NCI: From buying ETH at $1 to building a $3B Ethereum machine

NCI From buying ETH at $1 to building a $3B Ethereum machine

Speaker1: [00:00:00] Welcome to Non-Consensus Investing. I'm Rahm Aal, your host, and CIO at Lumida Wealth, where we specialize in the craft of alternative investments. At Lumida, we help guide clients through the intricacies of managing Wealth so they don't have to shoulder the burden alone. Through this podcast, we draw back the curtain to reveal the strategies of Floyd by the best in the business for their clients so that you too can invest beyond the ordinary.

Alright, welcome to the next episode of Lumida Non-Consensus Investing. I am thrilled to have a very special guest and friend, Andrew Keys. This title of this show is called Dimon Hands, the Ethereum Machine with Andrew Keys. Andrew's got an incredible story. I'm thrilled and honored to have him share that story with us today.

And Andrew is the chairman of the Ethereum machine, which is publicly traded. He is the largest contributor. To any [00:01:00] publicly traded Ethereum debt. And not just by a little bit, but by an order of a magnitude. So we're gonna get into that. Andrew also comes from a traditional finance background, like me. He saw the opportunity around Ethereum, Andrew and I, of all places we've met in China, right?

And we met in China in 2015. We were on a, we were on a bus with maybe a dozen other FinTech entrepreneurs. We got to know each other there. Struck up a friendship there, and Andrew was telling the story of ETHE in 2015. What I should have done is just sold my company there and say, Andrew, can I work for you?

Let's go do this thing. Let's go. You should've just bought 

Speaker2: it there, sold your company and bought it there. You wouldn't have, that would've been much better. Exactly. 

Speaker1: 20, what was it? They priced that back then? 

Speaker2: A dollar. It was a dollar, so quick and interesting story. The first time Ether crossed $1 was because [00:02:00] I put a permissioned version of the Java client on top of Microsoft Azure.

So banks and Fortune five hundreds could play with the concept of tokenizing any asset. And we named it the cliche marketing blockchain as a service. And had Paul Vina from the Wall Street Journal write a hundred word article. And on that article being released, ether crossed the dollar in October of 2015.

Speaker1: So that was limit up Ether, yeah, to an dollar based on this article. $1. Thanks. We're going places then. We're gonna talk about quite a few topics today. One is your story, which is as much a story about Ethereum because you are the person who introduced the constant to Wall Street. So we'll get into that.

We'll get into where we are in the digital asset Treasury cycle. The differentiation. Ethereum machine is out there, bid miner's out there, bid miner, put on a press release the other day. We'll talk [00:03:00] about that too. And also just your experience, like just Dimon handing this thing through massive drawdowns and riding Ethereum from a dollar to where it is today, which is a 4,000 x return.

So a lot to get to do. First off, why don't you introduce that theory machine just to orient everyone like what is Ethereum machine? Sure. So the Ether Machine is 

Speaker2: a institutionally focused public vehicle with the just shy of $3 billion of committed capital and about 500,000 Ether and some dollars. That is not a buy and hold Digital asset Treasury.

We are an operating business that gives public market exposure to Ether and Ether generated yield and the way we got here. Was PRI prior in, in a prior life, I had built an institutional commodity pool operator and commodity [00:04:00] trading advisor, under the acronym of Dharma, which is Digital Asset Risk Management Advisors, and had been staking tens of thousands of E ether validators.

So there's 32 ether per validator. So institutional scale from inception of Ethereum's, proof of state consensus transition from proof of work. And one of the large ETFs came up to me and said, will you be my market maker? Because when ETFs enable staking, the ETFs have a 24 hour redemption requirement.

And so right now in the United States, the Exchange traded funds in America do not enable staking. So simply put, that's like having a stock that generates a dividend, but owning the stock and not getting the dividend. But that's more of a relic of the gens rera. And we believe those headwinds will be tailwinds soon enough and they will enable staking in the [00:05:00] ETFs.

But the issue, and you can look at Canada or Europe as a proxy, is can Canadian and European ETPs that do enable staking stake at what I call 50% capacity. Meaning if you have a billion dollars, they're staking only 500 million and they're generating what I would call the floor yield on that 500 million.

So really on the billion dollars, the floor yield right now is 3%. So they're really generating 1.5%. And I thought that was inefficient and we'd be able to generate the full staking yield ALT, because this is an operating business rather than an ETP that has 24 hour redemption requirements. And then furthermore, we could do other.

Ether denominated yield generating activities. So 1, 1, 1 place that we could add is through a concept of retaking, where you can [00:06:00] take Ethereum's proof of state consensus mechanism and use it to secure other technologies. The leader in that space is a company called Egen Layer. And Eigen layer had 10 million, $10 million invested in it at a hundred million dollars by Andreesen, excuse me, a hundred million dollars at a billion dollar valuation by Andreesen Horowitz.

About a year ago, two years before that, I personally invested $2 million at a $25 million valuation. Wow. And my firm has been closest to the metal in creating user experience testing bug bounties, and basically doing product market fit testing, the concept of retaking. And so you're on 40 

Speaker1: x on Igan layer.

Look, it's not a 4,000 x. Ethereum, but we'll give you a pass on that one. Lightning strikes twice, so free it up. There was Bitcoin. Yeah. And digital Tread for Bitcoin is MicroStrategy. MSTR. That was the first that. And then you are involved in Ethereum in the very early days [00:07:00] at a dollar and you're at consensus.

And now you launched Ethereum machine. And essentially it's built off this, the technology and knowhow from Norma 'cause you are a service provider to these publicly traded funds that wanted to maximize the yield generated by the state activities of Ethereum. 

Speaker2: So to talk through that differentiation, we should start with Bitcoin versus Ether.

So Bitcoin has a category defining winner already in MSDR. Furthermore, Bitcoin doesn't really interest me too much on the Bitcoin blockchain. There is one asset, a Bitcoin and there is one function send. It's like a global abacus where I can send the bead to rom on the Abacus and Rom can send it back to me.

Ethereum interests me because I believe Ethereum to be the next generation of the internet, and basically we can digitize any type of asset. So a stock, a bond, a [00:08:00] derivative, an electron on a solar panel, and then we can embed those assets into Li digital legal agreements called smart contracts. And we can say, if X were to occur, then send the asset else failure.

And so basically, I believe that Bitcoin has the TAM of digital gold, whereas Ether has the TAM of the next generation of the internet. And if you can put a price on the total addressable market of what commerce on the internet is, I believe it to be exponentially larger now, furthermore. If you really understand the digital asset Treasury space, it's important to understand how MicroStrategy got to where it was.

And basically the benefit of having a public vehicle versus my commodity pool operator, commodity trading advisor when I had SMAs, for example, separately managed [00:09:00] accounts is in the public vehicle. We're able to use the public capital markets and we can issue equity or we can issue debt is simply blip.

And MicroStrategy didn't get from single digit billions to a cent a billion dollar vehicle by issuing equity, and depending upon how you issue equity, that could even be dilutive to your shareholders. And what made MicroStrategy grow from single digit billions to cent billions is what is called a convertible bond.

And to understand how these convertible bonds work, you're essentially. Selling volatility to a hedge fund that wants to acquire volatility, and then you, the proceeds of that sale via convertible bond is for cash to acquire the digital asset for the shareholders that are looking for exposure to the underlying, specific digital asset.

[00:10:00] In MicroStrategy case, that was Bitcoin. The good news is that with Ether, it is double the volatility of Bitcoin. And unlike Bitcoin, that doesn't generate yield, Ethereum can generate yield. So if there are coupons, like in a preferred share, we have a much better way to satisfy yield payments. So basically it's double the ball with the ability to generate yield.

So basically this is a better asset for this type of public vehicle. 

Speaker1: So MicroStrategy. Built a capital markets machine around ela. And to your point, what they did is they were selling convertible bonds and they packaged an equity-like instruments instrument that was marketable to fixed income investors.

If you're a fixed income investor, the world is very dry, plain vanilla. There's not much to do. But in a convertible bond format, fixed income investors had the [00:11:00] ability to get an exposure to the growth in Bitcoin. It's very clever, brilliant move that Michael Saylor did. And obviously he's expanded that and it's created an array of different products participating and that was the first digital asset Treasury.

Over the last three months, we've seen a proliferation of them. You, I think what separates Ethereum machine versus others is like your personal commitment to it. Like how much capital did you contribute to the Ethereum machine versus the other debts. So 

Speaker2: I contributed 150,000. Ether present day, that's about $750 million.

And I think the second largest contributor was $40 million. 

Speaker1: That'd be like Joe Lubin. At espen. At Espen, right? Yes. 

Speaker2: And I think it, it's important to understand when we talk about differentiation, we've explained Bitcoin versus Ether. We talked about the ETFs as a way to [00:12:00] express one's views of, for Ether. I look at it as an inefficient way because you're only availing yourself to part of the yield that's being generated versus a public vehicle like this where we can generate the full Ether yield and also have staking and part potential participation in Defi.

So we should be able to, if you look at this as a perpetual bond and we have double the yield of the ETF. It should be double the value. And that's where I think you can start to justify an MN greater than one in co. A market cap. 

Speaker1: A market cap divided by net asset value ratio. 

Speaker2: Go ahead and if you have a multiple to the net asset value within the 

Speaker1: vehicle right now, bit minor.

‍