Module XI·Article II·~3 min read
Ethereum and L2
Crypto as an Institutional Asset Class
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Ethereum: decentralized finance infrastructure
If Bitcoin is digital gold, then Ethereum is a decentralized computer. ETH is the native token of the largest smart contract platform, on which DeFi, NFT, and tokenization infrastructure are built.
Bitcoin vs Ethereum: fundamental differences
| Parameter | Bitcoin | Ethereum |
|---|---|---|
| Purpose | Store of Value | Programmable Money / Platform |
| Consensus | Proof of Work | Proof of Stake (since Sep 2022) |
| Issuance | Fixed (21 million) | Dynamic (often deflationary) |
| Smart Contracts | Limited | Turing-complete |
| Staking Yield | None | 3-5% annually |
| Transaction Speed | ~7 TPS | ~30 TPS (L1), 1000s (L2) |
The Merge: transition to Proof of Stake
September 2022: Ethereum switched from energy-intensive PoW to PoS:
- Reduction of energy consumption by 99.95%
- Staking opportunity — 32 ETH required for validator node
- Deflationary mechanism — part of fees are burned (EIP-1559)
- Staking yield — ~4% annually for validators
Layer 2 ecosystem
For scaling, most activity shifted to L2 solutions:
| L2 Solution | Type | TVL | Features |
|---|---|---|---|
| Arbitrum | Optimistic Rollup | $10+ billion | Largest L2, DeFi ecosystem |
| Optimism | Optimistic Rollup | $5+ billion | OP Stack, Superchain vision |
| Base | Optimistic Rollup | $5+ billion | Coinbase L2, mainstream adoption |
| zkSync | ZK Rollup | $500+ million | Zero-knowledge proofs |
| Polygon | Sidechain + zkEVM | $1+ billion | Enterprise partnerships |
RWA: Real World Assets on-chain
Tokenization of real assets is the largest trend among institutions:
| Asset Class | Market Size | Examples |
|---|---|---|
| Tokenized Treasuries | $1+ billion | Ondo Finance, Franklin Templeton |
| Private Credit | $500+ million | Maple Finance, Centrifuge |
| Real Estate | $200+ million | RealT, Lofty |
| Commodities | $500+ million | Paxos Gold (PAXG), Tether Gold |
DeFi Ecosystem
| Category | Protocols | TVL | Function |
|---|---|---|---|
| DEX | Uniswap, Curve | $10+ billion | Decentralized exchanges |
| Lending | Aave, Compound | $15+ billion | Collateralized lending |
| Liquid Staking | Lido, Rocket Pool | $30+ billion | ETH staking with liquidity |
| Derivatives | dYdX, GMX | $3+ billion | Perpetuals, options |
Liquid Staking: stETH as collateral
Lido stETH is a derivative representing staked ETH:
- Receive ~4% staking yield
- stETH remains liquid (can be sold or used as collateral)
- Accepted as collateral in Aave, MakerDAO
- Risk: depeg from ETH (was in 2022)
ETH ETF
May 2024: SEC approved spot Ethereum ETF:
| ETF | Provider | TER |
|---|---|---|
| ETHA | BlackRock | 0.25% |
| FETH | Fidelity | 0.25% |
| ETHW | Bitwise | 0.20% |
Feature: ETF does not include staking yield (regulatory limitations)
CIO Recommendations
- Different thesis than BTC — ETH is an infrastructure play, not just a store of value
- Staking yield — an additional source of income (if not through ETF)
- L2 exposure — consider L2 tokens for higher beta
- Smart contract risk — understand DeFi risks before participating
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