jasperthefriendlyghost.Eth on Warpcast

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jasperthefriendlyghost.Eth

The SEC filings today, filled with factual errors and misleading statements, show concretely that the agency's incompetence is endangering investors. The most decentralized dApp on Ethereum is Rocket Pool - it has more home stakers than Solana, Gnosis, Polygon, Avax, everything but Ethereum itself. In a sea of charlatans, Rocket Pool has pioneered true decentralization. In this post, I will first explain why I believe $rETH is NOT a security by analyzing all of Howey, Reves, and the FIT21 criteria. Next, I will explain several factual errors that the SEC has made in its lawsuit against @Consensys with evidence. After this I will say why Consensys will likely win on summary judgment by analysing the Coinbase victory. Finally, I will explain how, just like tornado cash, Rocket Pool is unstoppable. Neither the Rocket Pool DAO, nor Rocket Pool LTD., nor the SEC, nor any US or international court has the power to stop people from running nodes at home or holding $rETH in their wallet.

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Permisionless. Decentralized. Censorship resistant. By the end of this thread, I hope you walk away with the knowledge that the SEC is hollow, Ethereum is the future, and Rocket Pool is enabling it. If you prefer a single long article, check it out https://mirror.xyz/jasperthefriendlyghost.eth/NHymsHgeiVIE2aQM9zIPKLdR433IsNDvNe1ouw7zXCo

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Let's start with the elephant in the room. The SEC has alleged in its complaint against @Consensys that the $rETH token is an unregistered security. Before diving into why I think the lawsuit will be dismissed before it ever gets evaluated on its merits, I want to defend the tougher position and establish why $rETH ought not to be a security. This analysis will be broken into 3 sections: an analysis through the Howey test and each prong, an analysis through the Reves test and its prongs, then finally an analysis through the yet hypothetical FIT21 for good measure. I will be using @TeamPOSA 's analysis for the below section and will link to their full report. I highly recommend reading it. Disclaimer: I'm a full-time medical student. I am not a lawyer and I have never studied law. The people who wrote the report are, and you should read the real report. This is just my interpretation of their arguments. 2/16

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Prong 1 of Howey: Investment of Money Liquid staking tokens operate akin to titles on staked assets such that "the holder possesses legal and beneficial ownership of the staked cryptoassets and any Network Rewards generated from (or slashing penalties deducted from) such cryptoassets." Rocket Pool is fully noncustodial -- ETH is automatically allocated to a pool where it is used to launch validators across a many thousand strong node operator set. In the context of Rocket Pool, the protocol does not "have any discretion as to how to use the funds, but instead the cryptoassets are required to be staked until the Liquid Staker makes the decision to redeem the underlying cryptoassets" 3/16

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Prong 2 of Howey: Common Enterprise None of Rocket Pool node operators, Rocket Pool DAO, nor Rocket Pool LTD form a vertical or horizontal common enterprise. Horizontal commonality requires the pooling of assets and the entwinement of providers' and investors' fortunes. Neither of these bars are met in the case of $rETH. First, assets are not pooled for investment. Users retain custody of their title and have ownership of the underlying ETH at all times. The SEC actually acknowledges this in a roundabout way in their suit. "put up collateral..." is an incorrect view of what is really happening. Each and every Rocket Pool node operator only ever has custody over their own ETH. It is collateral in the sense that it is what node operators provide and may lose. There is no link between a node operator losing their ETH and $rETH holders writ large.

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The situation does not even qualify as a bailment! There is no direct relationship between the fortunes of individual node operators and the $rETH holders. Custody is silo'd such that no liability is engendered. From this, it is clear that the DAO and the Rocket Pool LTD are not engaged in a horizontal relationship as neither has any ability to claim custody over $rETH's underlying assets in a legal or practical sense at any point in the arrangement. Vertical commonality requires providers and investors to share risk. As I explained above, this is not present for the decentralized automatic system that $rETH operates upon. Node operators have custody only over their provided ETH and $rETH holders only have custody over their supplied ETH. The risk profiles of these two are distinct as exemplified by some node operators experiencing large losses due to slashing while $rETH holders feel no loss. In this way, the traditional managerial component of staking is fully absolved/removed/inapplicable.

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To sum up this section: the profits and losses of $rETH holders are not tied to one another, nor are they tied to individual node operators providing ministerial services. Assets are silo'd thanks to smart contracts such that custody remains with each independent party and so no vertical or horizontal commonality can be established. 4/16

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Prong 3 of Howey: Expectation of profit This is nuanced. There is *some* expectation of profit from holding $rETH. However, I agree with @TeamPOSA that the Supreme Court's decision in United Housing Foundation, Inc. v. Forman is illustrative here. "The Forman Court distinguished ancillary features of consumptive instruments that might generate “speculative and insubstantial” profits, which are insufficient to bring the entire transaction within the scope of the federal securities laws, from the core features of an instrument that are designed to return profits to the investor." further: "“[p]rice appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered ‘profit’ under the Howey test."

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I hold that staking is an ancillary feature of ETH that it provides 'insubstantial' profits. Just like growing a few plants on land for consumption and use is an inherent yet minor part of owning land, staking is an inherent yet minor part of owning ETH. In terms of USD, the average fluctuation of ETH massively outweighs the small return that one gets. One might take another approach and argue that inflation paid to $rETH holders is compensation for work provided in defense of Ethereum rather than profit. The primary feature of staking is *not* profit seeking - it is providing security and functionality to the Ethereum blockchain. This role inherently requires cryptoeconomic incentives. Thus, the argument is that there is not an expectation of profit, but a desire to make use of one's ETH and receive compensation from it. An analogy could be made to storing plants in a greenhouse - the plants will grow but the relationship is only that of warehouse bailment. 5/16

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Prong 4 of Howey: Efforts of others For this prong, consider the case of gold storage. In this case, gold is stored in a facility and a receipt is created. The individual who sold the future right to the gold did not have a security relationship with the gold storage facility. The storage facility provided non-essential services and were largely unrelated to the profit or loss realized. I say largely as it seems prima facie true that gold stored in a facility will retain value better than gold held in a closet and so some degree of value fluctuation is acceptable. The same is true for $rETH. ETH is stored within the Rocket Pool contracts (more accurately within validators on the beacon chain) and users retain custody over it. As I explained in the previous section, the primary factor for profitability of $rETH in USD terms is the value of the underlying ETH. The services provided by the Rocket Pool contracts provide a minuscule fraction of the average yearly volatility.

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