Arthur Hayes’ new blog post: Ethereum as a “bond” will exceed $10,000 by the end of the year

(It’s important to note that this article, like Vitalik’s, was published on April Fool’s Day, April 1st, but this seems like a “serious” article. But in other words, if the end of the year isn’t there, Arthur has a good “reason”.)

The full text is as follows:

I don’t really like the so-called “financial advisors” in the traditional financial field. Their purpose may not be to provide you with financial advice, but to maximize their own management fees and performance fees, even if the final financial performance is not good. How, they can also get that part of the income.

And most of the “financial advisors” I’ve met are generally disgusted with cryptocurrencies and tell their clients not to invest in cryptocurrencies.

Of course, we don’t need to “look down” on them, we should apply their usual financial knowledge to the cryptocurrency industry. The purpose of this article is to illustrate the importance of categorizing assets when making investment recommendations to individuals, companies and governments.

What is ETH?

This is a simple but profound question.

If you say it’s a commodity, a class of investors will be interested.

If you say it’s a currency, another class of investors will be interested.

But what if you could convince the world that ETH is just an indefinite bond?

The merged Ethereum will transition to PoS, with validator staking rewards and network fees turning ETH into a bond.

If we can convince financial advisors that ETH’s asset classification is a bond rather than a currency, then they might be able to move. In addition, Ethereum has become more environmentally friendly and prosperous ecological data, making ETH significantly undervalued relative to Bitcoin, fiat currency and other L1 competitors.

Calculate the pledge account of ETH

According to Ethereum researcher Justin Drake’s forecast data, in the early stages of the merger, the annualized return on staking is about 8–11.5%.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

If you are a diehard ETH fan, you may or may not agree with these numbers. But I’ll take them as “facts” for now. The point of this post is not to delve into whether the yield is 5% or 10%, but to use scenario analysis to value ETH as a bond.

In this analysis, we will assume that you are selling an equal amount of USD to buy 32 ETH. This is extremely important, and I look at this valuation from the perspective of someone who invested in fiat first. Therefore, as with any carry trade, the cost of dollar funding is extremely important.

For this analysis to have the greatest impact, we must convince larger capital allocators that ETH is a bond. Once this concept is established successfully, the follow-up will follow.

These pools can borrow funds that are closer to the U.S. Treasury curve. That’s why I’ll use the 5-year, 10-year, 20-year, and 30-year yields as my discount rate. I used the ETH reward estimates from the table above, and that’s where the 8%, 9.60%, and 11.50% returns come from. I used the yield on these bonds sometime on March 28, 2022.


  1. Borrow USD for a period of time, then buy ETH at the current exchange rate.
  2. Stake 32 ETH to earn ETH-standard rewards.
  3. After a certain number of years, sell 32 ETH and get rewarded in USD.
  4. Repay the loan in U.S. dollars.

The table below shows the current value of ETH bonds in ETH.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

Remember, we started with 32 ETH. This is the bond value in ETH, including the initial 32 ETH principal. Market convention is to refer to the bond as a percentage of face value, which would be 32 ETH. But to highlight the amount, I used the nominal amount of ETH. I also did not reinvest the ETH earnings through staking. The value of the bond would be higher if we used continuous compounding when we received ETH returns. Obviously continuous compounding is possible and financially prudent, but I didn’t do it for mathematical simplicity.

The table below reflects the breakeven price for ETH/USD. This is the price at which the loan matures, and from a dollar perspective, the transaction is break-even. I’m assuming all ETH cash flows are converted to USD at a constant ETH/USD price so I can figure out the price at which this trade becomes uneconomical.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

Below is another version of the same table, this time expressed as a percentage change from the current ETH/USD spot price of $3320.

local currency bonds

A local currency bond is one in which the issuer’s domestic currency and the borrowing currency are the same. If you are a dollar-based investor, these bonds have currency risk. Some investors like these bonds because they typically have high yields. However, if investors hedge their currency risk, the effective rate of return usually decreases.

Typically, non-deliverable forward (NDF) points in emerging markets are positive. This is because of interest rate parity.However, take a look at this example of the Malaysian Ringgit NDF below.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

The spot USD/MYR is 4.2148, while the 1-year NDF is 4.24/4.26, meaning it is trading at a higher price than the spot price.If I bought a MYR local currency bond and needed to sell MYR and buy USD in the future, I would trade on the right (RHS) and effectively pay forward points. This means I need to spend money to hedge my position.

Some investors are happy to take currency risk, some are not. As a good financial advisor, you are contradictory, you will just offer two different products. One is hedged and the other is not. In both cases, you will be charged a fee.

In the case of a 5-year ETH local currency bond, if we assume an annual yield of 11.50%, then the price of ETH/USD would have to fall by 29.35% for investors to lose money in USD after 5 years.

But if investors want to hedge currency risk, they need to at least hedge the expected total cash flow through forward transactions. Right now, ETH/USD listed futures have very little liquidity over the past 3 months. I contacted a well-known broker on March 28, 2022 and asked them what the median premium or discount would be for a 1-year ETH/USD forward.

If I go long on ETH bonds and get a quote for the ETH/USD forward, I trade on the left (LHS), sell ETH and buy USD. The broker offered me a premium of +6.90% in the middle of the market. This means that I actually receive income in order to hedge my local currency ETH bond. I sell ETH/USD forwards at a premium to spot. This is an aggressive carry trade.

There are few trades that give you a higher yield when investing in foreign currency bonds, and the act of hedging back into your home currency actually earns you money.

As the final part of this analysis, I value a perpetual bond using validator revenue from staking ETH.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

In the beginning, I thought ETH was similar to perpetual bonds. That’s a bond with no maturity date. Before being delisted at the end of 2016, UK Conzern had one of the longest consecutive price histories of any government bond ever issued.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

Throughout the centuries-old history of this debt instrument, nominal long-term yields in the UK have been essentially 5% or less. So let’s assume a long-term return of 5% from now and ETH’s return at the low end of our forecast of 8%. We arrive at a final present value of ETH cash flow of 51.20 ETH. The required input for this ETH cash flow is 32 ETH.

If we use it to determine the bond implied value of ETH, we get the following chart. These values ​​are simply multiplications of [spot * present value of ETH rewards].

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

This should not be seen as a price forecast, but as a guide for a new way of thinking. If you think ETH can or should be valued as a bond, then as an investor, given your long-term interest rates and ETH’s return assumptions, you should be willing to buy ETH at today’s price as long as it trades at a higher price than its perpetual bond derivatives The price is discounted.

We’ll come back to this perpetual ETH bond table when we discuss ETH bond derivatives later.

Capital Efficiency

To utilize ETH bonds, capital needs to be locked up indefinitely. This is because currently, once ETH is staked on the Beacon Chain, it cannot be unstaking. After the merger, ETH yields will rise when POS verification begins, but stakers are still frozen.

There are various validation pools that allow traders to easily contribute ETH and start earning. To provide liquidity to those locked up, these pools have issued their own tokens that are pegged 1:1 to staked ETH.

For example, if you deposit 1 ETH into the Lido pool, you will get 1 stETH, which trades at a price determined by the market. The three largest pools are Lido, Binance and Rocketpool.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

This graph shows the daily premium or discount percentage for a pool of tokens traded against ETH.

Pool token price premium = Rug risk + implied ETH return + liquidity preference

Let’s illustrate with an example:

Rug risk: This is the risk of having some bugs in the validator code. If, for whatever reason, this smart contract is compromised, stakers’ funds may not be available for withdrawal.

Implied ETH rewards: Tokens in these pools receive ETH rewards. Therefore, the market will discount future rewards received by token holders to the present.

Liquidity Preference: This is a quantification of the desires of those coiners looking for liquidity today. The higher the preference, the higher the discount to ETH for tokens in a pool. On the other hand, if a pool limits the amount of ETH deposits it can accept, liquidity preference may actually increase the price of the pool token, as was the case with Rocketpool.

My analysts delved into the details of what each of the Lido, Binance, and Rocketpool tokens represent, trying to understand why they trade at different premiums to ETH.

Lido: This pool has the largest market share (~85%), and the transactions are very in line with the price of ETH. When you stake ETH, you get stETH at a 1:1 ratio. The staking reward in ETH will accrue to stETH minus the fees charged by Lido for providing services. This token can be used as collateral in other DeFi applications without affecting the accumulation of ETH rewards.

Binance: This is the second largest pool by market share, trading below ETH. When you stake ETH, you will receive bETH at a 1:1 ratio. The staking reward for ETH will be earned by bETH, minus the fees for services provided by Binance. This token can be used as collateral in other DeFi applications, but you will not be rewarded with ETH when bETH is staked outside of your Binance wallet. My analysts believe this is a big reason why bETH is trading at a much lower price than ETH. In the DeFi ecosystem, it is not as good an aid as stETH or rETH.

Rocketpool: The market share of this pool is the smallest among the three pools. It has always traded above ETH. When you stake ETH, you get rETH at a 1:1 ratio. The ETH staking reward will be accumulated to rETH minus Rocketpool fees.Rocketpool is decentralized, unlike the other two pools, and severely limits the amount of ETH deposits it can accept. More deposits will only be accepted once more operators come online. This token can be used as collateral in other DeFi applications without affecting the accumulation of ETH rewards.

stETH is the best approximation of the present value of an ETH bond. I made a theoretical assumption about present value, and stETH is a concrete market performance.

It is puzzling that stETH trades at roughly the same price as ETH.

Liquidity preference: Coingecko data shows that stETH has a market value of $9.8 billion and a daily trading volume of $100 million, accounting for about 1% of its market value. Ethereum’s daily trading volume to market cap ratio is around 3%. If holders of stETH really care about the liquidity of the ETH balance they don’t have access to lido investments, stETH’s trading volume will be higher relative to its market cap. As a result, investors’ liquidity preference appears to be close to zero. As more DeFi platforms accept stETH as collateral, the need to monetize stETH to ETH decreases.

Implied ETH reward: If we consider the combined ETH annualized reward to be 8%, then the implied reward is 8% multiplied by the time the staked ETH is released. We don’t know how long this is. If the market believes it will take another 6 months after the merger to release the ETH balance held, then the premium should be 4%.

Rug Risk: It is almost impossible to estimate what exactly this risk is. We can only prove it by assuming the other three variables. However, it is certain that if you stake ETH on Lido and don’t trust the technical integrity, you will sell your stETH.But given that stETH trades at the same value as ETH and has a lower average daily volume, the market certainly believes in Lido’s technology.

My conclusion is that stETH either assumes that the entire ETH 2.0 process will be completed very quickly post-merger, or it’s extremely undervalued compared to the bond math of post-merger ETH rewards. If, after reading this article, market participants agree with me that ETH merges to be a bond, then stETH should slowly trade at higher and higher premiums.

Collateral utilization

Now that these staking tokens exist, they should be used as collateral in the DeFi ecosystem, essentially unlocking trapped collateral. AAVE is a decentralized lending protocol that allows traders to put stETH as collateral. Currently, the LTV of stETH as collateral is 70%. MakerDAO also allows users to use wrapped stETH (WSTETH) as collateral to create DAI, its USD-pegged stablecoin. The current guarantee ratio is 160%.

This is huge. The cornerstone of the global fiat credit market is the ability to create debt assets, which are simply a loan to some entity, and then use that debt asset as collateral to borrow more money. This is how the lever flywheel drives the global economy.

Despite the obvious benefits of this behavior, it does introduce systemic credit risk into the system. If the protocol allows for increasing utilization of pool tokens as underlying collateral, and there is a matchmaking event that renders the pledged tokens worthless, then all the value built on top of this will also suffer. As these tokens become more widely accepted, we must be aware of this risk. The great thing about DeFi is that all activity is completely transparent because it is on-chain. Therefore, we can build a very precise monitoring system to measure the instant DeFi system credit risk attributable to staked tokens.

The ways in which these collateralized tokens can be used are virtually limitless when it comes to interest rate and credit derivatives. Before I get too excited, though, let’s see how the market plays out. In the future, I will have a lot about promising projects that are starting to use this new collateral pool to do innovative things and bring life to the ETH fixed income market in a decentralized way.

What would Michael Saylor do?

Saylor is a “rogue” because he leverages Microstrategy to use the institutional corporate bond market as a financing vehicle for Bitcoin. This is indeed a strategy, but Bitcoin is pure money and has no inherent gain. ETH is the commodity that powers the world’s largest decentralized computer. The combined ETH will have inherent benefits.

What Saylor or any other high yield issuer should do is issue debt and buy ETH. This is an aggressive carry trade.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

The chart above is the Bloomberg US Corporate High Yield Average OAS. What this shows is that US corporate junk bond issuers are currently paying an average of 3.41%.

Using the model above, let’s assume you are the CEO of a brick-and-mortar company and want to get a high stock price through meme. Regardless of what your business is supposed to do, your purpose is to achieve financial optimization.


3.41% cost of capital

5 years due

8% ETH reward

ETH price of $3,320


The present value of this bond is 41.28 ETH.

The breakeven ETH price is $2573, or 22.48% lower.

Assuming no price movement in the ETH/USD exchange rate, the return in USD is 29%.

Would a profligate CEO really hedge currency risk? Absolutely not!

For any publicly traded CEO, announcing debt combined with a massive purchase of ETH bonds can create twice the value.First, because your stock is now a company with the tags “DeFi”, “web3.0”, “Metaverse”, etc., this will get reddit meme stock traders excited to accumulate. Second, the deal has a positive spread; therefore, putting this on a $1 billion scale, the $290 million in revenue could be recognized immediately or at a later date, depending on the accounting treatment. You will not lose money!

ESG: Green investment themes

ESG investing themes are all the rage right now in traditional finance, and while the idea is true, who knows if it’s a gimmick for financial advisors to better sell you. Although many funds have previously wanted to allocate some funds to cryptocurrencies, the energy consumption of PoW violates the ESG concept, but the transition of Ethereum to PoS is a kind of catering to ESG, and they will change ETH. For a wider audience of funds, although many other public chains also use PoS, as a trader, this marginal change in fundamentals is a huge benefit.

Ethereum Killer

Ethereum’s performance issues are always a point of criticism from competitors, the price of these Ethereum killers started to soar last year, valuations got a big boost, and now Ethereum is on the cusp of a merger, which may or may not be Bringing performance improvements, will ETH perform better relative to other L1 tokens?

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

This “price/developer” ratio graph reflects the market capitalization of part of L1 divided by the number of active developers.

Electric Capital published a very important and insightful research article in which it estimated the number of active developers on each major public chain. A public chain is built to be used. If only a few developers create new projects on a chain, that chain will never become valuable.

Most Ethereum killers have much higher multiples because they hope to attract talent to develop on their chain.

According to the report, Ethereum has around 4,000 developers, which is 3 times larger than Polkadot on the chain with the second largest developer base.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

This “price/address” ratio graph reflects the market capitalization of selected mainstream L1 protocols divided by the number of addresses.

The number of addresses on a chain is another rough but useful metric that can be used to assess the health of public blockchains. Ethereum has 16 times as many addresses as the second-place Solana, but is still cheaper on a price/address basis.

This is another good measure of hype. Blockchains that exist only to grab market share from ETH have much higher multiples.

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

“Price/TVL” is the market capitalization divided by the total value locked in dApps on the protocol.

This ratio is the easiest way to identify how much DeFi is gaining traction. ETH is the third cheapest after TERRA and AVAX.I’m not even sure if ADA should be included, if there is one coin that trades purely on hope, it’s Cardano.

If you look at these base ratios, ETH may be the cheapest L1. Ethereum’s success has spawned a group of competitors who trade on a promising future rather than concrete results. There’s nothing wrong with that, but as ETH is about to feel loved by bond and ESG investors, can these other coins keep up?

If you are a capital allocator and either already own some of these coins or have to choose which L1 token to invest in, don’t you want to buy the cheapest one? While ETH’s market cap is orders of magnitude larger than its competing chains, it’s still cheap judging by the valuation of the network’s fundamentals.

As this year progresses and mergers come, I expect ETH to significantly outperform any L1 chain built. This statement has been valid from 2020 to the end of 2021, but now, from a capital flow and returns perspective, Ethereum supports extremely positive price fundamentals.

Please don’t mistake this sentiment for my belief that these L1 chains cannot retest their November 2021 all-time highs.This is purely a relativistic argument. ETH can go up to $10,000, about a 3x return, and Solana can go up to $200, about a 2x return. Would you be happy to have Solana? Capital will go where it is best treated.

Three ways to configure ETH

There are three ways to think about how to configure ETH: Fiat & Bitcoin & other L1s.

fiat currency

Arthur Hayes' new blog post: Ethereum as a "bond" will exceed ,000 by the end of the year

This is a 10-day rolling correlation chart of ETH and the Nasdaq 100, with a high correlation coefficient of 84%.

ETH (and Bitcoin) are risky assets, just like large U.S. tech stocks.

As the Fed continues its path of raising nominal interest rates and the 2s/10s curve inverts, pointing to a future US recession, stocks will be beaten (referring to a 30% to 50% drop) until credit markets go awry and the Fed reopens Money printing machine.

If I believe this with all my heart, then I also have to believe that ETH in USD can drop 30% to 50%. I wouldn’t sell fiat and buy ETH unless the broad risk asset market collapses or ETH’s short-term correlation with the Nasdaq 100 or S&P 500 starts to decline.

Whatever I think about ETH’s strong fundamentals, macros don’t exist.


My cryptocurrency portfolio for early 2022 is 50% Bitcoin and 50% Ethereum. I firmly believe that ETH is cheap relative to the rest of the crypto world. So my target allocation is 25% Bitcoin and 75% Ethereum.

Bitcoin being the “worst rock star” again requires a narrative change. Similar to Ethereum, Bitcoin is seen as another risky asset, but it is a huge risky asset because it trades 24/7 and is the last remaining free market in the world.

Bitcoin must once again be seen as a store of value and an inflation hedge, as it is the hardest form of money ever created. Ethereum is not a currency, it is a commodity that powers the world’s largest decentralized computer. The Ethereum community has clearly decided that ETH is a commodity used to power this computer, not a pure monetary tool.

At the protocol level, Bitcoin has no implied yield, but merged Ethereum does. So, Bitcoin is a currency and ETH is a commodity-linked bond.

Since global real interest rates are negative, I would like to own an asset with positive returns in its currency. Right now, that’s ETH, and Bitcoin itself doesn’t generate revenue. So, from a pure spread perspective, I should have more ETH than Bitcoin. Thanks to the new reward and validation system, this will change when the price of ETH rises enough to include future ETH cash flows.

Finally, funds from green investment theories like ESG will also be “safely” invested in ETH after the merger, not Bitcoin.

ETH vs L1s

I hope the charts posted earlier make it clear that the perception that ETH is undervalued is based on network fundamentals, while its competitors are more based on a brighter future. Likewise, other L1s may achieve their dream of overthrowing ETH, but they are still struggling to do so. With ETH’s impending implicit yield, and the ability of ESG investors to allocate ETH, the hope of surpassing ETH will become increasingly remote. They are better off trading something that they can prove to be undervalued on the fundamentals of the network.

Finally, let’s talk about asset cross-chain bridges. Wormhole and Ronin (Axie Infinity) stolen nearly $1 billion worth of ETH, other cryptocurrencies and stablecoins. Essentially, these bridges are the ecosystem’s attempt to bring all the amazing DApps built natively on ETH onto the new chain. If traders get tired of worrying about whether their bridge will be the next to implode, they might just migrate their TVL and business back to ETH, which is marginally negative for any competing L1. Instead of putting your feet in the river Styx and flirting with the wrath of Hades, trust in Vengeance.

ETH price breaks through five figures

A few years ago, I wrote an article predicting that the price of ETH would break into double digits, and it did so quickly.

Then, when I saw a chart showing that the total value of DApps built on Ethereum was greater than the market value of Ethereum itself, I further allocated ETH, which was a strong buy signal.

I’ve been through the current ups and downs and am very pleased with the relative size of my ETH allocation in my crypto portfolio. The rest of 2022 will be ETH show time.

When the dust settles at the end of the year, I believe ETH will trade above $10k.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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