In this episode, Andrew Keys, co-founder of The Ether Machine, outlines the company's innovative strategy to provide institutional investors with exposure to Ethereum through a public platform. Unlike traditional ETFs, The Ether Machine aims to generate additional returns for shareholders through active staking, re-staking, and participation in decentralized finance (DeFi). Andrew also emphasizes the company's clear corporate structure and its focus on Ethereum, which sets it apart from other crypto asset management tools.
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Introduction of Andrew Keys and The Ether Machine
Ehan: Welcome to the Wu Shuo podcast. For the latest insights in the cryptocurrency and blockchain space, please subscribe to the Wu Shuo YouTube channel and follow us on Twitter to stay updated and join the discussion.
Today, we are honored to have Andrew Keys, co-founder of The Ether Machine, as our guest. Andrew, could you briefly introduce yourself and your background?
Andrew: First of all, thank you for inviting me to the Wu Shuo podcast. I really appreciate you taking the time to talk with me. I also really enjoy visiting China multiple times. My first visit was in 2015 when I went to China with Vitalik Buterin, right when Ethereum was launched. My background is primarily at the intersection of capital markets and technology. I helped create a company called ConsenSys, which developed three of the eight Ethereum implementation versions and created some of the most widely used developer tools and web applications, such as MetaMask, which is one of the most popular user wallets in the crypto space.
I also created a company called Dharma, which is a commodity pool operator and commodity trading advisor registered with the U.S. Commodity Futures Trading Commission (CFTC). Dharma stands for "Digital Asset Risk Management Advisor," and since the launch of proof of stake (PoS), it has become one of the largest institutional staking platforms. Recently, I founded The Ether Machine, a publicly traded company on NASDAQ under the ticker ETHM. The Ether Machine is an Ethereum treasury that actively manages its Ethereum through staking, re-staking, and participation in DeFi. This allows shareholders to gain exposure to Ethereum investments while enjoying additional yield generation.
Transition from ConsenSys and Dharma to The Ether Machine
Ehan: The Ether Machine recently raised $654 million worth of ETH. What is the reasoning behind this treasury-centric model?
Andrew: Currently, The Ether Machine's committed capital is $2.5 billion, which is about 500,000 Ethereum. We just raised an additional 150,000 Ethereum, worth $654 million. This investment comes from a large Ethereum investor who wants access to our operating business, which generates yield through staking, re-staking, and participation in DeFi, while also having publicly traded securities ETHM listed on NASDAQ. The investor wants to ensure they have quality collateral and a clean entity to invest in.
Broadly speaking, there are two ways to manage a digital asset treasury. One is through acquiring shell companies, but many shell companies come with existing liabilities. For example, I have discussed with three different shell companies. One was a biotech company that declined due to a failed drug trial. The CEO wanted to stay on, but this person couldn't even spell "Ethereum" correctly and wanted me to pay millions in continued salary. Another was a Bitcoin mining company that no longer wanted to be a miner due to rising cash costs. They had a data center lease worth millions and wanted us to take on those costs.
These are just examples of liabilities that can be inherited when acquiring shell companies. Instead, we created a new limited liability company (LLC) based on Ethereum. Then, we merged with a special purpose acquisition company (SPAC) that merged with this new LLC. As a result, we now have a clean operating business. This is exactly what investors need: a clean entity and a tool to deploy capital.
Ehan: So why not choose Bitcoin or other cryptocurrencies?
Andrew: I believe Ethereum is the foundation of the next generation of the internet. Simply put, Bitcoin can only do one thing—I can send you Bitcoin. With Ethereum, we can programmatically create any type of application. Bitcoin has one use case and one asset, while Ethereum offers infinite use cases and infinite assets. We observe that, similar to Google's impact on search, Ethereum is experiencing a power law effect, where 90% of high-quality liquid assets are deployed on Ethereum. Additionally, 80% of stablecoins are also deployed on Ethereum. We believe Ethereum will become the foundation of the next generation of the internet. Furthermore, Ethereum is a productive asset that can generate yield, which is crucial for creating returns for our shareholders.
Ehan: Was there a key moment or change, such as the rise of staking, that catalyzed this treasury-centric model?
Andrew: There are several catalysts for this treasury model. The first is our ability to measure digital assets at market value. This is an important development because accounting institutions within public companies can start measuring digital assets at market value. This change was passed in December 2024. We also saw political tailwinds, where former political resistance has now turned in our favor. For example, the Genius Act (the stablecoin act) provides clear regulations for institutions on how they can custody and trade stablecoins. The biggest beneficiary of the Genius Act is Ethereum, as most stablecoins settle on Ethereum.
Similarly, the Clarity Act, expected to be introduced in November, is a market structure bill that will clarify the tokenization rules for securities such as stocks, bonds, and derivatives. We believe this will further benefit Ethereum, as most high-quality liquid assets settle on Ethereum.
Comparison of The Ether Machine with Traditional Holding Companies and ETFs
Ehan: You are preparing for an IPO with over 495,000 Ethereum on the balance sheet. How does The Ether Machine position itself compared to traditional holding companies, ETFs, or other corporate structures?
Andrew: We believe we are not just a holding company; our positioning is more unique compared to ETFs. We are an operating company that generates income through staking, re-staking, and participation in Ethereum's decentralized finance (DeFi). A holding company merely holds Ethereum without utilizing the yield generated by Ethereum. ETFs can only stake when they are under-allocated, meaning they cannot stake all the Ethereum they hold.
Our model allows for full staking, re-staking, participation in DeFi, and the issuance of credit instruments such as convertible bonds or preferred stock to purchase more Ethereum. A similar operating company is MicroStrategy, and we aim to become the MicroStrategy of the Ethereum space.
Explaining NAV (Net Asset Value) and Its Importance
Ehan: Can you explain the Market Cap to Net Asset Value multiple as a metric and why it is important for on-chain public companies?
Andrew: I believe the Market Cap to Net Asset Value multiple is important for these public companies because it reflects two aspects. First, it demonstrates the ability to generate staking yields beyond what ETFs produce. Staking can be viewed as a perpetual bond, and we have the ability to outperform European or Canadian ETFs, which typically have a staking capacity of only 50%, while we can achieve 100%. If that is the case, you have to consider that doubling bond yields should mean doubling the price. This is one consideration for NAV.
Secondly, NAV can also be attributed to the ability to issue financial instruments. In our case, we can issue preferred stock or convertible debt, which can increase the Ethereum concentration per share, and this will be reflected in NAV.
Ehan: Does NAV present unique challenges or opportunities compared to traditional equity valuation?
Andrew: Yes, NAV is a function of multiple factors, and the choice of financial instruments depends on the NAV. For example, if a company's NAV is greater than 2, or even greater than 1.5, it may be necessary to issue more stock because it might be slightly overvalued. But if NAV is less than 1, it may be more appropriate to buy back stock because the company is undervalued. Therefore, fundamentally, NAV is a useful gauge to help understand the value assigned to a company, far beyond merely holding stocks or crypto assets.
How Staking and Yield Generation Shape The Ether Machine's Business Model
Ehan: What role do staking and yield generation play in The Ether Machine's business model? Can this approach continue to outperform traditional ETFs?
Andrew: ETFs have their nuances. If you understand how ETFs operate, they require 24-hour liquidity. This means that if you are an ETF holder and want to sell your ETF shares, the ETF issuer must be able to redeem those shares in real-time and return the funds. However, this is not compatible with Ethereum's withdrawal queue. Typically, if you unstake, you will get your Ethereum back in less than a week.
Recently, there was concern about large staking institutions potentially being attacked. They began to unstake all their Ethereum, causing the withdrawal queue to increase from a few days to over 30 days. This does not align with the redemption requirements of ETFs, as ETFs need to complete redemptions within 24 hours. If a "black swan" event occurs, the staking withdrawal queue could even extend to six months or a year. ETF issuers must reduce staking to cope with this situation. Currently, in the U.S., ETFs do not stake, while in Europe and Canada, the staking ratio is about 50%.
As an operating company, we do not have the 24-hour redemption requirement. Therefore, we can stake at 100% capacity, which allows us to outperform ETFs.
Ehan: As a new model, how do you plan to communicate this on-chain asset model to traditional market investors?
Andrew: We communicate through monthly reports, which provide guidance and include quarterly reports. Each quarter, we explain our revenue, Ethereum generation, and Ethereum capacity. Additionally, we collaborate with some of the largest institutions in the world. For example, one of the largest investment banks globally, Citibank, is our bank, and they will publish research reports for us. This provides them with a way to communicate with analysts and investors in the traditional financial markets.
Ehan: Do you also plan to adopt advanced yield strategies like restaking or LRT?
Andrew: Yes, we do plan to use advanced strategies like restaking and possibly LRT from the beginning. Initially, we will start with basic staking and then gradually transition to restaking and LRT.
Advantages of SPAC in the Cryptocurrency Regulatory Environment
Ehan: Why choose the SPAC route instead of a direct listing? What advantages does the SPAC route offer considering the cryptocurrency regulatory environment?
Andrew: We chose the SPAC route because we did not want to inherit any existing liabilities. In a direct listing, the company is essentially "selling" itself, but the business they operated before may not be viable. In fact, every direct listing involves some already failed companies. When a company fails, there are usually issues related to management, operational business, governance, equity structure, and possibly even litigation. We did not want to inherit these liabilities. Through SPAC, we established a clean operating company, a brand new entity without these issues. We believe this is the best way forward.
Ehan: What advantages does the SPAC route provide given the cryptocurrency regulatory environment?
Andrew: We believe this will give us the cleanest, most institutionally-focused Ethereum operating company in the public market. By having an entity without existing liabilities, no existing business, no governance issues, and no operational management problems, we are in a strong position. We can also have our accounts audited by the Big Four accounting firms. With this structure, large investment banks will be able to work with us to issue various financial instruments, not just ATM stock offerings. From my perspective, the ATM stock issuance space has become somewhat tired, and we believe we will be the first to launch other financial instruments, such as convertible bonds or preferred stock.
Ehan: How have you designed this capital structure that includes convertible debt and preferred stock to avoid dilution of crypto assets?
Andrew: By definition, we created these financial instruments, although we have not issued them yet. Essentially, potential dilution depends on the tools used. For example, if the NAV of an ATM issuance is below 1, this will dilute shareholders. If the NAV is below 1, stock buybacks should occur. If we create different financial instruments, such as preferred stock or convertible bonds, they can be issued at a premium, allowing them to be equityized at a higher price. This will provide us with another way to issue value. Ultimately, we will purchase the underlying assets, which may increase the Ethereum concentration per share.
Ehan: Is The Ether Machine paving the way for a new type of on-chain public company? What makes this model sustainable in the long term?
Andrew: What we are doing is unique, differentiated, and challenging. Many low-level efforts involve reverse mergers or direct listings to acquire declining micro-companies, as you mentioned. We chose an unusual path, creating a new entity that maximally protects investor assets. We believe this approach will help ensure long-term sustainability.
Balancing Institutional Interest with Ethereum's Native Value
Ehan: You mentioned well-known companies like PayPal, RockingCom, and Kraken. How do you balance institutional interest with maintaining Ethereum's native value?
Andrew: Great question. We are Etherheads, right? I have been part of the Ethereum ecosystem since before its release. We believe this tool should help with the mainstream adoption of Ethereum. Essentially, we created a financial instrument within this public entity that institutions can access in a way they are familiar with. Large institutions will not open accounts on platforms like Coinbase or Kraken and manage their public and private keys themselves. What they need is a stock that fits this type of exposure.
What we are doing is positioning ourselves as a pillar of the Ethereum ecosystem. Our role is to explain to Wall Street and Main Street what Ethereum is and where its power lies. By creating this tool, we provide ourselves with a platform and also have the responsibility to educate Wall Street and Main Street about Ethereum's potential. We believe we are the guardians of this story, which aligns with the values and interests of Ethereum.
Ehan: What does Ethereum's native value mean for a public company?
Andrew: Ethereum provides a price discovery mechanism for intermediary value. What this public company is doing is acquiring an asset—Ethereum—which we believe will be very valuable in the future. This allows anyone with a brokerage account to access Ethereum without worrying about yield generation or managing custody issues related to public and private keys, which can be cumbersome when dealing with crypto assets. That said, the values we will promote are the use cases of Ethereum and its potential as a protocol to build upon.
Differentiating The Ether Machine from Competitors
Ehan: The Ether Machine is now one of the top three large Ethereum treasury holders globally, second only to Tom Lee's Big Maya and John Rubin's Shuffling. How do you differentiate your strategy from theirs? Is it through staking, corporate structure, or public market assets?
Andrew: I think it’s a combination of all three. A key difference is our commitment to maintaining a clean corporate structure without inheriting any liabilities from previous operating companies. That’s one point. Additionally, we are one of the few Ethereum investment tools that are purely driven by institutional investors.
Secondly, we differentiate ourselves from other companies by not outsourcing asset management. Some other companies outsource asset management to asset managers, which can dilute shareholder equity, and we believe this is another key difference.
Thirdly, we have been staking since the launch of Proof of Stake and understand the rewards and risks involved in generating yield. We plan to continue staking securely. Finally, we have a clean structure as a new entity, and with the Big Four accounting firms auditing us, we can issue financial instruments like convertible bonds or preferred stock. This allows us to drive growth in Ethereum concentration per share in a balanced way, and we have a unique advantage in this regard.
Ehan: Do you see this as a race to become the MicroStrategy of Ethereum, or is your vision fundamentally different?
Andrew: I do believe scale has its value, and I think the three companies you mentioned—our company, Tom Lee's investment tool, and John Rubin's company—have reached what I call "critical scale." We are discussing treasuries in the billions, which is quite substantial. However, I don’t think being the largest is necessarily the goal. Our goal is to generate the most Ethereum per share. For us, the most important thing is how effectively we can generate the next incremental Ethereum. I believe that is the most important North Star for our business.
The Fusion of DeFi and Traditional Finance: The Future of Finance
Ehan: With more public crypto channels emerging, how do you view the relationship between on-chain companies and traditional capital markets?
Andrew: I think they will ultimately merge. We will see DeFi and traditional finance (TradFi) combine into "finance." Ethereum will become the foundation of the next generation of the internet, which will be very exciting. We will truly see the value of tokenization, the power of smart contracts, and the application of these technologies in production.
Ehan: How important are SEC compliance and legal clarity for The Ether Machine's operating model and investor expansion?
Andrew: I think it is crucial, absolutely key. The good news is that we have already obtained most of the regulatory approvals we need. The SEC has reiterated that Ethereum is a commodity, not a security. Additionally, the recently passed stablecoin legislation has made Ethereum the biggest beneficiary, as most stablecoins settle on Ethereum. Another important bill—the Clarity Act—is expected to be introduced in November, which will further clarify the tokenization of all assets.
Ehan: Do you foresee challenges similar to those faced by WorldCoin or Kraken's staking products?
Andrew: No, I don’t think there will be such challenges. We are very familiar with the staking business and have been involved from the beginning. Essentially, we are applying the experience we gained at Dharma to The Ether Machine.
Ehan: Will regulatory risk become a limiting factor for expanding into other assets or on-chain strategies?
Andrew: No, regulatory risk is not a limiting factor. Our tool focuses on Ethereum exposure and Ethereum-denominated yield. From our conversations with institutional investors, we find that they prefer pure investment exposure—they do not want to own a basket of assets. We believe providing this pure investment exposure, combined with a clean tool that can safely generate top-tier yields and issue convertible debt or preferred stock, is the best option for our investors.
Thoughts on The Ether Machine's Future and Ethereum's Role
Ehan: Will The Ether Machine introduce tokens or a DAO governance layer in the future?
Andrew: Probably not. We are currently a publicly traded tool on NASDAQ, and if you consider tokens, they are essentially securities—equity in ETHM.
We believe this is the best way for public market investors to gain exposure to Ethereum. We have a unique advantage in safely generating yield and issuing financial instruments to acquire Ethereum and increase Ethereum per share as safely as possible.
Ehan: Alright, thank you for joining today and sharing your insights.
Andrew: Thank you.
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