The first general purpose blockchain that can process and execute code of arbitrary complexity.
Self-executing code deployed on Ethereum.
Its native cryptocurrency, ether, is the second most valuable cryptocurrency by market capitalization.
Ethereum has long trailed bitcoin in terms of name recognition. But thanks to the recent launch of Ethereum exchange-traded products (ETPs), such as the Invesco Galaxy Ethereum ETF (QETH),* more investors are getting to know this digital asset. And for good reason: Its native cryptocurrency, ether, is the second most valuable cryptocurrency by market capitalization. And its blockchain technology is constantly innovating thanks to a vibrant community of developers and entrepreneurs. So, here’s what digital asset investors need to know: What is Ethereum, and how does it work? And what makes it potentially so valuable?
*The Fund is not registered, does not intend to register or will be required to register, as investment companies under the Investment Company Act; therefore investors will not be provided any protections under such Act.
Ethereum is a decentralized blockchain that establishes a peer-to-peer network to securely execute and verify application code. It’s transparent and secured through a consensus mechanism. More simply, Ethereum is like a big, global computer that anyone can use. But instead of being controlled by one company or person, it’s run by many people all over the world. Users can create and run applications without a middleman, using a public digital ledger and a cryptocurrency called ether (ETH).
Decentralized blockchains bring together participants who don’t know or trust each other. Imagine a big, digital notebook that everyone can see and add to, but no one can go back and change. The Ethereum blockchain records all transactions and activities.
How participants find consensus is vital for the network to function securely. The Ethereum network relies on a Proof-of-Stake (PoS) consensus mechanism. Someone who wants to give money to a friend, for example, creates a transaction that’s sent to the network. Transactions and other important data are recorded in digital containers called blocks. Certain network participants known as validators are incentivized to propose and validate new blocks. They put up ether — Ethereum’s native currency — as collateral (the “stake”) and then are either rewarded or penalized for truthful or fraudulent behavior.
One key feature of Ethereum is its smart contract functionality. These applications live on the blockchain and can be accessed and used by anyone. Smart contracts are self-executing, with their agreement terms enforced through the blockchain. They are used to execute agreements between parties, ensuring that these agreements are transparent, secure, and tamper-proof — without the need for an intermediary.
Ethereum has a broad range of financial and non-financial use cases and can support a diverse marketplace of financial services, games, social media, and whatever other decentralized applications people decide to build. Bitcoin is mostly a payment network and a store of value (earning it the nickname “digital gold.”) Bitcoin, with a capped supply, achieving digital scarcity, tells the sound money story. Ethereum, with an uncapped supply, tells a technology-focused story.
Ethereum is built on a different blockchain architecture than bitcoin. As explained previously, it operates on a Proof-of-Stake model. Bitcoin’s Proof-of-Work (PoW) approach relies on actors called “miners” who solve complex mathematical problems to validate transactions and add them to the blockchain. Miners essentially play a game of limbo, using brute force computation to check if a certain number is under the target number. PoS is much more energy-efficient than PoW. It relies on actors called “validators” who must lock a minimum of 32 ETH as collateral to the network that can be penalized in the event of misbehavior or malicious activity.
Ethereum’s currency, ether, has an unlimited supply. New ETH is created with each block, and existing ETH in circulation is burned with each transaction. Thus, the supply of ether fluctuates over time. Bitcoin’s supply, on the other hand, is fixed at 21 million coins. Once it’s all mined, no more will be created.
Ethereum can be used in many ways. On Ethereum, users can interact with stablecoins, Decentralized Finance (DeFi), non-fungible tokens, and the creator economy.
Any asset, such as equities, bonds, and real estate, can be represented on Ethereum through tokenization. Today, the largest category of tokenized assets are stablecoins, which are tokens that are pegged to the value of another asset such as the US dollar. Stablecoins are a technology through which users can transact quickly, globally, and more cheaply than the traditional payment system. Compared to other blockchains, Ethereum supports the highest amount of stablecoin activity by daily transfer volume.
Stablecoins are widely used in Decentralized Finance, a system of apps and protocols offering financial services without a central financial intermediary. DeFi financial services replicate traditional financial functions — such as borrowing, lending, and trading — often without the participation of banks, brokers, or exchanges. Ethereum supports a flourishing Decentralized Finance ecosystem.
NFTs are a special type of digital asset that represents ownership or proof of authenticity of a unique item or piece of content. These crypto assets can be transferred but not replicated. NFTs can represent digital art, real-world collectibles, virtual real estate, video game assets, other types of media, and more.
Ethereum lets creators directly connect with and monetize from their audience by enabling them to design their own decentralized applications and tokens. It hands them the tools to expand their reach while maintaining control of their creative output. The new business models that Ethereum allows (e.g., tokenization and crowdfunding) help shift the balance of power away from corporations and towards creators.
While Ethereum is well-known for its financial applications, it also has a wide range of non-financial use cases. These range from digital identity to supply chain management Tokenized supply chains can improve the traceability and authenticity of goods and services.
Ethereum derives its value from the strength of its public blockchain network, dynamically adjusting supply schedule, and general-purpose functionality.
Thousands of nodes (participant computers) run Ethereum software and validate transactions on the network. Therefore, the network is resistant to centralized points of failure as well as hacking or tampering by a single entity. The more nodes that run Ethereum software around the world, the more decentralized and resilient Ethereum can be as a public blockchain.
Ether supply depends on the amount of newly issued and burned ether. Issuance is based on staking demand — interest and participation in staking ether to help secure the network and earn rewards. A higher staking demand increases ether supply while a lower demand decreases it. Burned ether refers to ether permanently removed from circulation. A portion of the transaction fees that users pay is burned rather than awarded to miners or validators. More network activity leads to more burned ether.
Ethereum’s smart contract functionality has many financial and non-financial uses. When a user interacts with a smart contract, their actions are automatically validated and recorded on the Ethereum blockchain. Ethereum is the most popular smart contract platform among software developers and programmers and offers many opportunities for innovation and collaboration.
A digital container that holds a list of transactions and other important data, such as timestamps and references to the previous block.
A decentralized digital ledger that records all transactions in a secure and transparent manner. It consists of a chain of blocks, each containing a list of transactions, and is maintained by a network of computers (nodes) to ensure data integrity and security. Ethereum is a blockchain.
A system of apps and protocols offering financial services without a central financial intermediary. DeFi financial services replicate traditional financial functions — such as borrowing, lending, and trading — through smart contracts.
The native cryptocurrency of the Ethereum network, used to pay for transaction fees. It’s the fuel that powers the Ethereum platform, enabling users to execute smart contracts and interact with decentralized applications.
A type of digital asset where each unit is identical and interchangeable, like traditional currencies. Ether is a fungible token in Ethereum.
A computer that participates in the Ethereum network by maintaining a copy of the blockchain and validating transactions. Nodes help ensure the security and integrity of the network.
A unique digital asset that shows ownership or proof of authenticity of a specific item, such as digital art, collectibles, or real estate. Unlike fungible tokens, each NFT is distinct and cannot be exchanged on a one-to-one basis with another NFT.
A consensus mechanism where validators are chosen to create new blocks and confirm transactions based on how much ether they have “staked” as collateral.
A self-executing program with the agreement terms written directly into code and automatically enforced and executed when the conditions are met. These contracts run on the Ethereum blockchain, providing transparency and security and eliminating the need for intermediaries in some cases.
A type of cryptocurrency that’s pegged to another asset like the US dollar or gold to maintain a stable value.
Locking up a certain amount of ether to participate in the network’s Proof-of-Stake consensus mechanism. Participants, known as validators, earn additional ether in return for staking their own.
ETFs can be tax efficient because they rely on an in-kind creation and redemption process that helps limit capital gains distributions and investor taxes.
The fair market of an ETF may be gauged by its net asset value (NAV), which is based on its underlying assets, leading to premiums and discounts.
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Companies engaged in the development, enablement and acquisition of blockchain technologies are subject to a number of risks. Blockchain technology is new and many of its uses may be untested. There is no assurance that widespread adoption will occur. The extent to which companies held by the Fund utilize blockchain technology may vary.
As blockchain technology is new, there is a risk that companies developing applications of this technology may be subject to additional risks including, but not limited to, intellectual property claims and legal action. Furthermore, blockchain technology may be subject to future law and regulation that may adversely impact adoption.
Companies transacting on the blockchain are required to manage a user’s account (or “wallet”) which is accessed via cryptographic keys. Mismanagement, theft, or loss of the keys can adversely affect the companies operations on the blockchain.
Blockchain technology relies on the internet, the disruption of which may adversely affect companies involved with the technology or even the blockchain itself.
While the Fund will not invest directly in cryptocurrencies, the value of a Fund’s investments in cryptocurrency-linked assets (including private trusts and ETPs) is subject to fluctuations in the value of the cryptocurrency, which have been and may in the future be highly volatile. The price of a digital currency could drop precipitously (including to zero) for a variety of reasons, including, but not limited to, regulatory changes, a crisis of confidence, flaw or operational issue in a digital currency network or a change in user preference to competing cryptocurrencies.
Cryptocurrencies trade on exchanges, which are largely unregulated and, therefore, are more exposed to fraud and failure than established, regulated exchanges for securities, derivatives and other currencies.
Currently, there is relatively limited use of cryptocurrency in the retail and commercial marketplace, which contributes to price volatility.
There are risks involved with investing in ETFs, including possible loss of money. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
QETH Risks
The Fund is speculative and involves a high degree of risk. An investor may lose all or substantially all of an investment in the Fund.
The Fund is not a mutual fund or any other type of Investment Company within the meaning of the Investment Company Act of 1940, as amended, and is not subject to regulation thereunder.
Shares in the Fund are not FDIC insured, may lose value and have no bank guarantee.
This material must be accompanied or preceded by a prospectus. Please read the prospectus carefully before investing.
The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.
The Trust will not participate in the proof-of-stake validation mechanism of the Ethereum network (i.e., the Trust will not “stake” its ether) to earn additional ether or seek other means of generating income from its ether holdings.
Ether has historically exhibited high price volatility relative to more traditional asset classes, which may be due to speculation regarding potential future appreciation in value. The value of the Trust’s investments in bitcoin could decline rapidly, including to zero.
The further development and acceptance of the Ethereum network, which is part of a new and rapidly changing industry, is subject to a variety of factors that are difficult to evaluate. The slowing, stopping or reversing of the development or acceptance of the network may adversely affect the price of ether and therefore an investment in the Shares.
Currently, there is relatively limited use of ether in the retail and commercial marketplace in comparison to relatively extensive use as a store of value, contributing to price volatility that could adversely affect an investment in the Shares.
Regulatory changes or actions may alter the nature of an investment in bitcoin or restrict the use of ether or the operations of the Ethereum network or venues on which bitcoin trades. For example, it may become difficult or illegal to acquire, hold, sell or use ether in one or more countries, which could adversely impact the price of ether.
In the past, flaws in the source code for ether have been discovered, including those that resulted in the theft of users’ ether. Several errors and defects have been publicly found and corrected, including those that disabled some functionality for users and exposed users’ personal information. Discovery of flaws in or exploitations of the source code that allow malicious actors to take or create money in contravention of known network rules has occurred.
The Trust’s returns will not match the performance of ether because the Trust incurs the Sponsor Fee and may incur other expenses.
The Market Price of shares may reflect a discount or premium to NAV.
The price of ether may be impacted by the behavior of a small number of influential individuals or companies.
The Ethereum network and ether face scaling obstacles that can lead to high fees or slow transaction settlement times and attempts to increase the volume of transactions may not be effective.
Competition from central bank digital currencies (“CDBCs”) and other digital assets could adversely affect the value of ether and other digital assets.
Prices of ether may be affected due to stablecoins, the activities of stablecoin users and their regulatory treatment.
A temporary or permanent “fork” in the Ethereum network could adversely affect an investment in the Shares.
A disruption of the internet may affect the use of Ethereum and subsequently the value of the Shares.
Future regulations may require the Trust and the Sponsor to become registered, which may cause the Trust to liquidate.
The tax treatment of ether and other digital assets is uncertain and may be adverse, which could adversely affect the value of an investment in the Shares.
The venues through which ether trades are relatively new and may be more exposed to operations problems or failure than trading venues for other assets.
The Trust is subject to the risks due to its concentration in a single asset.
Ether spot trading venues are not subject to the same regulatory oversight as traditional equity exchanges.
Ethereum transactions are irrevocable and stolen or incorrectly transferred bitcoin may be irretrievable. As a result, any incorrectly executed bitcoin transactions could adversely affect an investment in the Trust.
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