Dialogue with ETHZilla CEO: How does the DeFi flywheel reshape the value logic of ETH?

Original Title: ETHZilla: Ethereum’s Monster Treasury Company | McAndrew Rudisill & Avichal Garg

Host: Ryan Sean Adams

Guests: Avichal Garg, Founder of Electric Capital; Mac Rudisill, Chairman of ETHZilla

Compiled & Edited by: LenaXin, ChainCatcher

ChainCatcher Editor's Summary

This article is compiled from the fifth episode of the Bankless podcast series "ETH Asset Management Companies," featuring Electric Capital founder Avichal Garg and ETHZilla head Mac Rudisill. They discuss the reasons behind the surge in the size of the ETH treasury during this cycle; how credit market tools such as convertible bonds, preferred stocks, and debt accelerate capital accumulation; and how the flywheel effect transforms Ethereum into high-quality collateral from stablecoins to DeFi and then to ETH. They analyze the business logic that makes the ETH treasury more akin to Berkshire-style value investing rather than short-term speculation.

Why have asset management companies been so active recently? Will this wave ignite a second boom in DeFi?

ChainCatcher has compiled and edited this content.

Key Insights Summary

Avichal: ETFs have limitations; if maximizing returns is the goal, decentralized asset trusts (DAT) may be a better choice.
Avichal: It is essential to strictly control leverage and position concentration, continuously assess market liquidity boundaries, and avoid chain reactions caused by the risk exposure of a single entity.
Avichal: The core difference between Ethereum and Bitcoin is that Ethereum can perfectly accommodate compliant assets and debt instruments.
Avichal: If a robust on-chain financial infrastructure is built, Ethereum will achieve autonomous asset management and credit operations.
Avichal: The current phase is similar to the consolidation period after the 1999 internet bubble; once infrastructure and user scale mature, the potential of digital finance will be truly unleashed.
Mac: Despite differences in market resources, Ethereum still shows a prosperous trend.
Mac: Generate free cash flow through differentiated business and continuously convert it into increased ETH holdings.
Mac: Currently, no ETH asset company can access such preferred markets or high-yield money markets.
Mac: Investing in Ethereum treasury companies allows shareholders to gain cash flow returns.
Mac: The current implied volatility of Ethereum is much higher than that of Bitcoin, actually nearing the levels of Bitcoin five years ago.

(1) How Does the ETH Treasury Catch Up with Tom Lee and Peter Thiel?

Ryan: Tom Lee currently holds 1.5 million ETH (worth about $7 billion). Can you catch up? What plans does ETHZilla have to accumulate a large amount of ETH?

Mac: We continuously purchase ETH from the market, and our spot reserves have reached $1 billion. Our operating model is highly similar to Tom Lee's early immersive trading phase with Bitmine.

Avichal: Tom Lee's target of a 5% ETH holding may face diminishing marginal returns. Although the flywheel effect can continuously increase holdings through compounding, excessive positions may negatively impact the ETH ecosystem. If he actively adjusts his strategy, it will provide a value recovery window for major holders like SBET and Joe Lubin, as well as for ETH.

Ryan: How do you attract investors like Peter Thiel?

Mac: Unlike other ETH asset management institutions, our highlight is our collaboration with Electric Capital and Avichal Garg for asset management.

Our returns significantly outperform the market peers, which is a core differentiating advantage; the deep integration with the Ethereum ecosystem constitutes another key competitive strength.

We collaborate with many leading DeFi protocol founders, accessing high-yield protocols while integrating real-world assets through Ethereum. This dual advantage of "ecosystem access + asset standardization" forms the core investment logic that generates free cash flow through differentiated business and continuously converts it into increased ETH holdings.

Ryan: Why does Peter Thiel choose to invest in ETH asset management institutions rather than directly holding ETH or Ethereum ETFs?

Mac: Investing in Ethereum ETFs requires a management fee of 1.5%-2%, while investing in Ethereum treasury companies allows shareholders to gain cash flow returns. Their net asset value (NAV) includes cash and ETH holdings, and the cash flow multiplier effect can generate a premium that ETFs cannot provide.

Directly holding ETH makes it difficult to achieve compounding growth under scale effects; investing in treasury companies essentially bets on their ability to continuously generate cash flow and accelerate ETH accumulation through scale expansion.

Avichal: Currently, ETFs cannot be staked, which is a limitation, and returns will inevitably be lower than direct staking. If maximizing returns is the goal, decentralized asset trusts (DAT) may be a better choice. They can achieve excess returns through scale effects and on-chain strategies.

For public market investors, DAT can provide on-chain yield exposure without the need for active management of DeFi; for private market investors, it avoids the technical barriers and compliance complexities of directly operating DeFi. Both types of capital may find more efficient allocation paths from DAT than from ETFs or direct holdings.

(2) Treasury Strategy vs ETF Allocation vs Purely Holding ETH: The Game of Three Investment Paths

Ryan: Can independent asset management companies use 100% of their ETH for staking to gain full yield advantages?

Avichal: Creating or redeeming shares requires liquidation, necessitating asset transfers, buying or selling ETH, so liquidity management is essential.

If a conservative strategy is adopted, one can refer to the practices of BlackRock or Bitwise, retaining 20% to 25% of ETH on the balance sheet to address potential liquidation risks. However, if regulatory changes lead to some ETH being frozen while facing redemption demands, it could trigger serious issues.

Therefore, under current rules, even if ETFs allow staking in the future, their performance is likely to be inferior to direct staking.

Ryan: Is the general rise in government bonds related to institutional investment strategies?

Mac: One reason institutions choose government bonds is their high liquidity and mature micro-strategies, with daily trading volumes ranking among the top 50 in U.S. stocks.

Scale effects are another key factor. For example, the cash flow generated from holding $100 billion in government bonds far exceeds that of smaller holdings, and its compounded cash flow is viewed by investors as a high-profit business, with opportunities to gain from the underlying asset's appreciation. Therefore, despite differences in market resources, Ethereum still shows a prosperous trend.

Avichal: Saylor's innovation lies in building a new capital base, namely the credit market. Large institutions can provide funding at about a 10% interest rate, while borrowers can invest it in assets yielding 30%-40% annually, creating an arbitrage space.

The core lies in financing low-cost purchases of high-yield assets, repaying debt with the appreciation of those assets, and continuously amplifying scale.

In the capital market, institutions like sovereign wealth funds indirectly gain leveraged Bitcoin exposure by holding related instruments, often outperforming direct Bitcoin holdings. This is driven by the pursuit of profit and financial instrument innovation.

Mac: Each share of Bitcoin appreciates by 16 cents daily; compared to the Anit Zilla strategy, our percentage return rate is higher.

Similar situations exist in other Ethereum treasury companies. The current implied volatility of Ethereum is much higher than that of Bitcoin, actually nearing the levels of Bitcoin five years ago.

The collaboration mechanism between debt capital market investors and Ethereum treasury companies allows us to issue convertible bonds at low interest rates. Investors seek both volatility exposure and the appreciation potential of Ethereum, and the combination can attract significant capital.

Ryan: Has Saylor fully utilized the potential of financing tools like convertible bonds? Has he completely absorbed the demand for convertible bonds in the cryptocurrency market?

Mac: Yes.

Ryan: Does this mean that the financing space for convertible bonds has been exhausted? Do other Ethereum asset management companies still have similar opportunities?

Mac: He recently issued preferred stock fully collateralized by Bitcoin, structured similarly to Morgan Stanley's money market products. Investors can earn a 9% yield without sacrificing Bitcoin's appreciation potential.

He pays about 4%-10% interest using the cash he holds as collateral and directly purchases Bitcoin with the raised $500 million to pay the yield. This innovative tool achieved de-convertibility within two weeks.

Ryan: Can Saylor replicate similar financing opportunities? Do other Ethereum asset management companies have the same conditions?

Mac: Currently, no ETH asset company can access such preferred markets or high-yield money markets.

Avichal: This is similar to BlockFi but on a larger scale and aimed at institutions. Saylor borrows against Bitcoin as collateral, pays 9% interest, and then uses dollars to buy more Bitcoin. If the debt term is long enough, this arbitrage strategy is highly valuable.

His core ability is to tap into massive funds in the capital market. By offering a 9% yield (higher than the 4% in the money market), he only needs to attract 1% of that market's funds to double the operable capital.

If interest rates decline, the 9%-10% yield will become even more attractive. It is expected that within 6-12 months, ETH asset companies may also enter similar funding pools.

Ryan: If ETH treasury companies emulate MicroStrategy and enter the debt capital market, could they face similar risks as BlockFi?

Avichal: Rehypothecation risk is the core issue exposed in cases like BlockFi. When collateral assets are withdrawn and re-lent, it creates a cycle of leverage, a model that has led to collapses in the DeFi space multiple times.

The real risk lies in maturity mismatches and liquidity pressures. Although the capital market provides a way to repay old debts by issuing new ones, this mechanism may fail if market confidence wavers. For the ETH ecosystem, if a single entity holds too high a proportion of assets, it poses systemic risks to the underlying protocol. Excessive concentration combined with high leverage is extremely dangerous.

Therefore, it is essential to strictly control leverage and position concentration, continuously assess market liquidity boundaries, and avoid chain reactions caused by the risk exposure of a single entity.

Ryan: Why are there such leverage opportunities? Who are the buyers of these micro strategies, such as bonds?

Avichal: It is necessary to distinguish between the financing targets of micro strategies and ETH treasury companies. The former has covered multiple channels of capital, including convertible bonds, high-yield bonds, preferred stocks, and money markets; while ETH companies currently mainly rely on traditional convertible bond investors.

Currently, most ETH convertible bonds are fully cash-collateralized structures, allowing holders to enjoy conversion rights when stock prices rise in the future, while issuers gain the option to issue cash on the balance sheet, posing very low risk to shareholders' funds.

Overall, the financing stage of ETH treasury companies is still in its early days, far from the diversified capital utilization level of micro strategies.

Ryan: When financing capabilities improve to cover multiple channels such as convertible bonds, high-yield bonds, preferred stocks, and money markets, who are the actual buyers of these debt instruments?

Mac: The global high-yield market has daily trading volumes reaching trillions of dollars, even hundreds of billions. Buyers are looking for opportunities like this that have high profit margins and recurring cash flows, leveraging operations. They must redeploy funds to achieve substantial interest income.

They are still pursuing yield.

Ryan: How high of an excess return can buyers of debt instruments from ETH treasury companies potentially achieve?

Avichal: The ability to service debt depends on the ratio of ETH holdings to debt. For example, when there is $200 million in debt corresponding to $1 billion in ETH, the interest coverage ratio is extremely high, and the risk is manageable.

The core breakthrough is that the credit market now recognizes Bitcoin and ETH as legitimate collateral.

Ryan: Have Bitcoin and Ethereum been officially classified as "high-quality liquid collateral" by the global capital markets? If so, do they hold the same positioning as traditional high-quality collateral? Do other assets possess the same level of collateral attributes?

Mac: Real estate, oil, and most commodities are considered high-quality collateral due to their liquidity, and securities portfolios have long been the preferred targets for bank loans. Now, Bitcoin and Ethereum have been included in this category, becoming recognized collateral assets in the capital markets.

(3) Why Have Asset Management Companies Been So Active Recently?

Ryan: Why did ETH asset management companies suddenly emerge in concentration after May 2024? Is this directly related to regulatory clarity?

Avichal: Regulatory clarity is a core driving force, and the market's long-term value recognition of ETH and the DeFi ecosystem is also key. The acceleration of stablecoin legislation, primarily relying on Ethereum, further validates the necessity of ETH as infrastructure.

Ryan: What else is related to this?

Avichal: Application demand drives ETH purchasing behavior, which in turn raises ETH prices, creating a positive feedback loop. The market's deepening understanding of Ethereum's essence and the widespread recognition of ETH as an asset attribute reflect a shift similar to the cognitive evolution of Bitcoin in 2019.

Ryan: Is ETH replicating Bitcoin's institutional path (2019-2024) and becoming "the next Bitcoin"? Can the market accommodate multiple mainstream crypto assets simultaneously?

Avichal: History often resembles but does not simply repeat itself. In the next three to five years, the market will gradually realize that ETH possesses characteristics such as 100% digitalization, inherent nature, ultra-low inflation, a stablecoin foundation, and an efficient DeFi ecosystem, all of which are tacitly approved by the U.S. government. From a purely capital perspective, ETH and Bitcoin meet similar value conditions, but current capital still prefers Bitcoin.

Why has the market not fully recognized ETH's compliance and technical economic advantages? In fact, ETH reached a market cap of $350 billion at its 10th anniversary. The capital market will eventually awaken, recognizing that ETH meets all rational investment conditions; why not include it in allocations?

Ryan: Does the core logic of ETH asset management companies rely on the long-term appreciation of ETH prices? How can the correlation between stablecoin growth and ETH value enhancement be demonstrated?

Avichal: Many countries worldwide are facing significant inflationary pressures, with about 20%-25% of the population experiencing a base inflation rate of 6%-8%. In this context, the market urgently needs a financial system that is dollar-denominated, globally accepted, institutionally secure, and capable of avoiding unilateral intervention by local or U.S. governments. The Ethereum DeFi ecosystem is spontaneously constructing such a system through stablecoins and supporting mechanisms.

The use of stablecoins has spurred DeFi demand, and as ETH serves as a mainstream collateral and ecosystem reserve asset, its demand has increased accordingly. Users can borrow without third-party custody by collateralizing ETH, further driving up ETH demand and price, attracting institutional participation.

Institutional behavior, in turn, feeds back into the scale of stablecoins and on-chain asset liquidity, forming a closed-loop flywheel. This model relies on Ethereum's smart contracts and collateral mechanisms to achieve self-enhancement, fundamentally differing from Bitcoin, which lacks a stablecoin ecosystem's closed loop.

Ryan: What does the future of stablecoins depend on?

Avichal: The future of stablecoins depends on specific use cases and the needs of market participants. For example, in the case of Tron or other fast Layer 1 chains, stablecoins will indeed exist on these chains and serve specific scenarios.

However, institutional users place greater emphasis on censorship resistance and trusted neutrality. If users are entirely under U.S. jurisdiction, they may choose Layer 1 solutions launched by companies like Circle or Stripe, which are similar to the past Silvergate SEND network, providing efficient infrastructure for regulated entities.

Yet many countries are unwilling to be entirely subject to U.S. jurisdiction. For instance, in the logic of the Eurodollar system, when both parties to a transaction are unwilling to use their local currency, they will opt to settle in dollars. In this case, decentralization, high stability, and continuous operational capability become key advantages.

(4) Ethereum vs. Bitcoin: The Battle for Value Storage and Differences in Institutional Paths

Ryan: How can the market be convinced that ETH is not only a value storage asset but that its attributes are superior to or distinct from Bitcoin and other traditional value assets?

Avichal: The concept of value storage makes sense both economically and logically, with core characteristics including portability, divisibility, durability, and verifiable scarcity. Both Bitcoin and Ethereum meet these criteria and outperform gold on multiple dimensions.

As for whether one would prefer to own art, farmland, platinum, or ETH, many may reinterpret the rationale for ETH within this framework. Gold or art does not possess absolute intrinsic value; its uniqueness stems from human consensus and cultural preferences, which aligns perfectly with the logic used to defend Bitcoin a decade ago.

Value storage assets are not the only option.

Ryan: Since ETH outperforms or at least matches Bitcoin in functionality and value storage attributes, why has its price performance lagged behind Bitcoin in this cycle?

Avichal: The next round of token issuance development takes time. The retail market has reached a considerable scale, but a new round of capital injection is still needed. The Bitcoin community has excelled in this regard, particularly in attracting institutional participation, which has been significantly aided by DAT.

Mac: Due to compliance restrictions, investors previously had to sign numerous documents to purchase Bitcoin through banks, while Ethereum ETFs were even directly prohibited by compliance departments. Thus, IBIT became the first approved Bitcoin ETF security, with many large bank clients allocating Bitcoin through MicroStrategy's brokerage accounts.

In contrast, Ethereum ETFs only began trading at some large banks in recent months. Although Ethereum's actual application development has progressed more rapidly, its institutional adoption has only just begun. This reality indicates that Ethereum's compliance access and capital inflow are still in the early stages.

Ryan: What are the differences between the ETH treasury and the Bitcoin treasury?

Avichal: Ethereum's network architecture creates abundant on-chain yield opportunities. Bitcoin is viewed as digital gold, with investment logic based on faith and price growth expectations; whereas Ethereum requires a simultaneous bet on network expansion, including underlying protocols, multi-layer scaling, and ecosystem development.

The most critical difference is that Ethereum can perfectly accommodate compliant assets and debt instruments. When Wall Street institutions begin to utilize its mechanisms, the scale of assets touched will far exceed that of Bitcoin, which is the core advantage of Ethereum's financial model.

(5) ETH Investment Strategy: What is the Key to Project Success?

Ryan: What kind of returns are you looking at? What is your expected return?

Avichal: The core issue is how much risk one is willing to take. We have established a comprehensive risk framework, considering LRT solutions that are slightly above basic staking. There are interesting opportunities in the RWA space, with an attractive risk-reward ratio.

For the ETH ecosystem, just a few million dollars can guide new protocols, promoting ecosystem development through around 15% token incentives. As investors, active participation is more valuable than passive holding.

Mac: The core value of current market education lies in the fact that most institutions still lack the motivation for in-depth understanding, but over time, they will awaken.

Ryan: Does the ETH purchasing strategy have a price trigger mechanism and a scale limit? Will excess liquidity be used for allocation?

Mac: We adopt a regular investment strategy to continuously build positions in ETH, based on medium to long-term bullish expectations, without pursuing short-term timing.

Ryan: How do you define a reasonable range for total market cap premiums in a stable state?

Mac: The stock price of financial companies is linked to Nasdaq liquidity, and there has been volatility recently due to AI market trends. The reasonable valuation range for MNAV is 1.7-2 times, with bull markets potentially breaking 3 times, while bear markets may see valuation compression leading to buyback opportunities.

Ryan: How do you assess the risks posed by investment tools like BitMex due to insufficient liquidity and high fees?

Mac: The initial fundraising cost for this business is high, but once scaled, the operating costs are extremely low, allowing for the management of large-scale assets with minimal manpower, achieving high net profit margins and significant operational leverage.

Ryan: Can holding ETH treasury bonds generate cash flow in a manner similar to Berkshire?

Mac: This is my reason for betting on buying these stocks. Due to free cash flow returns, the actual business operations of this company are performing very well.

Avichal: The Ethereum ecosystem has now accumulated about $60 billion in TVL, with many core developers deeply involved in technological evolution. The current strategic focus is on re-integrating ETH assets into the on-chain system, reducing reliance on the traditional Wall Street financial system through tokenization and the construction of on-chain credit markets.

If a robust on-chain financial infrastructure is successfully built, Ethereum will achieve autonomous asset management and credit operations. The value of this long-term ecological construction lies not in short-term market cycles but in over a decade of continuous technological accumulation and community consensus. When the public chooses on-chain financial products, they are more likely to lean towards those that genuinely practice on-chain principles.

Ryan: Does the community multiplier effect constitute a key condition for project success?

Mac: I believe that being in the top three of ETH asset management rankings is one thing, but what truly sets us apart is our ability to create returns and our business operation methods. Because I believe that once the market sees this in a few months or a few quarters, we will be distinctly different from other asset management companies.

(6) The Wave of Mergers and Acquisitions in the Crypto Market and Cycle Evolution: From Bear Market Arbitrage to Long-Term Value Reconstruction

Ryan: Do you think there will be some mergers and consolidations in the market in the coming months or years? When do you think such activities will rebound?

Avichal: The market may see mergers and consolidations in the future, especially in the next bear market cycle. Companies with a market cap below $1 billion are likely to attract aggressive investors. When stock prices fall below net assets, it may trigger arbitrage. Investors can acquire shares at a discount and then force liquidation to profit from the price difference.

In similar cases, Michael Saylor may acquire an ETH asset company, sell its ETH, and increase his Bitcoin holdings, thereby eliminating competitive assets and achieving capital transfer.

Ryan: At what stage is the current cryptocurrency cycle? Does it still follow historical bull market patterns? How much upward space is there in this cycle?

Avichal: The cycle's trajectory is mainly related to capital flows brought about by interest rate cuts.

Ryan: Is the cryptocurrency cycle primarily driven by liquidity?

Avichal: Historically, these assets have low liquidity, and the four-year cycle mechanism does exist, but actual operation is quite challenging. As venture capitalists, we focus more on long-term trends over a ten-year span rather than short-term trading. The current cycle may extend to about 4.5 years due to external events.

The maturity of Wall Street's capital markets may change traditional cycle patterns, but the history of gold ETFs indicates that the sustainability of capital inflows may far exceed expectations.

Ryan: What are your views on ETH's price trajectory by the end of this year or in the next 18 months to three years?

Avichal: Short-term price predictions are extremely difficult to achieve. Our core strategy is that when asset values are extremely low, if their potential value can reach ten times the current level, even with time uncertainty, as long as the core logic holds, there is room for long-term error tolerance. The key is to judge that "if the underlying logic holds, value will ultimately far exceed the current state," rather than chasing short-term fluctuations.

Ryan: Do you expect asset growth multiples of 10x, 25x, or 100x? Do you agree with Tom Lee's view of a hundredfold increase?

Avichal: If Bitcoin is benchmarked against the $20 trillion gold market as digital gold, its price could reach a million dollars. Ethereum, with its current $400 billion market cap, could have a 50x growth potential if it achieves the same benchmark. History has shown that technological innovation expands the total market capacity, so the actual potential may far exceed static calculations.

Failed cases often underestimate market capacity, while successful cases frequently surpass initial expectations. If Ethereum truly realizes its function as a global digital value storage, its potential may surpass traditional assets. The accessibility of the internet will create an unprecedented market scale. When everyone can easily hold digital assets, the existing valuation framework will completely fail.

Ryan: Why choose to benchmark physical gold as a value storage reference? Shouldn't the potential user base for digital assets far exceed the number of gold holders?

Avichal: Taking stablecoins as an example, when users discover that assets can generate returns, even if they only allocate a portion of their positions, it may rapidly push the scale beyond the traditional banking system.

The current stage is similar to the consolidation period after the 1999 internet bubble; once infrastructure and user scale mature, the potential of digital finance will truly be unleashed.

The industry may be entering a mature window similar to the internet from 2005 to 2008. The infrastructure and cognitive readiness are in place, and long-term visions may be realized during this phase.

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