Why the 'Expectation of Profits' Test Fails for Modern ETH Holders

The Howey Test is obsolete for evaluating ETH because it assumes a passive investment. Modern ETH holders are active network participants, not passive investors. They stake for consensus, pay gas for execution, and govern via proposals.

Profits are a side-effect, not the primary expectation. The primary utility is access to a decentralized compute layer. Profits from staking or fee market dynamics are emergent properties of using the network, akin to earning interest on a checking account you use daily.

The SEC's passive investor model fails when applied to users of protocols like Lido, Uniswap, or Aave. Holding ETH is a prerequisite for interacting with DeFi, not a speculative bet on a common enterprise. The expectation is utility, not dividends.

Evidence: Over 40% of ETH is staked or locked in DeFi, directly powering the network's security and liquidity. This capital is productive, not passive, creating a fundamental mismatch with securities law designed for static shares.

ETH is a consumptive commodity. Holders pay ETH to execute smart contracts on Ethereum, Arbitrum, or Base. This is a fee-for-service model, akin to buying AWS credits, not a bet on corporate profits.

Staking is a network service. Validators provide computational security and block production in exchange for ETH rewards and fees. This is a work-reward system, distinct from a dividend from a common enterprise.

The profit source is exogenous. Value accrual stems from global usage of DeFi (Uniswap, Aave) and L2s (Optimism, zkSync), not from the managerial efforts of a centralized promoter like the Ethereum Foundation.

Evidence: Over 30% of ETH's supply is locked in staking contracts and DeFi protocols like Lido and MakerDAO, demonstrating utility-driven demand, not passive investment.

ETH is a consumable commodity. Modern holders acquire ETH to pay for gas on L2s like Arbitrum and Base, not to speculate on its price. The asset's primary function is to be burned for computation, a dynamic formalized by EIP-1559's fee-burning mechanism.

Profits derive from utility, not enterprise. Value accrual stems from network usage by protocols like Uniswap and Aave, not from the managerial efforts of a common enterprise. This inverts the traditional investment contract model.

The staking yield is a security service fee. Validator rewards compensate for providing the decentralized physical infrastructure (DePIN) of block production and attestation. This is a payment for work, not a dividend from corporate profits.

Evidence: Over 30% of Ethereum's gas fees are spent on L2s like Arbitrum and zkSync. The network processes more value in gas fees for decentralized applications than it generates in 'profits' for a centralized entity.

ETH is a consumable asset. The primary expectation for a modern holder is network access, not price appreciation. Users spend ETH to pay gas for transactions on L2s like Arbitrum, execute swaps via Uniswap, or mint NFTs on Zora.

The profit mechanism is indirect. Value accrues from utility, not corporate effort. A user's 'profit' is the successful execution of a smart contract or the acquisition of a digital good, which is a byproduct of the network's function.

Speculation is a secondary market. The spot price on Coinbase is a liquidity layer atop the utility layer. This is analogous to speculating on AWS credits; the underlying value is compute capacity, not a share of Amazon's profits.

Evidence: Over 60% of Ethereum's daily transactions are now L2-based, where ETH is the canonical gas token. This demonstrates consumptive demand that is structurally separate from investment activity.

The SEC's core argument asserts that staking ETH qualifies as an investment contract. This relies on the third prong of the Howey Test: an expectation of profits derived from the efforts of others, namely the Ethereum Foundation and validators.

The fatal flaw is context. This test was designed for passive orange grove investors, not active protocol participants. Modern ETH holders use their asset as productive capital within systems like Lido, Rocket Pool, or EigenLayer for network security and yield generation.

Profits are a secondary effect. The primary purpose is securing the blockchain and accessing services. Staking rewards are a network fee for providing a public good, akin to AWS credits for running infrastructure, not a dividend from corporate profit.

Evidence: Over 40% of staked ETH is via liquid staking tokens (LSTs) like stETH or rETH. These are used as collateral in DeFi on Aave or Compound, not held for passive appreciation. The utility is the primary driver, invalidating a pure profit expectation.