Bond, Ethereum Bond
Why staking ≠ bonding.
In the context of proof-of-stake consensus protocols, analogizing staking with the idea of bonding is extremely dangerous because: (a) it’s factually inaccurate; (b) legally sus; (c) enables regulators to easily capture onchain instruments, processes, and actors within their self-inflated jurisdictional bubbles (eg, stake → bond → security within the meaning of, eg, U.S. securities law jurisprudence).
The staking-as-bonding meme has been around for a while, including among very large crypto teams like Coinbase.
Coinbase and the broader community was repeatedly warned this would boomerang hard. It’s now boomeranging, hard.
Apparently, for the past year, the SEC has been investigating “Ethereum 2.0” because, in the SEC’s flawed understanding of blockchain and the law, Ethereum’s merge from proof-of-work to proof-of-stake somehow magically transformed ETH into a security (and Ethereum into an issuer of securities).
Of course, the SEC should lose their legal fights against projects like Coinbase, Uniswap, and Consensys. The SEC’s anti-crypto crusade is patently unconstitutional and totally un-American. Unfortunately, the disputes will center not only on how blockchains function, but on how these functions have been described by crypto teams. Which is not great due to the prevalence of legally-loaded financial jargon to describe blockchain mechanics, from protocol specs down to legal pleadings:
Bonds are Contracts, yo!
Please put aside whatever preconceptions you might have about “smart contracts” as contracts, whatever preconceptions you might have had about bonds, and let’s reason from first principles and settled jurisprudence.
A bond is a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged — depending on the bond’s terms — to provide cash flow to the creditor (e.g. repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as interest (called the coupon) over a specified amount of time).
The etymology of the word “bond” relates to “bind,” referring to an “instrument binding one to pay a sum to another,” appearing in trade and legal usage from the 1500s. The instrument in question is a contract.
Thus, a bond is a special type of contract. All bonds are contractual in nature.
So what?
Saying that Ethereum staking = bonding necessarily implies the existence of a contractual relationship between the staker and ________? It necessarily implies the existence of an identifiable bond issuer.
Yeah, that’s a big gap and a big problem. For a stake to be a “bond,” there would need to be, at minimum, some sort of a contract between the staker and the protocol. Meaning, Ethereum. So if you describe staking as bond[ing], you’re saying that Ethereum-the-protocol is a legal person with the capacity to enter into a contract, since legal personhood is a basic requirement for contract formation.
As you can see, that’s an absurd legal position since Ethereum is not a legal person. Ethereum is a code-based consensus protocol. Like the Internet itself, Ethereum is a digital public space. Suggesting that people enter into contracts with Ethereum is like saying people enter into contracts with “the Internet,” or with “TCP/IP,” or “WiFi.” You cannot enter into contracts with your “Bluetooth” button any more than you can enter into contracts with your personal ChatGPT agent. See, eg, Miles Jennings, Regulate Apps, Not Protocols (2022–23).
Describing core Ethereum protocol staking as “bonding” or “posting a bond” is ascribing legal personality onto Ethereum and drawing direct lines of contractual privity between stakers and Ethereum. It’s factually inaccurate. And legally very problematic.
Words Matter
If you think these are just word games, that nobody cares about the legal etymology of “bond” or how you describe staking relationships and other blockchain legal relations, you’re off the mark. Words matter. Words and usage are outcome-determinative in gray area matters like this. Especially against wordsmith opponents.
So why give your opponents the talking points they’ll use to shut you down?
Chillax, They’re Just Analogies!
People and courts need accessible references to wrap their mind around the technical complexity of Ethereum. That’s why we have words like cryptocurrency, wallets, smart contract, and bond — they help! Why you gotta get all intersubjective? We’re proud of the decentralized financial system we’ve built. We refuse to hide behind euphemisms. If we wanna call it bonding, we’ll call it bonding. Permissionlessness ftw!
Of course it’s your right to say whatever you want, but when you allege something like “validators ‘stake’ some of their blockchain tokens — posting the tokens as a bond” in a legal filing, that’s not an analogy, but a legal admission/waiver. Opponents will obviously capitalize on this in their quenchless thirst to project rigid lines of contractual privity on every onchain relation. So why give your opponents the talking points they’ll use to shut you down?
Waiver/non-waiver aside, even by way of analogy, “bond” is a bad legal analogy. It doesn’t accurately describe what’s actually happening in the staking process. Granted, because they are creatures of contract, there is a virtually limitless number of types of bonds: there are payment bonds, performance bonds, muni bonds, corporate bonds, appeal bonds, bail bonds, treasury bonds, so on.
There’s a key commonality between all these different types of bonds, however: contract. Whether bilateral bonds, or more complex trilateral bonds like sureties, there are contracts; sometimes elaborate webs of contracts (eg, payment-performance-license bond trifectas in federal procurement or public works construction contexts). The contract obligations may be folded into the “terms” of the bond instrument and even not use the word “contract,” but the contractual undertaking is always there, legally.
But Government Bonds Aren’t Contracts!
Yes they are. Even in the context of bonds issued by government entities (U.S. Treasury bonds, municipal bonds), there is an underlying bond issuer and contractual obligations. These government-issued securities may not constitute contracts between the issuer and eventual holders in the typical sense of a bilateral negotiated contract.
True, downstream ‘retail’ holders may not enter into a bilateral agreement with the issuing agency but instead purchase securities that reflect the terms that appear to be unilaterally set by the government body. In the federal treasuries context, the bonds are said to be obligations of the government and are backed by its full faith and credit. But upstream ‘institutional’ buyers of treasuries are certainly constantly negotiating, down to the last discount penny. Treasury bond auctions are about as arms-length contractual undertaking as it gets.
Bottom line, the contractual nature of bond relations is settled law at the federal, state, and even international level. There are clear lines of legal liability, and even express statutory limitations on the doctrine of sovereign immunity (eg, Tucker Act) that permit private parties to assert contract claims against the federal government in specialized courts. So that when a bond issuer defaults on their obligations, there are more or less clear lines of liability.
Securities law may exempt certain types of bond issuers from SEC registration and reporting obligations, but that doesn’t make these bonds non-securities. They’re just special types of securities.
Drawing legal analogies between blockchain staking relations and these statutorily exempt instruments and issuers is a really interesting and important exercise. It should animate policymaking discussions around broad exemptions for blockchain protocols, a step which would require express statutory authorization. Unfortunately, the current SEC policy towards blockchain is the complete opposite of exemption and the complete opposite of good-faith policy discussion. So long as the SEC tries to unilaterally stretch its statutory mandate to cover core blockchain protocols, bond analogies should be avoided like the plague. The same is true for backroom policymaking/lobbying discussions.
Bonds on Ethereum ≠ Ethereum Bonds
Nothing above is meant to suggest that bonds can’t be issued on Ethereum. Of course they can be issued, and are being issued. This includes bonds issued by private, public, and quasi public-private entities:
All these examples (and countless more in the ‘tokenization of RWA’ genre) underscore the attractiveness of Ethereum as the metaphorical ether — the medium — on which, and through which, different legal persons can create, distribute, and track their respective bond issuances, redemptions, and so forth. Ethereum-the-blockchain is not a contract party in these issuances. Among other reasons, Ethereum can’t be a contract party because Ethereum has no legal personality. Nor is Ethereum some macro ‘Internet bond’ issuer — like the Metaverse’s Fedsury — that guarantees ultrasound base monetary properties of/for some imagined financial base settlement layer that these various securities issuers tap into.
What makes Ethereum so attractive to bond issuers, tokenized stock issuers (see, eg, Aktionariat, Daura) is that it is a general-purpose consensus protocol with 100% uptime. It invites parties to do all sorts of financial & non-financial, contractual & non-contractual consensus truth-building … on people’s own terms, including and especially, own legal terms. This includes the ability to define contractual obligations in an extremely granular way, and, as important, to express non-contractual intent.
Despite what some observers or overzealous regulators may claim, Ethereum doesn’t reduce everything on Ethereum into a ‘digital asset’ linked by programmable contracts. That conception of Ethereum is factually untrue and provably insecure.
Ethereum is neither a corporation nor an unincorporated business association: it’s a non-profit global public cyberspace, like Wikipedia and the Internet itself, a digital public block. It doesn’t issue bonds nor is its security premised on some intended/incidental third party benefit from validators as ‘bond posters’ or ‘bond issuers.’ Rather, Ethereum’s security is premised on the general-purpose nature of its consensus engine that invites different people, with competing and diverse interests and motivations, to agree on very fragile shared interim truths (canonical blocks). Over time and continued group confirmation, these fragile interim truths ossify into very durable canonical state. Not because of mathematically-predetermined and contractually-guaranteed “yield” expectations of blockchain validators, lol, but in spite of them.
Ethereum Bonds = Bondage
If you’re a tradfi institution or government agency issuing bonds on Ethereum, great. If you’re a DeFi project issuing bonds or using “bonding” terminology by analogy or whatever, more power to you, so long as you understand what you’re getting yourself into, legally. If you’re a non-fi project running onchain social experiments via Augmented Bonding Curves, or whatnot, do your thing. Thankfully, there are more flavors of blockchain staking than Ben & Jerry’s ice cream, so when someone writes “bond” they might be talking about wsCNX or a token foundry using some novel ABC. Pluralism is blockchain’s superpower.
But if you project “bonding” terminology or analogies onto voiceless Ethereum-the-protocol and core protocol relations, you’re inflicting fatal wounds on Ethereum. If you’re a crypto lawyer doing this, you have no excuses. Please stop.
— — — — — — — — —
PS: this note is inspired by an excellent Punk6529 𝕏 thread playing out right now:
Please join in & make your voice heard.
