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The ETF Analyst
The ETF analyst

The ETF Analyst takes a closer look at…the Internet Computer Protocol (ICP) Token ETP

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In his regular column, investment analyst Matt Brazier, takes a closer look at the underlying investments in some of our recently reported ETF launches.

The material in this column is for information only, represents Matt’s opinions and is not designed for making investment decisions.

In the Global ETF launches column on 22nd February, in partnership with STOXX, ETF Express reported that Valour Inc, a subsidiary of DeFi Technologies, announced the launch of a physically backed ETP for the Internet Computer Protocol (ICP) token (ISIN: GB00BS2BDN04).

The ETP is listed on the Deutsche Börse XETRA exchange under the ticker 1VIC and the latest AUM is EUR11.9 billion according to data from Trackinsight.

As a Proof-of-Stake (PoS) blockchain, the Internet Computer Protocol (ICP) rewards holders of its tokens in return for allocating their holdings to support the blockchain’s operations. More specifically, ICP tokens committed to staking are eligible for rewards by actively participating in on-chain governance via voting.

Valour is partnered with VQF registered custodians and staking services provider Copper Markets (Switzerland) AG who take care of the practicalities of the staking process on behalf of ETP holders. The staking rewards accumulate into the daily NAV per share calculation found on Valour’s website.

Valour charges a hefty management fee of 1.9 per cent and it appears that this does not include fees for staking services. Valour’s website says,

“Given the additional costs associated with Valour’s staking ETPs, rewards are shared between investors and Valour, whereby Valour will pass through a fixed percentage of staking rewards to investors.”

Investors should also be aware that staking can be subject to lockup periods which Valour manages by only allocating a proportion of total assets to staking. In this way, Valour hopes to ensure sufficient liquidity for ETP holders. Clearly, a sudden large outflow could exceed the value of tokens not allocated to staking and lead to some holders having to wait to exit.

Another risk associated with staking is ‘slashing’ which is a penalty mechanism used by some blockchain networks to discourage negligent or malicious behaviour. Investors should consider carefully if they are comfortable holding an asset which can be seized at the discretion of the network.

Essentially, the purpose of ICP is to provide a distributed network upon which developers can build applications on behalf of users. Because Internet Computer is a fully decentralised blockchain, developers are not beholden to a centralised service provider with its inherent security risks such as vulnerability to hacking.

There are 204 projects currently on ICP which mirror a range of widely used traditional web services. Examples include Dmail, a Web3 (meaning it is built on a blockchain) replacement for email and DSCVR, a decentralised social media platform.

ICP is distinguished from similar decentralised software platforms such as Ethereum in that it operates on a reverse gas model. It costs money to run a distributed network of servers and gas is how it is paid for.  Under ICP’s reverse gas model, developers pay gas fees and not end users.

Using a reverse gas model incentivises users to adopt Web3 services instead of traditional Web2 equivalents which are typically also free to use. The distributed nature of Web3 applications means that in theory they offer additional advantages over their Web2 peers in that they are less vulnerable to hacks and provide users more control over their data.

Ultimately, the future price of the ICP token will depend on the demand from developers, which in turn depends on the popularity of applications on the platform. According to a projection from ICP, the token is expected to become deflationary in five to six years. Deflation means that more tokens are used (burned) by developers than are created (minted) to pay for computing power and staking.

Investors in 1VIC are not only betting that Web3 takes off, but that Internet Computer becomes one of the projects of choice.

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