I’ve been excited about Ethereum’s Proof of Stake system Casper for a while mainly because it’s a move away from Proof of Work, but in recent weeks I’ve found time to look into more of the details. I keep coming back to one major reason Proof of Stake is good for Ethereum as a system, but also has the potential to push out small players:

Casper will result in large-scale and long-term ETH investments, building credibility and trust in ETH, but small holders will have trouble profiting from these changes

Let’s take that apart. How will Casper “result in large-scale and long-term ETH investments”? This is a basic requirement for Casper to work, assuming the following pieces of info are true:

Total ETH staked will be around 10% of the ETH supply (per Vitalik’s comment to me, it’s “hard to estimate”, but targeting around 10m)

There will be around 1400 staking slots available (see p. 15)

The total supply of ETH is around 100m (or higher)

The price of ETH doesn’t fall to double or single-digit numbers

“Large-scale and long-term investments” are the likely results of Casper if the numbers above are ballpark correct because:

The average staking will be about 7.2k ETH to get to 10% staked (10m ETH /1.4k slots, of course we still wouldn’t know the median, just the mean)

The average staking will be an investment of around USD 5.2m value (7.15k ETH @ 730 USD/ETH, same issue not knowing the median)

Funds for staking will become unavailable for months at a time

I think the first two points justify the “large-scale” label, and the third is reasonable for a “long-term” label, at least on a cryptocurrency timescale (it still might seem not very long term for an investment of USD 5.2m in the fiat currency/banking world).

Next, why do I think large-scale and long-term commitment will build confidence in ETH? Here are some quotes from a recent Bloomberg article that make the point pretty well:

This week, one or more people delivered 275 bitcoin (valued at $4.5 million at the time) to the LedgerX clearinghouse, and wrote one-year calls 1 at a strike of $50,000 ($13.75 million in total) against them for a premium of $3,600 per coin ($990,000 total). One trade doesn’t make a market, but if, say, 1 percent of all bitcoin were taken off the market and held as option collateral, and financial investors put up cash in one-year derivatives, that could do a lot to stabilize the market. That means both reducing price volatility and giving confidence that market prices represent true trading prices for institutional quantities of bitcoin. This, in turn, could make Cboe and CME cash-settled futures more attractive, and thereby represent a solid base for bitcoin ETFs. And once that happens, institutions are likely to accept custodianed ownership of physical bitcoin, broadening and deepening the ownership base. There are few entities with institutional access to bitcoin derivatives trading and expertise with trading and holding physical bitcoin. That has to change for bitcoin to join the global financial system.

That’s all to say that when “institutional quantities” of a currency are tied up in big investments and financial vehicles (which is exactly what Casper will do!), it will make financial sense for new markets, derivatives, and other tools to be built that can facilitate its use for global trade, lending, and ventures.

Rocket Pool: a plan to profit from Casper

Now it should also be pretty easy to see why “small holders will have trouble profiting from” Casper. I’ve read that the minimum ETH necessary to participate in staking will be anywhere between 30 and 1000. That whole number range is untenable for the average ETH holder. But more importantly, with just 1400 spots, your chances of getting a spot even if you hold 30 ETH are slim to none if larger stakers are prioritized.

So I’m an individual ETH holder with minimal chance of profiting directly from Casper. That’s why Rocket Pool, and other staking pools that will inevitably pop up, are really important to me. That’s also why I’m using some of my ETH to buy the new Rocket Pool token. Are ETH investors interested in seeing a 15k valuation? I wouldn’t be mad if it happened, but I might feel like passing along that hot potato. I prefer the idea of sustainability, and Rocket Pool looks like a way to get a consistent and predictable percentage return on my holdings. This may be the most speculative statement in my entire analysis, possibly also the most boring and conservative, but a 15% annualized return with “dividend reinvestment” will leave ETH looking better than pretty much any traditional investment out there.