Ethereum 101 For Investors – Excerpt from Bloomberg Q&A

Oct 15, 2017

This interview first appeared on Bloomberg’s European ETF Bulletin Click here to see original

An Interview with Laurent Kssis and Chris Bendiksen from Coinshares


Instead of operating as a digital payment currency (as Bitcoin often does), Ether seeks to provide ‘fuel’ for running decentralized apps on the network.


We welcome Laurent Kssis, MD of XBT by Coinshares and Chris Bendiksen, Head of Research at Coinshares. XBT Provider (the issuer of the 2 Bitcoin and the 2 Ether ETNs listed on Nasdaq) is now owned by Coinshares. Coinshares represents a range of investment vehicles built to deliver professional grade crypto-exposure for all types of investors.

1. First, please summarize the difference between Ether and Ethereum. We understand that Ether is the currency. How is Ether mined, why is it called thus (originally a type of gas), and what is Ethereum?

CB : The intent of Ethereum is to act as a protocol allowing developers to build and run decentralized applications and smart contracts. These applications are hosted on a public blockchain and allow for the distribution of computational tasks across a network in exchange for market driven fees.

Unlike Bitcoin, the Ethereum protocol comes with a Turing-Complete programming language. In short, this means the protocol can be used to perform any calculation possible by any other programmable computer, allowing for the execution of arbitrarily complex computations over its decentralized network. A subset of these computations, referred to as smart contracts, enable atomized automation of value transfer between applications built on Ethereum, a functionality that could prove immensely useful in the development and practical implementation of the Internet of Things.

A central underpinning concept of the Ethereum blockchain is the value token called ‘ether’ (ETH). Ether is used as the denomination of all value-transfer functions on the network and is the currency in which the ‘gas function’ is valued. Gas is, not unlike combustion engines, what makes applications run on the Ethereum network. It acts as

remuneration for offering computational power to the network for use by decentralized applications (dApps) and is claimed by computation suppliers as a fee in the mining process.

Computations are executed on the Ethereum Virtual Machine (EVM) in return for gas (valued in ether). Every Ethereum node runs an implementation of the EVM and executes the same exact instructions. This includes all smart contracts, dApps and distributed autonomous organizations.

 

2. Please explain the concept of “Internet of Things”, and how it relates to Ethereum.:

CB: Among the most promising areas of applications for dApps and smart contracts are those that lie within the realm of the Internet of Things (IoT). The IoT concept envisions a future of increased device-to-device interconnectivity whereby automated programs communicate, collaborate, compete and transfer value between each other on a continuous basis with little to no human intervention required. In short, the IoT promises to deliver efficiency improvements across a wide range of services by unlocking time-effort and cost savings using algorithmically driven process optimization and automation. One can for example imagine a smart refrigerator monitoring stocking levels and food expiration, such that when its contents are consumed or spoiled, it responds by ordering replacements, in close coordination with other household smart appliances and service provision dApps.

In their 2015 report “The Internet of Things: Mapping the Value Beyond the Hype”, McKinsey estimates that the Internet of Things could unlock between $4 and $11 trillion of untapped efficiency gains by 2025. But many critics have voiced concern over the lack of standardized solutions offering sufficient privacy, data security and network interoperability. The Ethereum protocol aims to solve many, if not all of these issues.

 

3. Since its birth, how have the returns on Ether been?

LK : Ether first gained an exchange rate at a little over $1 and is currently priced at $338, meaning that since inception it has returned more than 270x – which sounds absurd, but rarely do investors gain exposure so near to the inception of an asset class. Until crypto-assets came along, most people did not have the exposure to or opportunity to invest in a new asset at this early stage of its life (and price). Venture Capitalists were the rare few who saw early exposure and huge promise.

 

4. Are your new products (denominated in SEK and EUR) backed by physical Ether? If so, how do you purchase Ether?

LK: We purchase Ether to represent the value of the shares purchased on the exchange. Based on the prospectus, we purchase Ether from various Digital Exchanges which we highlight – a combination of various sources based on liquidity, volumes and know-how, all this trying to keep true to the ETHER Index described.

 

5. Why should investors invest in your products, and not buy Ether directly?

LK: There are typically 3 core reasons why investors would use our Ether ETN as a tool to gain exposure to the price movement of Ether:
1) Accessibility – Investors purchase the ETNs via their broker or brokerage platform with access to Nasdaq Stockholm
2) Advantageous Fiscal (Tax) Treatment – in some jurisdictions – for instance in the UK where investors can invest via a SIPP (Self Invested Pension Plan) – an investment in Ether exposure can receive different tax treatment than normal investment
3) Security & Storage – As a group, we take the security and storage of any Ether as our top priority – meaning the client, who may not want to become and expert in this, does not have to concern themselves with ensuring world-class security for their investment.

 

6. What is the difference between Bitcoin and Ether? Can we say that Ether is an improved type of crypto-currency?

LK: The Ethereum network needs ‘Ether’, which is a unique digital asset that can be used to pay for the computational resources needed to run an application or program on the Ethereum virtual machine. Like Bitcoin, Ether is a digital bearer asset (similar to a security, like a bond, issued in physical form). Like cash, it doesn’t require a third party to process or approve a transaction (though all transactions are verified by Ethereum network). So, instead of operating as a digital payment currency (as Bitcoin often does), Ether seeks to provide ‘fuel’ for running the decentralized apps on the network. In this way, Ether has sometimes been called ‘digital oil’, and taking this analogy further, your ability to run an Ethereum based dApp is entirely dependent on how much ‘gas’ (Ether) the action requires relative to the amount of Ether you possess.

 

7. With the technology behind the crypto-currencies and supporting blockchain advancing rapidly, do you think cryptos can continue to attract broader investors and participants as they used to?

LK : We are just beginning to see the next wave of investors enter the market and these are professionals who prior to now, have had very few pathways to invest. There are entire pools of capital which can only invest via familiar pathways such an exchange traded product or a managed fund (usually with a more than 3 year track record). As a group – we are focused on creating the most fit-for-purpose vehicles to allow investors of all types to gain exposure to this revolution; and so far investor demand is out-pacing our ability to deliver – investors had been asking for the Ether ETN for more than a year.

 

8. What are the main risks of Ether and Ethereum

LK : At a high-level, all of the risks could be summed up in one – immaturity – this is a very young asset. Crypto-assets as a whole have been around for less than a decade and Ethereum itself, since 2015. There are serious risks ranging from regulatory hurdles to key-man risk and there is amazing opportunity as well, but we are in very early days. For a full discussion of some of the largest risks – please see the end of our research or consult our prospectus, both available at Coinshares’ website.

Oct 15, 2017

This interview first appeared on Bloomberg’s European ETF Bulletin Click here to see original

An Interview with Laurent Kssis and Chris Bendiksen from Coinshares


Instead of operating as a digital payment currency (as Bitcoin often does), Ether seeks to provide ‘fuel’ for running decentralized apps on the network.


We welcome Laurent Kssis, MD of XBT by Coinshares and Chris Bendiksen, Head of Research at Coinshares. XBT Provider (the issuer of the 2 Bitcoin and the 2 Ether ETNs listed on Nasdaq) is now owned by Coinshares. Coinshares represents a range of investment vehicles built to deliver professional grade crypto-exposure for all types of investors.

1. First, please summarize the difference between Ether and Ethereum. We understand that Ether is the currency. How is Ether mined, why is it called thus (originally a type of gas), and what is Ethereum?

CB : The intent of Ethereum is to act as a protocol allowing developers to build and run decentralized applications and smart contracts. These applications are hosted on a public blockchain and allow for the distribution of computational tasks across a network in exchange for market driven fees.

Unlike Bitcoin, the Ethereum protocol comes with a Turing-Complete programming language. In short, this means the protocol can be used to perform any calculation possible by any other programmable computer, allowing for the execution of arbitrarily complex computations over its decentralized network. A subset of these computations, referred to as smart contracts, enable atomized automation of value transfer between applications built on Ethereum, a functionality that could prove immensely useful in the development and practical implementation of the Internet of Things.

A central underpinning concept of the Ethereum blockchain is the value token called ‘ether’ (ETH). Ether is used as the denomination of all value-transfer functions on the network and is the currency in which the ‘gas function’ is valued. Gas is, not unlike combustion engines, what makes applications run on the Ethereum network. It acts as

remuneration for offering computational power to the network for use by decentralized applications (dApps) and is claimed by computation suppliers as a fee in the mining process.

Computations are executed on the Ethereum Virtual Machine (EVM) in return for gas (valued in ether). Every Ethereum node runs an implementation of the EVM and executes the same exact instructions. This includes all smart contracts, dApps and distributed autonomous organizations.

 

2. Please explain the concept of “Internet of Things”, and how it relates to Ethereum.:

CB: Among the most promising areas of applications for dApps and smart contracts are those that lie within the realm of the Internet of Things (IoT). The IoT concept envisions a future of increased device-to-device interconnectivity whereby automated programs communicate, collaborate, compete and transfer value between each other on a continuous basis with little to no human intervention required. In short, the IoT promises to deliver efficiency improvements across a wide range of services by unlocking time-effort and cost savings using algorithmically driven process optimization and automation. One can for example imagine a smart refrigerator monitoring stocking levels and food expiration, such that when its contents are consumed or spoiled, it responds by ordering replacements, in close coordination with other household smart appliances and service provision dApps.

In their 2015 report “The Internet of Things: Mapping the Value Beyond the Hype”, McKinsey estimates that the Internet of Things could unlock between $4 and $11 trillion of untapped efficiency gains by 2025. But many critics have voiced concern over the lack of standardized solutions offering sufficient privacy, data security and network interoperability. The Ethereum protocol aims to solve many, if not all of these issues.

 

3. Since its birth, how have the returns on Ether been?

LK : Ether first gained an exchange rate at a little over $1 and is currently priced at $338, meaning that since inception it has returned more than 270x – which sounds absurd, but rarely do investors gain exposure so near to the inception of an asset class. Until crypto-assets came along, most people did not have the exposure to or opportunity to invest in a new asset at this early stage of its life (and price). Venture Capitalists were the rare few who saw early exposure and huge promise.

 

4. Are your new products (denominated in SEK and EUR) backed by physical Ether? If so, how do you purchase Ether?

LK: We purchase Ether to represent the value of the shares purchased on the exchange. Based on the prospectus, we purchase Ether from various Digital Exchanges which we highlight – a combination of various sources based on liquidity, volumes and know-how, all this trying to keep true to the ETHER Index described.

 

5. Why should investors invest in your products, and not buy Ether directly?

LK: There are typically 3 core reasons why investors would use our Ether ETN as a tool to gain exposure to the price movement of Ether:
1) Accessibility – Investors purchase the ETNs via their broker or brokerage platform with access to Nasdaq Stockholm
2) Advantageous Fiscal (Tax) Treatment – in some jurisdictions – for instance in the UK where investors can invest via a SIPP (Self Invested Pension Plan) – an investment in Ether exposure can receive different tax treatment than normal investment
3) Security & Storage – As a group, we take the security and storage of any Ether as our top priority – meaning the client, who may not want to become and expert in this, does not have to concern themselves with ensuring world-class security for their investment.

 

6. What is the difference between Bitcoin and Ether? Can we say that Ether is an improved type of crypto-currency?

LK: The Ethereum network needs ‘Ether’, which is a unique digital asset that can be used to pay for the computational resources needed to run an application or program on the Ethereum virtual machine. Like Bitcoin, Ether is a digital bearer asset (similar to a security, like a bond, issued in physical form). Like cash, it doesn’t require a third party to process or approve a transaction (though all transactions are verified by Ethereum network). So, instead of operating as a digital payment currency (as Bitcoin often does), Ether seeks to provide ‘fuel’ for running the decentralized apps on the network. In this way, Ether has sometimes been called ‘digital oil’, and taking this analogy further, your ability to run an Ethereum based dApp is entirely dependent on how much ‘gas’ (Ether) the action requires relative to the amount of Ether you possess.

 

7. With the technology behind the crypto-currencies and supporting blockchain advancing rapidly, do you think cryptos can continue to attract broader investors and participants as they used to?

LK : We are just beginning to see the next wave of investors enter the market and these are professionals who prior to now, have had very few pathways to invest. There are entire pools of capital which can only invest via familiar pathways such an exchange traded product or a managed fund (usually with a more than 3 year track record). As a group – we are focused on creating the most fit-for-purpose vehicles to allow investors of all types to gain exposure to this revolution; and so far investor demand is out-pacing our ability to deliver – investors had been asking for the Ether ETN for more than a year.

 

8. What are the main risks of Ether and Ethereum

LK : At a high-level, all of the risks could be summed up in one – immaturity – this is a very young asset. Crypto-assets as a whole have been around for less than a decade and Ethereum itself, since 2015. There are serious risks ranging from regulatory hurdles to key-man risk and there is amazing opportunity as well, but we are in very early days. For a full discussion of some of the largest risks – please see the end of our research or consult our prospectus, both available at Coinshares’ website.

care for more depth? read the ether asset highlight:  

care for more depth? read the ether asset highlight: