Dialogue with Ether Machine Co-founder: How is DAT bringing new volume to ETH?

In this episode, Andrew Keys, co-founder of The Ether Machine, outlined the innovative strategy the company employs 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 emphasized the company's clear corporate structure and its focus on Ethereum strategy, distinguishing it from other encryption asset management tools.

Andrew Keys and The Ether Machine introduction

Ehan: Today, we are honored to invite Andrew Keys, co-founder of The Ether Machine. Andrew, could you briefly introduce yourself and your background?

Andrew: First of all, thank you for inviting me to participate in the podcast. I really appreciate you taking the time to talk with me. I also really enjoyed visiting China multiple times. The first time was in 2015 when I went to China with Vitalik Buterin, right when Ethereum had just launched. My background is primarily at the intersection of capital markets and technology. I helped to create a company called ConsenSys, which developed 3 of the 8 implementations of Ethereum and also developed 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 commodity pool operator and commodity trading advisory company called Dharma, which is 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 created The Ether Machine, a publicly traded company on NASDAQ with the stock ticker ETHM. The Ether Machine is an Ethereum treasury that actively manages its Ether through staking, re-staking, and participating in Decentralized Finance. This allows shareholders to gain exposure to Ethereum investments and enjoy additional income generation.

Transition from ConsenSys and Dharma to The Ether Machine

Ehan: The Ether Machine has recently raised 654 million dollars worth of ETH. What is the reason behind this treasury-centric model?

Andrew: Currently, The Ether Machine's committed capital is $2.5 billion, which is about 500,000 Ether. We have just raised an additional 150,000 Ether, worth $654 million. This investment comes from a large Ethereum investor who wants to gain access to our operating business, which generates returns through staking, restaking, and participating in Decentralized Finance, while also owning publicly traded securities ETHM listed on Nasdaq. The investor wants to ensure they have quality collateral and a clean entity for their investment.

Broadly speaking, there are two ways to manage a digital asset treasury. One is through the acquisition of shell companies, but many shell companies have existing liabilities. For example, I had discussions with three different shell companies. One was a biotech company that had declined due to a failed drug in clinical trials. The CEO wanted to stay on, but this person couldn't even spell “Ethereum” correctly and expected me to pay millions in continued salary. Another was a Bitcoin mining company that no longer wanted to be miners due to rising cash costs. They had a data center lease worth millions of dollars and wanted us to take on those costs.

These are just examples of liabilities that may be inherited when acquiring a shell company. Instead, we created a new Limited Liability Company (LLC) based on Ethereum. Then, we merged with a Special Purpose Acquisition Company (SPAC), which 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: Then why not choose Bitcoin or other cryptocurrencies?

Andrew: I believe that Ethereum is the foundation of the next generation 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, under which 90% of high-quality liquid assets are deployed on Ethereum. Additionally, 80% of stablecoins are also deployed on Ethereum. We believe that Ethereum will become the foundation of the next generation internet. Furthermore, Ethereum is a productive asset that can generate yields, which is crucial for creating returns for our shareholders.

Ehan: Is there a key moment or change, such as the rise of staking, that has catalyzed this treasury-centric model?

Andrew: There are several catalysts for this vault model. The first is our ability to measure digital assets at market value. This is an important development because accounting bodies within public companies can start measuring digital assets at market value. This change was approved in December 2024. We also saw political tailwinds, as former political resistance has turned in our favor. For example, the Genius Act (the stablecoin act) provides clear regulations for institutions, outlining how they can custody and trade stablecoins. The biggest beneficiary of the Genius Act is Ethereum, as most stablecoins are settled 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 Ether, as most high-quality liquid assets are settled on Ethereum.

The Ether Machine compared to traditional holding companies and ETFs

Ehan: You are preparing for listing, and the balance sheet has over 495,000 Ethers. How does The Ether Machine position itself compared to traditional holding companies, ETFs, or other corporate structures?

Andrew: We believe that we are not just a holding company; compared to ETFs, our positioning is more unique. We are an operating company that generates income through staking, re-staking, and participating in Ethereum's Decentralized Finance (DeFi). A holding company merely holds Ether and does not utilize the earnings generated from Ether. ETFs can only stake in cases where they are not fully allocated, meaning they cannot stake all the Ether they hold.

The model we adopt allows for full staking, re-staking, participating in Decentralized Finance, and issuing credit instruments such as convertible bonds or preferred stocks to purchase more Ethereum. A similar company is MicroStrategy, and we hope to become the MicroStrategy of the Ethereum space.

Explanation of NAV (Net Asset Value) and its Importance

Ehan: Can you explain the Market Cap to Net Asset Value multiple as an indicator, and why it is important for on-chain public companies?

Andrew: I believe the market capitalization 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 those of ETFs. Staking can be viewed as a form of perpetual bond, and we have the ability to outperform European or Canadian ETFs, which typically have staking capabilities 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 factor to consider for NAV.

Secondly, the 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 concentration of Ether per share, and this will be reflected in the NAV.

Ehan: Compared to traditional equity valuation, does NAV present unique challenges or opportunities?

Andrew: Yes, NAV is a function of multiple factors, and the specific financial instruments to use can vary depending 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 shares because it might be slightly overvalued. But if the NAV is less than 1, then it may be more appropriate to buy back shares because the company is undervalued. Therefore, basically, NAV is a useful metric that helps understand the value assigned to a company, far beyond just holding stocks or crypto assets.

How staking and yield generation shape the business model of The Ether Machine

Ehan: What role do staking and yield generation play in the business model of The Ether Machine? Can this approach continue to outperform traditional ETFs?

Andrew: ETFs have their nuances. If you understand how ETFs work, they require 24-hour liquidity. This means that if you are a holder of an ETF 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 the withdrawal queue of Ethereum. Typically, if you cancel your stake, you will get your Ether back in less than a week.

Recently, there have been concerns about large-scale staking institutions possibly being attacked. They began to unstake all their Ether, causing withdrawal queues to increase from a few days to over 30 days. This does not align with the redemption requirements of ETFs, which 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. To address this situation, ETF issuers must reduce staking. Currently, in the United States, ETFs have no staking, while in Europe and Canada, the staking ratio is about 50%.

As an operating company, we do not have a 24-hour redemption requirement. Therefore, we can stake at 100% capacity, which allows us to surpass 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 partner 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: Are you also planning to adopt advanced yield strategies like restaking or LRT?

Andrew: Yes, we do plan to use staking and possibly advanced strategies like LRT from the very beginning. Initially, we will start with basic staking and then gradually transition to staking and LRT.

The advantages of SPAC in the cryptocurrency regulatory environment

Ehan: Why choose the SPAC route instead of going public directly? Considering the regulatory environment of cryptocurrency, what are the advantages of the SPAC route?

Andrew: We chose the SPAC route because we did not want to inherit any existing liabilities. In a direct listing, a company is essentially “selling” itself, but the business they operated before may not be viable. In fact, every direct listing involves some companies that have already failed. When a company fails, there are usually issues with management, operating the business, governance, equity structure, and there may even be lawsuits. 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 offer given the regulatory environment for cryptocurrencies?

Andrew: We believe this will position us as the cleanest and most institution-focused Ethereum operating company in the public market. By having an entity with no existing liabilities, no current business, no governance issues, and no operational management problems, we are in a strong position. We are also able to have our accounts audited by the Big Four accounting firms. With this structure, large investment banks will be able to collaborate with us to issue various financial instruments, not just ATM stock issuance. From my perspective, the ATM stock issuance space has become somewhat fatigued, and we believe we will be the first company to launch other financial instruments, such as convertible bonds or preferred stock.

Ehan: How did you design this capital structure that includes convertible debt and preferred stock to avoid the dilution of crypto assets?

Andrew: From a definitional standpoint, we have created these financial instruments, even though we have not issued them yet. Essentially, potential dilution depends on the tools used. For example, if the NAV issued by the ATM is below 1, this would dilute the shareholders. If the NAV is below 1, shares should be repurchased. If different financial instruments are created, such as preferred stock or convertible bonds, they can be issued at a premium, allowing them to be equity-ized at a higher price. This would provide us with another way to issue value-added products. Ultimately, we will purchase the underlying assets, which may increase the Ether 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 run?

Andrew: What we are doing is unique, differentiated, and challenging. Many low-level efforts involve reverse mergers or direct listings to acquire struggling micro-companies, as you mentioned. We have chosen 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 the native value of Ethereum?

Andrew: That's a great question. We are Etherheads, right? I have been part of the Ethereum ecosystem since before Ethereum was released. We believe that this tool should help with the mainstream adoption of Ethereum. Basically, we created a financial instrument in this public entity that institutions can engage with in a way they are familiar with. Large-scale institutions will not open accounts on platforms like Coinbase or Kraken and manage public and private keys themselves. What they need is a stock, and this stock is just suitable for this type of exposure.

What we do is position 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 have provided ourselves with a platform and also have the responsibility to promote the potential of Ethereum to Wall Street and Main Street. We believe that we are the guardians of this story, and this aligns with the values and interests of Ethereum.

Ehan: What does the native value of Ethereum mean for a public company?

Andrew: Ethereum provides a price discovery mechanism as an intermediary for value. What our 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 having to worry about yield generation or managing custody issues related to public and private keys, which can be troublesome when dealing with encrypted assets. That said, the values we will promote are the use cases of Ethereum and its potential to build as a protocol.

Distinguishing The Ether Machine from Competitors' Strategies

Ehan: The Ether Machine is now among the top three large Ethereum vault holders in the world, 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, company structure, or publicly traded assets?

Andrew: I believe all three have it. One key difference is that we insist on having a clean company structure and do not inherit any liabilities from previously operated companies. This is one point. In addition, we are one of the few Ethereum investment tools purely driven by institutional investors.

Secondly, we distinguish ourselves from other companies by not outsourcing asset management. Some other companies may outsource asset management to asset managers, which can dilute shareholder equity, and we believe this is another key difference.

Third, we have been staking since the Proof of Stake began and understand the rewards and risks involved in generating returns. We plan to continue staking securely. Finally, we have a new entity with a clean structure, which has been audited by the four major accounting firms, enabling us to issue financial instruments such as convertible bonds or preferred shares. This allows us to drive the growth of Ethereum concentration per share in a balanced manner, where we have a unique advantage.

Ehan: Do you see this as a competition to become the MicroStrategy of Ethereum, or is your vision fundamentally different?

Andrew: I do believe that scale has its value. I think the three companies you mentioned—our company, Tom Lee's investment tool, and John Rubin's company—have all reached what I call “critical scale.” We are already discussing vaults worth billions of dollars, which is very substantial. However, I believe that being the largest is not necessarily the goal. Our aim is to generate the most Ether per share. For us, the most important thing is how to effectively generate the next incremental Ether. I believe this is the most important North Star for our business.

The integration of DeFi and traditional finance: The future of finance

Ehan: With the emergence of more listed encryption channels, how do you view the relationship between on-chain companies and traditional capital markets?

Andrew: I believe they will eventually 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 to the operational model of The Ether Machine and the expansion of its investors?

Andrew: I believe this is crucial, absolutely key. The good news is that we have obtained most of the regulatory approvals needed. The SEC has reiterated that Ethereum is a commodity and not a security. Additionally, the recently passed stablecoin legislation makes Ethereum the biggest beneficiary, as most stablecoins settle on Ethereum. Another important bill—the Clarity Bill will 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 a challenge. We are very familiar with the stake business and have been involved from the very beginning. Essentially, we are applying the experience we gained at Dharma to The Ether Machine.

Ehan: Will regulatory risks become a limiting factor for expanding to other assets or on-chain strategies?

Andrew: No, regulatory risk is not a limiting factor. Our tools focus on Ether exposure and Ether-denominated returns. From our communications with institutional investors, we found that they prefer pure investment exposure—they do not want to hold a basket of assets. We believe that providing this pure investment exposure, along with a clean tool that can securely generate top returns, and the ability to issue convertible debt or preferred stock, is the best choice for our investors.

Thoughts on The Ether Machine's Future and the Role of Ethereum

Ehan: Will The Ether Machine introduce tokens or a DAO governance layer in the future?

Andrew: It might not. We are now a publicly traded tool listed on NASDAQ, and if you consider tokens, it is essentially a security - that is, the equity of ETHM.

We believe that this is the best way for public market investors to gain exposure to Ether. We have a unique advantage in securely generating returns and issuing financial instruments to acquire Ether, and to safely increase the Ether per share as much as possible.

Ehan: Thank you for joining today and sharing your insights.

Andrew: Thank you.