Barry Silbert (Founder of DCG, the parent company of Grayscale), but now things have gone sideways. He believes that those in positions of power, like Silbert, have an obligation and duty to act when something goes wrong.
The Scoop - CoinFund's New Composite Ethereum Staking Rate
In this episode of The Scoop which took place on May 3, 2023, Frank Chaparro is joined by Chris Perkins to discuss CoinFund’s Composite Ether Staking Rate (CESR), the state of crypto regulation, and more! Read our notes below to learn more.
Background
Frank Chaparro (Host) - The Scoop
Chris Perkins (Guest) - President of CoinFund
CoinFund - crypto-native investment firm and registered investment advisor
The Block - Leading information services brand in the digital asset space
Discussion on CoinFund's Innovations
Chapparo asks Perkins about the various activities at CoinFund, including digital assets, advocacy work across Wall Street and Washington, and the development of indexes. He prompts Perkins to walk through the ongoing projects.
Chris Perkins mentions that he has a background in fixed income and that he ran a few businesses in traditional finance. He also mentions that he spent a lot of time working in the interest rate and derivative space.
Perkins talks about CoinFund's excitement over Ethereum's migration to proof-of-stake. He explains that Ethereum network validators will now receive rewards daily, which could be standardized to unlock significant innovation. Perkins compares the potential of this standardization to the $500 trillion interest rate swaps notional market in traditional finance.
Perkins criticizes the London Inter-Bank Offered Rate (LIBOR), the benchmark interest rate at which banks lend to and borrow from one another in the interbank market, for its manipulability and praises crypto for its observability, transparency, and replicability, making it challenging to manipulate.
Composite Ether Staking Rate (CESR)
Perkins goes on to discuss the Composite Ether Staking Rate (CESR), which was a big data problem that CoinFund solved. CESR calculates the new emissions that the Ethereum protocol emits to 500,000+ validators plus transaction fees, including all MEVs (Maximal Extractable Value).
Perkins shares the need for a partner to distribute CESR, leading to their collaboration with CoinDesk Indices, which could provide a seven-day rate. The standardization of the rate is essential, and Perkins mentions that CoinDesk indices release the rate every day at 4 pm New York time, but plans are in place to release the rate hourly in the future.
Perkins explains that CESR could be used as a foundation for building various products, like futures, used for hedging or speculating. He also points out that professional stakers tend to outperform the average rate.
Perkins explains that CESR is not a security, but rather a rate. Having a long history in the field, he's confident that rates are considered commodities under regulation.
Perkins highlights that the rate increases when the Ethereum network gets busy due to increased transaction fees. The biggest spikes in CESR were witnessed during times of financial turbulence, such as the recent banking crisis around Silicon Valley Bank (SVB).
Perkins notes that as counterparty risk in the system increases, people move their assets on-chain, leading to increased network activity, higher transaction fees, and, in turn, a higher CESR.
Frank Chapparo asks how one can predict the market based on CESR's performance.
Perkins responds by explaining that the rate has two components: emissions and transaction fees. Emissions decrease as more validators come online, while transaction fees are volatile and correlated with on-chain activity.
Perkins suggests that during periods of stress, one can take a position to hedge risk. He envisions that CESR will eventually lead to the development of a forward curve, which can unlock various types of derivatives.
Perkins ends by discussing the potential for a basis swap, a floating for floating swap, which could trade rates on-board. He envisions this as a possible future application of CESR.
Crypto and Traditional Finance Integration
Chris Perkins highlights the appeal of crypto's synthetic nature. He notes that banks and traditional financial institutions often can't include crypto in their balance sheets, but with indexes referencing crypto prices, they can engage indirectly. He specifically mentions the ether staking rate as a derivative that fits into traditional financial frameworks.
Perkins elaborates on the potential advantages of this setup. Traditional players understand and utilize different types of rates, and these can be applied to crypto for capital efficiency. He also notes that this could open up a new way to use these rates, citing the numerous products currently denominated in Ethereum and the ability to use an interest rate for forward valuation projections.
Chris Perkins speaks about the endless opportunities to create new offerings based on these principles. He describes this as a "primitive" that they can standardize and build on top of, with the potential for widespread use. He shares his excitement about the positive response they've received so far, mentioning a partnership with Franklin Templeton.
Perkins continues, stating that traditional financial players seem to quickly grasp and appreciate this concept. He praises the team behind CoinDesk’s Indices calling them professionals with decades of experience in the traditional index space, and expresses excitement about the partnership.
CoinFund Strategy
Frank Chapparo asks Chris Perkins about CoinFund's broader strategy and how their current actions are part of their greater ambitions. He highlights the perception of CoinFund as a venture capital firm.
Chris Perkins explains that CoinFund is heavily invested in Web3, partnering with various projects that are building and composing. They focus on projects ranging from CeFi (Centralized Finance) to DeFi (Decentralized Finance), with the aim of making Web3 successful.
Perkins hopes to extend this to other proof of stake layer-1s, aiming to enrich the ecosystem with a wealth of derivatives and rates, fueling the growth of the entire ecosystem.
Perkins expresses his desire to see both DeFi and CeFi build on this new development, indicating his belief in its potential to serve as a fundamental building block.
Chapparo asks Perkins about how they plan to elevate their initiative to the point where tradable products tied to it can be seen on CME (Chicago Mercantile Exchange).
Perkins responds that one of CoinFund's central beliefs is the theme of convergence. They want the space to be regulated based on principles, leading to a blend of crypto and traditional finance.
Perkins envisions a future where terms like "crypto" and "traditional finance" are replaced with simply "finance". He anticipates that exchanges like CME may license their product, facilitating a curve and enabling on-screen transactions.
Chapparo then asks Perkins about the timeline for this convergence of crypto and traditional finance.
Perkins responds optimistically, expecting that the market makers and stakers he works with would appreciate using a rate like this. He believes it's not too far in the future.
Perkins emphasizes their commitment to making this an institutional rate by following the guidelines of The International Organization of Securities Commissions (IOSCO). He explains that they aim to industrialize rates while adhering to principles of governance, resiliency, and accuracy.
Perkins highlights the role of their partners at CoinDesk Indices in making this rate investable and consumable. He believes that industrializing these rates will make them more accessible and usable.
Status of Crypto Regulation
Frank Chapparo inquired about the current state of the regulatory environment, especially regarding derivative markets in the US, and noted the trend of crypto exchanges like Coinbase moving offshore. He questioned whether derivatives are becoming defunct in the US outside of organizations like the CME.
Chris Perkins responded by expressing his concerns about the lack of accessible derivative markets for Americans, and the consequent setbacks for the country and those who can't hedge. He emphasized that derivatives were initially designed to manage risk, and the absence of scalable solutions beyond limited products is a significant issue.
Perkins went on to explain his view of two approaches to regulation:
A proactive, nuanced approach that recognizes new technology as an opportunity to drive job growth and stimulate the economy, thereby creating specific, nuanced regulation and law that facilitates this.
A more reactive approach that relies on existing infrastructure and attempts to adapt to new developments without making significant changes, with the belief that the old system will eventually manage to incorporate the new.
Perkins noted that globally, many jurisdictions are adopting the former, proactive approach. He cited MiCA (The Markets in Crypto Assets regulation) as an example of a clear, nuanced regulatory framework that enables entrepreneurs to build within it. Although not perfect, Perkins appreciates its clarity.
He also mentioned the UK's efforts to establish a nuanced approach to regulation, especially given the significant role of financial services in their economy and in the wake of Brexit.
Perkins highlighted similar proactive movements in Hong Kong, with officials attending conferences and promoting a nuanced regulatory approach. He added that Singapore and the UAE, including ADGM (Abu Dhabi Global Market), are also moving forward with nuanced regulations, prompted by global developments.
Perkins also highlights the problem in the US, where he believes they're still dealing with a "hangover period" with FTX, implying that the US might be taking a more reactive approach to regulation.
Frank Chapparo raises concerns about proactive regulations potentially leading to a situation where companies can do whatever they want.
Chris Perkins responds by emphasizing that the right regulation should be principles-based and that jurisdictions should recognize the principles of other jurisdictions in a global context. He envisions a "race to the top" where principles are followed and jurisdictions recognize each other's licensing.
Perkins acknowledges the challenges faced by regulators in the U.S. due to the lack of clear legislation, leaving them to follow legacy principles and rulemaking. He believes that new technology, like digital assets, presents opportunities not contemplated by old rules, and that legislation is needed to address these issues.
Perkins is hopeful that stablecoin legislation may emerge in the near future but recognizes the difficulties in achieving this, particularly during election season. He stresses the importance of staying engaged, educating regulators, and being constructive rather than antagonistic in order to move forward.
Frank Chapparo expresses concern about ensuring proactive regulation doesn't result in an uncontrolled environment. He questions how to ensure a favorable regulatory environment without allowing any kind of activity.
Chris Perkins argues that the best regulation is always principles-based. He points out that if regulations differ across countries but the principles are the same, consistent results can be achieved. Perkins suggests a system of global passporting, where jurisdictions recognize and honor the principles of other jurisdictions, leading to global adherence to principles and regulatory changes for global liquidity.
Perkins sympathizes with U.S. regulators who face challenges implementing a law called Dodd-Frank drafted during the financial crisis and lagging behind European regulation. He believes the U.S. should initiate legislation for this new technology and its opportunities, as clearer policy exists in Europe.
Perkins expresses hope for the future of stablecoins in the U.S. despite political uncertainties. He emphasizes the importance of engagement and education in progressing forward and highlights his appointment to the CFTC's Global Markets Advisory Committee as a positive step.
Perkins mentions that stablecoins are one of the main topics, presenting a great opportunity due to their utility, potential for reducing remittances, and sustaining the U.S. dollar as a reserve currency. He also mentions the need to address issues arising from the banking crisis and the ongoing discussions about defining commodities or securities in the legacy system.
Perkins acknowledges the comment but maintains his belief that many of these issues will be settled in court, leading to a new equilibrium and greater certainty in the absence of legislation. He reiterates his commitment to engagement and continuing his role until progress is made.