Ethereum as a ‘digital bond’ – a far-fetched objective?

With Ethereum’s imminent move to Ethereum 2.0, the process of staking will be introduced by the blockchain network, and the $26 billion worth of Ethereum will all be convertible into yield-bearing assets.

Now, Stefan Coolican, President of Ether Capital recently explained that the eventual shift to staking would potentially transform Ethereum into a digital bond, which will mirror the utility of a conventional bond.

In a recent newsletter, Coolican explained that Ether will not only be a virtual commodity but a financial asset that allows the users to earn dividends. However, he indicated that Stake ETH will not reciprocate the counterparty risk of a conventional bond as the yield will be trusted to their stakes at the protocol level and not via a counterparty.

Hence, Staked ETH will be more of an intrinsic yield instrument. The newsletter added,

“Where staking differs from ordinary asset lending is that there is no counterparty risk – the risk profile is internal to the protocol itself.”

Now Staked ETH has been touted as one of the ways to improve Ethereum’s store-of-value narrative as users will have guaranteed dividends on their staked Ether.

Additionally, once proof of stake is implemented on Ethereum and brings the inflation rate of ETH near zero at 0.5%, ETH will have a limited supply, possibly giving it all six characteristics of money: durability, portability, acceptability, divisibility, uniformity, and limited supply, as indicated by James Spediacci in 2019.

However, the current potential surrounding Ethereum as a digital bond might be getting a little ahead of itself.

In theory, things are appearing to be smooth for the world’s largest smart contract but behind the curtains, a lot of work still needs to be done for an efficient shift to Ether staking.

Konstantin Kladko, A SKALE network developer, recently stated that there are “fatal flaws” in the way ETH 2.0 implementation is taking place. He believed that once staking takes place on the network, it might be huge “embarrassment” since there would not enough capital to back the network”.

Kladko was queried by Ethereum Co-Founder Vitalik Buterin himself on what these “fatal flaws” maybe, to which Kladko responded that the 1-day or unidirectional bridge will indicate that users will destroy 32 ETH when staking is done. He added,

“ETH2 is going to be less than ETH1 because there is no way transfer back… [which means] validators will IMMEDIATELY lose 50% of money.”