Mike Silagadze, pictured in 2020, has retooled Ether.fi as a way for holders of ether cryptocurrency to increase the yield of their digital assets on the Ethereum blockchain.Peter Power/The Globe and Mail
Mike Silagadze had been dabbling in bitcoin for a decade when he decided in 2021 to fully commit to cryptocurrency. The Toronto tech entrepreneur left Top Hat, the online textbook company he’d led, moved to Grand Cayman and started a crypto hedge fund, figuring he’d found a low-risk way to make solid returns on digital currencies.
Then, in November, 2022, crypto exchange operator FTX Trading Ltd. filed for bankruptcy, tying up US$5.4-million of the assets Mr. Silagadze’s company managed. While his investors should get back most of the funds, the experience shook him. Fund management “didn’t seem like a thing that we wanted to do anymore,” he said. Instead, he dove even deeper into crypto.
Now, 18 months later, Mr. Silagadze’s retooled Ether.fi SEZC is one of the hottest things in the rebounding crypto market. He’s building Ether.fi into a blockchain-based financial services entity that allows users to save and invest crypto and spend it on real-life things. With Ether.fi, “You no longer need traditional financial institutions, you can just live your life in a crypto native non-custodial way with all the freedom and niceties that involves,” he said.
Ether.fi has quickly become a leading player in liquid staking, a way for holders of ether cryptocurrency to increase the yield of their digital assets on the Ethereum blockchain. As of Tuesday, holders have locked 1.48 million ether tokens, valued at US$5.5-billion, into Ether.fi’s protocol, up from 44,780 and US$103-million, respectively, on Dec. 31. That includes multibillionaire Justin Sun, who deposited US$480-million of ether with Ether.fi in March. Ether.fi now represents the eighth-largest pool of locked crypto assets and generates US$20-million in annualized revenue.
The 14-person company has raised US$32-million in venture capital since early 2023 and some investors have already made unrealized gains of 50 times-plus their investment. Most of that is in special Ether.fi tokens issued to investors, staff and others that give holders a say in the company’s governance. The tokens carry a fully diluted value of US$4.2-billion, although most can’t be traded until after March, 2026.
Ether.fi is “probably the most explosive investment ever” by Version One Ventures, said Boris Wertz, general partner with the Vancouver venture capital firm, a long-time backer of Mr. Silagadze.
Mr. Silagadze, whose share of governance tokens is worth US$600-million-plus at current prices, said the extent of Ether.fi’s early success “is 100 per cent because we were fortunate with timing.” Whether that can continue is another matter in the wild world of crypto. His implied, eye-popping wealth in governance tokens, which are locked for three years, is “not real,” the 40-year-old said. “It’s almost an irrelevant number. There’s no math to justify that.” If anyone tried to sell a big chunk of them, “it would lead to a spiral.”
To understand what Mr. Silagadze is trying to build requires a quick primer on the complex dynamics at play in crypto. The decentralized nature of digital currencies means participants must agree on who owns what and what transactions have occurred. That information is recorded on virtual ledgers that are continually updated with new blocks in an ever-expanding chain. Blockchain systems are built to be resilient, secure and prevent bad actors from manipulating the underlying data.
For bitcoin, the process involves thousands of miners – entities powered by electricity-guzzling supercomputers – that compete every 10 minutes to put forward the latest block of the cryptocurrency’s ledger. They do that by gathering and verifying data on all transactions as they happen, then solving complex math puzzles before anyone else, and others in the network then verify the answer. The winner updates the ledger on everyone’s behalf, earning 3.125 bitcoin, now worth more than US$200,000, for the effort.
Ethereum, conceived by Canadian Vitalik Buterin and launched in 2015, is a different blockchain that supports its own currency – ether – and other assets and applications, giving it broader potential. Ethereum started with a similar mining-driven consensus process, but in September, 2022, switched to a different system. Under the new process, Ethereum participants “stake,” or commit, at least 32 ether (worth US$3,747 apiece Tuesday) to participate in the process of validating transactions and updating the ledger.
As a reward, validators earn 3 per cent to 4 per cent annually on their staked ether, paid from network transaction fees or with newly minted tokens. Those who cheat or don’t keep their validation software running can get their staked ether “slashed,” or partly confiscated. That mix of incentives and disincentives keeps Ethereum running.
The problem is that once holders stake their ether, it can take more than a week to pull out of the staking commitment so they can sell it. That’s where Ether.fi comes in.
Ether.fi, originally called Gadze Finance, did staking early on and also staked ether for others, taking a cut of their gains. But last year the company jumped into a newer activity known as liquid staking.
To get around the liquidity dilemma for stakers, Ether.fi, like other Ethereum protocols, began last November to issue tokens known as eETH pegged to the holders’ staked ether. While the staked ether stays put, holders of eETH tokens (which are separate from governance tokens) are free to trade or deploy them for other money-making purposes. Ether holders piled in, paying Ether.fi 5 per cent of their staking gains.
Then, in March, Ether.fi launched Liquid, which operates like a crypto version of a robo-adviser. Users put their eEth tokens into a Liquid “vault” – which remains in their custody – and Ether.fi automatically deploys the cryptocurrency into a range of riskier yield-seeking activities including financing crypto lending markets and derivatives. Ether.fi charges 2 per cent of the vault’s value and users can pull their assets anytime.
If staking ether is somewhat like putting money in a savings account, liquid staking is akin to investing. Next, Mr. Silagadze says, is Ether.fi Cash, which will function like a spending account allowing users to spend in the real world with Visa cards and borrow against their Ether.fi balances.
Ether.fi also plans to be a big player in another emerging trend known as “restaking,” (not to be confused with staking or liquid staking) in which holders use their staked ether to validate other Ethereum application protocols, and possibly those in other blockchains. That promise “has really helped develop the Ether.fi story and given them a lot of traction,” Mr. Wertz said, as Mr. Silagadze and his employees work “insanely hard” to execute on their strategy.
Mr. Silagadze said that building Top Hat “was a 10-year grind and a fight every inch of the way,” while Ether.fi “has been way more fun. In crypto almost anything you do will succeed to some degree because there’s unlimited money pouring in. But there is regulatory risk.”
Values of bitcoin and ether have soared this year as investors poured into cryptocurrency exchange-traded funds. But the crypto market is still in its early days and operates in a regulatory grey area, particularly in the United States.
In addition, Ethereum is slow, expensive, clunky and complex to navigate. “The usability isn’t there,” says Karim Hamasni, head of crypto asset innovation with Royal Bank of Canada’s RBCx digital banking group. “There are interoperability challenges because so many blockchains aren’t communicating well with each other. But eventually it will be fast, scalable, easy to use and it will have its moment. That’s when I think we’ll see it really take off.”