Just because its a complicated loan/bond doesn't mean its not a loan/bond.
Lending money to somebody else, with a promise for future returns, is fundamentally a bond. It will act like a bond, subject to the economic principles of a bond / loans / etc. etc.
It is an alternative to proof-of-work, which requires capital investment to provide security to the network (e.g. purchase and run Bitcoin mining machines). Staking is a substitute for that capital requirement. You are refusing to understand this simple fact.
If you loan a business money or buy a government bond, they are SPENDING that money to run the business/government. The Ethereum network is not selling your staked ETH to maintain security.
So lets say I own 10 ETH. Explain to me how I get my staking rewards.
Because step #1 involves me transferring that ETH to Coinbase (or some other entity with a large enough ETH basis to serve as a trusted staking entity). That is a loan. I don't own ETH anymore, I gave it to Coinbase.
Coinbase creates an "IOU", saying "I promise that dragontamer will get his 10 ETH back", through some system of trust, contracts, databases and whatnot. It doesn't really matter what the details are, the whole thing is an IOU, a promise to return my ETH later.
Similarly, when I deposit $10,000 into a bank (be it a savings account, or money market account), the Bank writes down an IOU saying it owes me $10,000. The bank then sends the money to the market (and worst-case, to the Fed Overnight loans), and lends the money out. Later, I withdraw the money, the bank undoes the process.
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The only difference is that ETH doesn't allow you to withdraw the money as often as a savings account or money-market account/fund. So its kind of crappier than a normal savings/money market style loan that goes on.
I guess ETH also gives a different level of rewards, seems to be 4.4% (though denominated in ETH rather than dollars).
You DO own the ETH. Regardless of whether you are staking it yourself, or have given it to Coinbase to stake. Similar to how you maintain ownership of your rental property even if you allow a property management company to run it.
This is true if you move your ETH from a self-custody wallet to coinbase (custodial wallet). Either way, you maintain ownership. The tokens earned are taxable as income, just as income from a paying tenant on your rental property is taxed.
Also, the IRS defines crypto tokens as "property." As far as I know, there is no such distinction for bonds or loans.
Personal wallets cannot participate in ETH staking and you know it. The first step is to transfer your ETH to a large scale, trusted wallet, like Coinbase's wallet.
What you own is an IOU from Coinbase saying they owe you the ETH at a future date. The value of this IOU is taxable of course. But the important thing is that if Coinbase goes bankrupt, it is an unsecured IOU / bond that is junior to Coinbase's other creditors.
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Just like how depositors into Celsius "owned" IOUs saying they had BTC or ETH or USDC in Celsius... it turns out that the value of those IOUs is worthless as the bankruptcy proceedings carried forward. Customer deposits, in the USA, are junior to investment banker's bonds that funded the business to begin with.
> The first step is to transfer your ETH to a large scale, trusted wallet, like Coinbase's wallet.
Absolutely FALSE. I don't know how you could possibly be so confidently wrong. One of the big selling points of PoS is that you don't need mining facility/hardware. You only need 32 ETH, and the resources to run the node. NO central entity is required.
"Solo staking on Ethereum is the gold standard for staking. It provides full participation rewards, improves the decentralization of the network, and never requires trusting anyone else with your funds."
Even if you move it to Coinbase for them to do the staking, the custodial wallet is in your name. The same happens with ETH held for trading. You can move it from one exchange to another, and still not trigger a taxable event as long as you own both accounts/wallets.
> Similarly, when I deposit $10,000 into a bank (be it a savings account, or money market account), the Bank writes down an IOU saying it owes me $10,000. The bank then sends the money to the market (and worst-case, to the Fed Overnight loans), and lends the money out.
Incorrect! My understanding is it would be illegal for them to give away your deposits. That includes the Reverse-Repo market (RRP), which is the source of the overnight rate you referring to. The RRP is a contract, not a transfer. Factional-reserve banking means they don't loan out customer's deposits.
Also, you are confused about the users of RRP. It is overwhelmingly money-market funds, NOT checking/saving accounts. This would include Vanguard, Fidelity, Schwab, etc. which are not banks.
"In practice, the vast majority of ON RRP usage is done by MMFs, who have $4.5 trillion in assets. That enormous pool of capital is the mechanism through which Fed policy is transmitted in the money markets."
ON RRP = Overnight Reverse-Repo
MMF = Money-Market Fund
And it is never "spent" by the fed. It is held as a liability on their balance sheet. The reason you see such a high RRP now is due to a shortage of low duration treasuries. They want the RRP to be high in case there is a run on MMFs like in 2008.
Lending money to somebody else, with a promise for future returns, is fundamentally a bond. It will act like a bond, subject to the economic principles of a bond / loans / etc. etc.