Bernstein says Ethereum treasuries face liquidity risks

Equity research and brokerage firm Bernstein revealed that Ethereum treasuries are generating more on the digital asset than their Bitcoin-focused counterparts. According to the report, the treasuries are generating staking rewards in addition to holding the virtual asset as a reserve asset.

On Monday, the analyst wrote in a note that Ethereum treasuries are facing challenges such as liquidity constraints and smart contract risks that differ from Bitcoin treasury models. The company argued that Ethereum’s proof-of-stake mechanism allows the firms to stake assets for yield, but Bitcoin’s proof-of-work structure allows entities to hold BTC without staking.

Ethereum Treasuries emerge as next evolution of Strategy’s playbook

Bernstein noted that Ethereum treasuries are also attempting to address limitations on how they deploy capital. According to the report, the treasuries’ staking contracts are liquid, but often wait for days in the queue to unstake.

The analyst argued that ETH treasuries need to balance Ethereum liquidity and yield optimization as they stake the digital asset for yield. The brokerage firm added that yield optimization techniques such as the Eigenlayer staking model and DeFi-based yield generation require smart contract security risk management.

“The ETH treasury model has the benefit of actual cash flow yield driving operating earnings, however liquidity risk and security would be important considerations.”

-Bernstein.

The report also noted that companies, including SharpLing Gaming (SBET), Bit Digital (BTBT), and BitMine Immersion (BMNR), are focusing on building Ethereum treasuries. According to Bernstein, the trio had accumulated around 876,000 ETH in July, which accounts for 0.9% of the total supply.

BMNR revealed last week that it surpassed $2 billion in its ETH holdings. The firm also announced that it’s aiming to hold and stake around 5% of the total Ethereum supply. 

Bernstein believes that the growth of the digital dollar and tokenized assets will drive higher user growth in the Ethereum ecosystem. The firm argued that ETH’s transaction volume on layer-2 chains, operated by platforms like Coinbase and Robinhood, will help Ethereum accrue value from the growth of the asset’s financial economy.

At the time of publication, the digital currency is currently exchanging hands for around $3,809, a 56.42% rise in the last 30 days. BitMEX founder Arthur Hayes has predicted that ETH will surpass its previous record high of $4,800 this year and reach $10,000 by the end of 2025. BitMine Immersion Chair Tom Lee also predicted that the digital asset could hit $60,000, almost 18 times its current value. 

The equity research firm also argued that Ethereum treasuries have mirrored Strategy’s model, which shifted its focus from software development to purchasing Bitcoin in 2020. The firm now holds around $72 billion in BTC, but Bernstein believes ETH treasuries could have a more involved risk management strategy compared to Strategy’s model.

DAOs face centralization risks

The brokerage company cautioned that Ethereum treasuries also face centralization risks, particularly in governance token distribution and control. The firm argued that treasury platforms such as Karpatkey, Llama, and Avantgarde are controlled by core contributors, which raises concerns over accountability due to the large sums of public capital they manage. According to the firm, DAO’s internal legal framework makes it hard to identify the responsible party for asset mismanagement.

The equity research company believes that, as much as treasury protocols offer undisputed composability, there’s a void in scaling in a decentralized and compliant manner. Bernstein acknowledged that ETH treasuries are unregulated asset managers, warning that a lack of a clear legal framework would expose them to enforcement action or internal governance breakdowns.

The brokerage firm still believes the treasuries will grow as DAOs adapt to financing parameters. The company also hopes that the category will mature as the regulatory environment begins to incorporate clearer standards for decentralized entities. Bernstein forecasts a $1 billion ETH treasure could garner around $30-$50 million in annual returns from staking and yield strategies.

Cryptopolitan Academy: Tired of market swings? Learn how DeFi can help you build steady passive income. Register Now