Bankless - Ethereum is Hilariously Underpriced | Will SOL Flip ETH?

Episode Date: December 5, 2023

Someone has to say it. ETH price at $2.2k is hilarious.  Everyone is out here trading "what ifs" this cycle when Ethereum has fundamentals. Let us tell you why $2.2k ETH doesn't make any sense. ------ 🌐 AEVO's Options and Perps DEX https://bankless.cc/aevo  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE ⁠https://k.xyz/bankless-pod-q2   ⁠ 🦊METAMASK PORTFOLIO | MANAGE YOUR WEB3 EVERYTHING ⁠https://bankless.cc/MetaMask   ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum   ⁠ 👾GMX | V2 IS NOW LIVE  https://bankless.cc/GMX  🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo   🦄UNISWAP | ON-CHAIN MARKETPLACE ⁠https://bankless.cc/uniswap  ------ TIMESTAMPS 00:00 Start 01:33 Ethereum is Underpriced 16:01 Will SOL Flip ETH? 38:12 Hating "Decentralization" 51:18 Changing of The Seasons ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠ 

Hey guys, welcome in bankless takes. We've got a few topics for you. First of all, David, I want to talk about Ethereum. Ethereum right now is hilariously underpriced, my friend. I'm just calling it. I've gotten to the stage where I'm just a bit angry about this. And we're going to talk about it. Yeah, there's a fundamentals mismatch between the market price and what Ethereum's actually doing. We've got Bitcoin above 40K. We've got token prices surging. And I want to talk to you about why I think ETH should also be surging. David, it's the market that's wrong. It's not us. What else we got? Speaking of fundamentals, does Solana have any? A notable crypto investor said that there is a 25% chance of Solana flipping Ethereum. How did he get to this number? We will do our best to unpack that. Lastly, I want to tell you why I'm starting to hate debating the word decentralized or decentralization.

I love the concept, but I hate what the word has become and what I think we should use instead. As always, these are the takes this week from David and myself. If you don't like our takes, there's other episodes for you. But this is where we cram it all into one concise episode. David, we've got a shout out from one of our friends and sponsors. What do they want us to know? Avo, previously known as Ribbon Finance, how you might know them, has been dominating the defy landscape with 70% market share in options and perps.

They are now launching AEUSD. So while you do your trading of options and perps, you also get 4.7% yield while you do so, thanks to the AEUSC. You can deposit and start trading at banklist.cc. C-C-Slas A-A-V-O. Ryan, why is Ethereum hilariously underpriced? This is a tweet you put out not too long ago. What do you mean by this?

Dude, I'm just sick of it. I think somebody has to say it. Somebody has to start getting loud or louder on Twitter because it's just not right, David. I feel like Ethereum is hilariously underpriced at 2.2K right now. It's very clear with Bitcoin above 40K, we are now in the bull market. And I'm seeing a lot of price pumping on like what if types of tokens.

What if price movements, yeah. Yeah. And I think Ethereum has actual fundamentals. So I spent some time enumerating the fundamentals. And again, I don't know. There's some price point at which Ethereum is fairly priced. But in a bull market, I don't think that price is 2.2K, right? I think it's a lot higher.

I spent some time enumerating this in contrasting Ethereum right now versus the start of the last bull cycle. And I remember the start of the last bull cycle. Bitcoin had its run. Defy tokens had its run. And at some point in time, a number of us, myself included, just said, enough is enough. Eat that like 200 is hilarious. It is stupid.

And I started this threat at this time to just track the number as it went up, started at 200, then it went to 300, then it went to 500, and then above 1,000. It started to become more fairly priced, you know, and I started tapered off after things got above 2K, where I am feeling similarly about Ethereum right now. And here's what's different from last cycle to this cycle. David, first of all, Ethereum now makes $2.7 billion in annualized profits. That is, fee revenue collected versus ether issued. Yeah, and you can see all of this on ultrasound money, by the way.

And if you contrast this with like, if you like a price to earnings, I mean, how much are you paying for Ether market cap versus how much it's earning in terms of profit? It's at $2.7 billion. The PE ratio, which is a common metric used in the stock market, a common metric used for any capital asset, whether you're renting a house or you're trying to value a stock. The PE ratio of Ethereum right now is 98. Okay? That is relatively low.

Contrast that with Amazon. Amazon's about 75 right now. So the amount that you're paying for $1 of earnings is $75 with Amazon. Okay? I think what that means 98 to 75 is that the market is pricing in that Ethereum will grow at least 25% faster than Amazon to put it like reductively. Yeah, 25%. Is that a conservative estimate to you? Feels that way to me.

If Amazon is a massive company, how do you grow that thing very quickly? I know. So you, I mean, if you look at other. high-tech stocks, Salesforce right now? You know what their P is, David? I think like I saw Netflix at one point in time, was at 400. Netflix goes to 400 Salesforce right now, like a customer relationship management software, software as a service.

You know, it's been a 163 is their P-E ratio. Zoom is 150. Also dumb. I mean, maybe that's fair, but something is dumb here because Ethereum is only 98. The global settlement system for the world potentially. That's the total addressable market we're playing at is only 90. And to me, that seems ludicrous. Compare that to last cycle.

All right, David. I don't know what our P.E. was like infinity. It was actually in the negative because Ethereum wasn't even profitable. And now it's throwing off $2.7 billion in cash. And might I remind folks, the only profitable chain. All right? So this is not like the other chains. And Tron.

Oh, Tron. Ron. Yeah. Shout out. Tron and Tron. Shout out Justin's son. Tron. So that's my first point. I think that is completely different than last cycle. Also, David, I was looking at ultrasound money yet again, which is a fantastic place to go view all of the

Ethereum fundamentals. And you know who are the highest block space buyers? Oh, let me guess. Protocols are. Other protocols. Yes. And a new entrant here. Okay. So I looked at the past seven days. If you do that, of the top 10, blocks based buyers, consumers, of Ethereum Blockspace, five of those were layer twos over the past seven days. That is an entirely net new demand agent consumer of Ethereum Blockspace that we didn't have in 2020, the certain blast bull run. Entire blockchains are now purchasing Ethereum Blockspace. All right. No other chain has this, by the way. That is bullish, my friend. So Arbitum can bundle hundreds of thousands, potentially millions of transactions into one concise atomic blockchain purchase.

of Ethereum block space. You have entire chains that are new purchasing agents for Ethereum block space right now. That is bullish. I think in particular, compared to last cycle, is pretty unique to Ethereum at this point.

And I would also add Arbitrum, Polygon, ZK Sync, optimism, they all have their chain development kit, which is about the freedom to fork their train development kit so that anyone can be a chain that settles on Ethereum.

Anyone can spin up a protocol that consumes Ethereum block space. So the BD teams of these layer twos are also working at establishing more and more network effects around the actual settlement of all chains into the same shared block space. And so if the success of these BD teams is at all meaningful,

then all of a sudden they're spinning up more chains that are consuming more block space. Yeah, I mean, how many net new layer twos do you think we'll get this cycle, David? More than I can think of today. at least hundreds. So those are all net new buyers of Ethereum block space. There will be some power law winners there.

Another point that's different from last cycle in 2020, Ethereum is going to be deflationary this entire cycle. Right. It already is. It already is. Last time, it inflated at about 4%. So between 3 and 4%, depending on what the burn was, during kind of the most. This time, it'll be at least negative 0.5% deflationary from the supply.

never seen the full, a full market cycle where Ethereum was deflationary. We had EIP, we had the merge happen late 2022. Yeah. Like at the end of the bull market. We have never seen like when all of the massive amounts of demand for Ethereum block space was happening was all pre-merge. We have never seen a full cycle of complete Ethereum deflation. We do not know how hot the burn can get.

It can get pretty hot. I wouldn't be surprised if we saw like one to two percent for, for like periods of time, maybe weeks, maybe months. But like we've never been net deflationary in a bull market. And this time we will be. Another point, David. Okay, so we've been talking about Ethereum as if it's valued as a capital asset and is a pretty attractive PE ratio, like relative to other growth tech stocks.

That's not even factoring in the monetary premium that Ethereum in ether the asset can actually have. Right. So if you look at something like gold, you know, 10 to 20% of its use is industrial. right is like kind of like an ingredient, a commodity to produce other goods. It's a consumable product. The rest of that value of the $8 to $10 trillion of value that is in the market cap of gold, that's all monetary premium. That's because people use it as money. They use it as a collateral. They use it as a store of value. Well, Ethereum and ether the asset is a store of value, is a collateral source in the Ethereum economy. Okay. And the 98 PE, that's just valuing it as a capital asset.

There's actually a dial. That's only one part of the triangle that is valued at 98. So there's a dial on ultrasound money where you can just like, you crank this up to the monetary premium. Equivalent to gold. Equivalent monetary premium. Because that's table stakes. If crypto meets gold at par in terms of money, I will consider that the bearish case for

crypto. We are here to be at least be gold. So gold is like a 10x above its utility value in terms of monetary premium. If you did that for Ethereum, just add 10x to it. It would already be worth 22K. Yeah. And people... And this is...

Okay, so it's worth 22K if we give ETH monetary premium equivalent amount of gold and at a PE ratio equivalent to Amazon. Yes. Which, again, I would consider both of these, the conservative versions of the long form of these things. Sure. And people can adjust that. However they want.

If you don't believe in monetary premium, you just want to view Ethereum as a capital asset, well, great. It's, you know, the PE of 98. right now. Okay? If you want to crank that to like 10x, then you have the monetary premium value. So the other point that's different, this cycle, David, bondholders, Ethereum bondholders, we call these validators. They're getting paid, my friend. So right now, ultrasound money, it's about 5.3% inflation rate. So if you add issuance, which is about 3.1, you add kind of the fees, the tips for Blockspace themselves, M.V, so the tip that you receive for Blockspace ordering,

you get about 5.3% on your e-field. Which goes up when block-based demand also goes up. So 5.3% is the current floor in this early-stage bull market environment. And people say, well, a lot of chains have yields. Like any staking chain has yields. Okay. But the difference is Ethereum has real yields, not just nominal yields. A lot of the issuance when you're doing proof of stake on other chains,

if they're not, if they're inflating as much as they are dishing out to validators, It's just a nominal increase. Yields are like 10% and inflation is like 7%. So actually you're only getting 3%. Yeah. And oftentimes it's even less than that, right? It's like there's kind of a delta there. So this is all 100% real yield versus like nominal yield, which I think is.

Not just 100%. So it was 5.3% real yield. And then you add on the 1% deflation, the half a percent deflation that we're currently experiencing. You add on both of those things. Yeah. Okay. here's another thing, David. This cycle, Bitcoin is very likely, hopefully January when you go

destroy Gary Gensler's Horace Crux, is going to get a spot ETF in the U.S. We've done episodes on this. This is going to unlock trillions in capital. Guess what else is likely going to happen this cycle? I give this a 80% probability in my mind, talking to all the analysts. Ethereum is going to get a spot ETF as well. Okay? It'll be Bitcoin and Ethereum and no one else is really close in getting through the gauntlet of getting a like it took 13 years for bitcoin to get here okay it's taking seven for a theorem no one else is going to be ready this cycle and we've done an entire episodes on this this unlocks trillions in potential capital okay so and what i would say an amplifier for this now that a theory do you remember last cycle people were upset about crypto investing

in crypto it's like it's not yesg friendly look at all the proof of work like nfts are bad because they burn so much energy. If you look at a Bitcoin or Ether ETF, only one of those is actually like ESG friendly right now. Only one of those doesn't burn any like, you know, carbon. Whether you care about that, bankless listener, it's kind of irrelevant to the narrative. Because the market wants that. Somebody does.

That's not your values. That's fine. But the market loves that as well. So that's what we got. We got the only asset to get a spot ETF. And it's the only asset to get a spot ETF. from Bitcoin, but it's the only asset to be ESG friendly with the spot ETF. So that is bullish from an inflows perspective. Oh, I've got, I've got more to add to that. Yeah. So the Bitcoin and

Ethereum ETFs, this is something that's echoed by Matt Hogan at Blockwise and a few other places. Ethereum as an instrument, as a financial instrument, is just more interesting to traditional market investors because it looks and feels like a high growth tech stock in comparison to Bitcoin, which is a little bit more on the money side, which is honestly confusing to a lot of investors. And so while Bitcoin has maybe 2.5.3X the market size of Ethereum, I think Ethereum itself out punches above its weight class in terms of external market demand simply because it's viewed as a software tech stock platform, which is easier to categorize in like the high gross risk assets that traditional investors will categorize it in.

So, I mean, it's probably not going to meet Bitcoin in terms of external capital demand, but it's going to punch above its weight class in terms of its market cap versus how much external demand that there is. This is what is the vibe that has been reported by people who speak to traditional investors out in this space. I think bankless listener, David and I could go on with these takes. There's like the eigenlayer increasing the eth yield. there is if ether being sent out to other chains

being the money for other chains which is something that we saw in last ball market the monetary premium of eth is strong people need low liquidity chains low TVL chains need to have ether as the money in their system

because their system's not money either like the growth of the ether unit of account has been up only yeah I just like you know as an ether investor and watching the rest of the market kind of like rage and ether hasn't followed suit, right? I'm actually past the cope phase. This isn't even cope. This is,

now I'm in the phase and I remember I was in this phase in 2022, whereas I'm just objectively, like, angry about this. Like, it's stupid. It's just call it what it is. It's stupid. And I think there's a ton of investors in the Ethereum community who are looking at this, like this tweet got, this tweet got massive traction, basically. And we're all looking at your tweet that you were pointing at, which is like in recapping this. Yeah. And we're all looking at Ether and we're like, everybody is chasing these what-ifs and Ethereum has fundamentals.

Everyone's going down the market cap stack, going down on the risk curve. And it's stupid. So whether the market catches up to that or not, I'm feeling very comfy with these fundamentals. And I'm just going to keep being angry until Heath is a little closer to 10K at least, David. So I'm going to keep tweeting this 5K and below at least. So this is your narrative, Ryan. Or is this fundamentals?

Yeah, good question. Which is this? What's the difference? What's the difference? Should we talk about that? Sure. Okay, so there was another narrative, I think, going on in crypto Twitter that was the flippinging, not of Ethereum, but of Solana flippinging Ethereum. In front of the show and investor, Santiago Santos, said this on the podcast.

He thinks there's a 20% chance that Solana actually flips Eith. I thought we should talk about this take on Vegas. Okay, let's hear the rationale. Okay, so do you want to hear him explain himself? Yep. There's a version of this next cycle where Solana flips Ethereum. I think it's a greater than 25% probability. You think it's a 25% probability that's Salana?

20% probability that Solana flips Ethereum. I don't want to say this cycle doesn't necessarily mean that Ethereum shrinks in size. Solana just uniquely enables different use cases that introduces way more usage, utility, therefore value. So Santiago goes in more detail in a follow-up tweet. fundamentally, the Salana case, bull case boils down to this. One, a viable scalability roadmap with more integrated network architecture, parallel execution, and local fee markets.

Really cheap transactions, I think is what he's saying here. Number two, fire dancer. This is a key network upgrade for network speed, reliability, and decentralization. We've talked about this a number of times on bankless. Again, this is max throughput TPS, built by jump capital, by the way. Number three, talking to teams has made me appreciate use cases. So Santiago is a VC, so he's talking to the devs, which is definitely what you should be doing. And appreciate use cases that are only possible in Solana.

Only possible on Solana. Opo. Category. All post. Number four. The ecosystem survived FDX and is flourishing, similar to Ethereum post-DOW hack and fork. I definitely agree with that one. Let's talk about these others, maybe contrast them.

First of all, some people are saying this is more narrative than it is actual fundamentals. I would be one of these people. Okay, what's your take on this? Okay, so yeah, so this is kind of what has come to be the Salana chant. You know, fire dancer, low fees, parallel execution, local fee markets, all of the things, by the way, that Ethereum doesn't have. Like, Ethereum doesn't have local fee markets. Ethereum doesn't have parallel execution. On its layer one, bro.

On its layer one, yeah, on the Ethereum layer one. And so, like, a lot of this is just like, hey, these are, this is what Solana has that Ethereum doesn't have. It's kind of like how I will simplify and reduce this down to what the elements that I see. Okay. Well, Santiago says all of these equal a 20% chance of actually flipping Ethereum. So let's say, let's just, let's just quantify this. If Ethereum is valued at $1 trillion at some point in this market cycle, so that

that'd be a 4x. 4x. That's a 10K, Eth and above. Okay. That would make, you know, Solana would have to be

above one trillion. Let's say $1.1 trillion, which would be about, I don't know, a 50x? That would be, Ryan, to get,

for Salon to get to 1.1 trillion, that would be a 44X, which would put sole price at $2,640. Dang. It's big. I should go buy salt,

clearly. I mean, there's, But let's talk about that. There's definitely a case for buying soul, David. Right? But the question is, what is the case? Is the case fundamentals?

Is it narrative? Or like, maybe there's some mis- There's some difference in what people mean when they say fundamentals. Because if you talk to Santiago, he would say, guys, all of these are fundamentals. Yeah. And what I point to you now that we have kind of much more maturity in terms of our change this cycle,

I'd be like, show me the revenue. show me the profits show me the numbers where's the three billion in block these ideas out of my face show me the numbers i'm a little bit more skewed on that direction like i the 25 billion dollar network show me the money a little bit right at at a one trillion dollar network you better damn well be showing me how this thing is is throwing off like you know hundreds tens of tens of billions in cash annually anyway go on what do you think's going on here uh okay so here's exactly what i think is on here. There is this tendency, I remember doing this in 2017, where I would pull out my calculator, I would perceive some likelihood about 3x on my shit coin bags, and then I would like, you know,

add those two together, and then that would be my future net worth. And I would look at, and so here's a kid. This is a meme that, like, everyone should be familiar with because this is what you are going to do, bankless listener, in this bull market. You're going to pull out your calculator. You're going to put some inputs into it. And then you're going to, like, you know, look at all the zeros and then you're going to get ecstatic. Or a spreadsheet if you're more sophisticated. Yeah. Sure.

Yeah, you know, yeah. But you don't, you just need your iOS app to really do it to look at all of your, your future rich net worth. So like the, my critique here is that there's no inputs into the calculation. And this is something that I think all bull market navigators should be aware of. Remember when Cardano finally introduced. smart contracts into its system. You know what happened afterwards?

Like super strongly like anticipated upgrade. Cardano is finally going to get smart contracts. It was going to enter the defy arena. And then it introduced smart contracts. And then the token price like plummeted. Because all of a sudden, narrative, an idea and future became present and got tested. And everyone realized like, oh, now we have so much left to build. There is a great premium.

for chains that are still in the idea phase. And so this is something that I think all bull market navigators should understand. Narratives are in in bull markets. Here's a response to Santiago's analysis from Kipfishi Catfish, who's a crypto-tweeter account, and says, quote, can't name the use case beyond vague categories, can't name the app that's doing the unnamed use case, can't name where and how those users will show up, and also can't name a decade when the unnamed user will show up for the unnamed app for the unnamed use case.

Meanwhile, given that Solana transactions cost fractions of a penny, you need tens of billions of transactions per day before Solana breaks even on revenue versus expenses, given its inflation rate in market cap. Meanwhile, as a secular trend, the cost of transaction execution, data availability, settlement, and the amount of MEV extraction will all trend downwards. Literally, everyone is working to make chains cheaper and faster. Nevertheless, Seoul will do great by simply meming chain go fast. And that's normie friendly enough to obfuscate the fact that Seoul won't be accruing value before 2030 because 99% of the population can't delineate between the difference between a protocol and a token well enough. This is especially true when the

token is a layer one gas token, aka like a layer one currency, which the market treats with irrational premiums and kid gloves. Plus, I'm sure Chris Berniske can also prepare some scripted lines for Kathy Wood to read on CNBC about how fast and cheap it is to create some extra pumps this entire space is deeply unsurious. Fishy Catfish is like a crypto Twitter and on account and sometimes I just really appreciate

these accounts who just come out and say it like it is and I just have to give it like this is just okay but let's explain a few things that fishy catfish is saying here he's basically he shows a chart here which is Solana revenue fees

versus expenses. Okay let's let's reorient bankless listeners to what this actually mean. So the first thing you have to know about blockchains is they sell something. They sell something called blocks. Only one thing. There's only one thing they tell. Blockchain sell blocks. Apple sells iPhones. iPhones, blockchain sell blocks. Okay. We repeat that all of the time. And there's a market price for the value of their blocks. Those are like, and the market pays for that in two ways.

One, they pay for to get their transaction in a block. Okay. And then they also pay for the ordering of the block. Right now, Salana's fees, remember I was saying $2.7 billion in annualized profit? That's how much Ethereum right now annualized is making from its blocks-based sales. Solana right now is making about $140,000 in daily fees. Okay, so that's the amount of revenue it's actually bringing in. Now let's talk about costs. It costs money to secure the network. How does a blockchain pay for this in fees, but mostly through issuance. It inflates its own supply to pay those that secure the network, the army, the validators, the mercenaries that do this, right? Bitcoin works the same way. They just pay miners. But in Ethereum and Solano, they're paying validators. In Ethereum,

they're also paying validators a certain amount in terms of ether rewards. But in Ethereum, when you subtract the revenue that's being created from block space sales, and you subtract the cost to pay validators. It's actually at a net profit of 2.7 billion per year is what we were saying. For Solana and most of the other chains out there, they are deeply unprofitable. So Salana, for example, in October, they spent 42 million in terms of issuance, so that is validator expense, like cost to secure the network. And they brought in about one million in terms of revenue. Okay. So there's a delta there. That's why it's a deeply unprofitable chain at this point in time. That's what catfishy is saying here. It's basically like, we're beyond like the speculative era of crypto.

Like that was that was series A, maybe series B. We're post some product market fit. We actually are selling block space to the masses. And so you can start to compare something like Solana, beyond speculative fervor, you can actually look at transaction revenue and how much it's doing what the profitability is. And maybe we should be looking at chains from that sort of fundamentals perspective. and less just from a speculative, hey, number go up. Like, it's, you know, it's valued based on a story that we tell. Mm-hmm. Putting these into daily numbers. Solana collects $140,000 of daily fees, daily transaction revenue, and then it issues $11 million in sole tokens to go to validators, who, similarly to Bitcoin, actually have to sell a decent amount of their soul

in order to maintain their profit. Maintaining a Solana validator is actually a pretty expensive endeavor. And so that turns into cell pressure. And this is something I would say, going back to one of Santiago's rationales for why Solana has a 25% chance to flip Ethereum, one of them was Fire Dancer, right? Why is everyone stoked about Fire Dancer in the Solana ecosystem? Because it makes transactions cheaper and faster. It actually reduces the amount of fees that the Solana network can take.

And so there's this identity crisis about Solana that I think is like under the, under the under the iceberg. All they want to do is reduce, reduce, reduce fees. And also that will just put them further and further away from actually being able to store value in the native sole token, which goes back to what Fisci was saying, this massive critique that Fisci was saying, the market treats with irrational premiums and kid gloves because no one can understand the difference between a protocol versus its token well enough. If there's bullish adoption on Solana, clearly that goes well for the sole token.

But that is not a given. And this is something that I think the entire industry has struggled to actually produce into its layer one assets, which actually kind of induces this speculative demand about the narrative of tokens, especially in bull markets, because in bull markets, fundamentals don't matter. It's all about the story. It's all about pricing in the future. And it's also about pricing in the perceived future, not the actual future. Well, let's go back to Santiago's take, though. So I actually think that there is the possibility that Salana Floresy. Lippins Ethereum. I wouldn't rate it as 20%. I would rate this as like, I don't know, in the single digit percentages, but I wouldn't completely say that that's not going to happen. But I think if it does so, it will do so based on narrative, not fundamentals. Because I don't see the fundamentals. When I say fundamentals, I'm talking about, you know, is the block space profitable, basically? And I don't see those rising, you know, 40x this year, let's say.

And particularly when they are, you know, expanding the transactions per second on the Salana in the way that they are. What chance do you give it? What, like, do you think that Salana could flip in Ethereum this cycle? Yeah. So, like, what are some catalysts, some sole catalysts that I can actually get behind that it doesn't have now that it could have in the future? Like, we give a lot of critiques. I'm about to give a lot of critiques of like Solana TVL and it's not that great. But that's something that could actually change.

Like more stable coins could go to Solana. Heath could go to Solana. And all of a sudden, we can get some actual real TVL into this chain. That's not, doesn't make it tied with blast, for example. And so another one is like reservation demand for soul. Okay, so if Sol's not generating revenue, if Soul is inflating, if that can be offset by alternative reservation demands as in collateral inside of Defi applications, that can be a real fundamental.

Monetary premium for Sol basically. Monetary premium for Sol. Yeah. And so like if the validators aren't able to hold on to their soul because their operational expenses and the issuance rates are so high, then somebody else like the other sinks for the soul token come come about that can largely be defy. And so like stuff like this can start to also create a narrative like, oh, the soul is now money, right? Maybe the Salonah community goes for the soul as money phase because they realize that that's actually how you have sustainable economics at the layer one. So like maybe that can also help propel a flippinging, a narrative flippinging. But

I'm with you. It's in the single thing. digits. Why do I think it's so low? I want to level check some fundamentals about Solana that we all know and love. TVL. Solana is eighth after the three major Ethereum layer twos, arbitram optimism and polygon. Also eighth after Avalanche, another competing ETH killer. And all of these, including the Ethereum layer twos, are behind Tron and Binance smart chain, which are, of course, behind Ethereum as well. So like, it's got some TVL to accrue in the first place. Even after all this excitement from Solana and there is like, I think there was like 100,000, yeah, 100,000 active monthly users on Solana and that has since jumped up to 175 in the last

month. So there's some growing adoption here. Even after all of that, we have not seen a growth in stable coins or TVL on Solana all that much. It's competitive out there, David. It is like all of these layer twos, all of these chains are launching. It's basically all the competition is going on the execution layer. And there's even probably, I would guess there'd be up to five SVM layer two chains. That's Solana virtual machine layer two chains that are trying to clone the success of Solana's parallelized execution environment and launch that as a layer two. That's going to be competitive with Solana as well. At least I think it will be. Yeah. And that's just the SVM. There's also parallelized EVM teams like Monad coming on to the Ethereum into the layer one space to

be honest. And also the whole narrative around Solana is the payments chain, because Visa is integrated there. I'm sorry, Ethereum's not even the payments chain. It's Tron. You have to compete with Tron, not even Ethereum. So the whole like Solana Ethereum narrative is, again, just a narrative. And that's just like the first half of Fundamentals reality. The second half is like, okay, if we want sole issuance to net out, as in we want burn on Sol, Solana does have a burn, 50% of transactions on Salon are burned. We need a 500x. We need a 500x. in transactions volume on Solana to break even to stop issuing Soul more than is burned. 500x.

And then if we want to match Ethereum in demands of in terms of deflation, which is the Solana narrative, by the way. This is the narrative that Austin articulated to me when I had them on the show. That needs to be a 1000X in demand of Solana transaction volumes, which brings Solana to a whopping 250 billion transactions per second that it has to sustain forever in order to be at par with Ethereum's bare market deflation volumes. 250 billion transactions per second, Ryan, does that seem reasonable? Is that a rational number?

So I don't think so. And I think it's time to start looking at kind of these chains from a profitability perspective. I mean, we've been doing this for 13 years, guys. We've been trying to get this industry to move towards fundamentals and profitability for a cycle. That said, let me flip that. And let me give you the, if we're wrong, how are we wrong sort of take? You could make the case that we are so early that competing for market share is the thing that you want to do. That profitability doesn't matter. So if you look at a startup, they don't care so much about your profit. They don't care at all. They want you

to recycle all of your profit back into growth. And that in a certain way, that's essentially what what Salana is doing. They don't care about profit. In fact, they're willing to dilute the existing, I'll call it in quotes token holders, shareholders, right? Dilute them and recycle that and subsidize blockchain fees. So the Salana argument would be like, no, we're just playing a game to make lost leader transactions as cheap as possible. And we don't care if we're diluting our token holders right now because we'll make that back later in network effect and maybe potential MEV. So I would say if we're wrong, David, that's how we could be wrong. I'll also say like a second thing, which is Ethereum and Layer 2s has not solved its UX problem right now. Yep.

It's a really freaking stupid and hard. I'm moving from Ethereum to like arbitrum and like the centralized exchange only supports Ethereum. And so I have to hop to Ethereum and then get on layer two and what do I do? And now I'm on this chain. Now I'm on that chain. Where are my assets? I can't even find them. Like there's the other case that this cycle, right, Ethereum Ux doesn't get solved. Maybe it never gets solved. And Salana just has like a better user experience. Just come on the phantom wallet. It's just everything works. You pay like nothing in transaction fees. Yeah, if you're getting like MEV attacked and it doesn't matter. Users don't notice and they'll create the killer app that way. So I will say, like, let's be open and you have to be open

to try to figure out where you're wrong. Oh, the last, the last area, I think, this could be the case, which is that this whole entire crypto thing becomes less of a revolution and more like a tradfi type of thing. It's just like everything is AML, KYC'd. Right. Like, we don't care about, you know, non-sovereign, non-nation state store of value. It becomes a lot like an open database for traditional finance. In those conditions, then like the decentralization of Ethereum might be entirely overkill. Those are three ways I think we could be wrong on this. And you have to be open to. I want to unpack that last thing about decentralization and whether this crypto experiment can actually produce the censorship resistant non-sovereign store value money

or if it just becomes an extension of tradfai in a more efficient manner. There's a lot of perceivedness about the word decentralization. It can mean a lot of different things. So I think we need to unpack that. And that's going to come in the second half of the show. But first, a moment to talk about some of these fantastic sponsors that make this episode possible. Cracken knows crypto.

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All right, let's get into this word, David, that you alluded to, this word decentralization. I've actually, I think I've come to hate the word decentralization, not like the meaning of it. So I don't want folks to get me wrong, but just the debates about it and the lack of definition for it and the lack of context and the whole discussion around it, at least in crypto circles and on crypto Twitter, it's almost become like a form of religious warfare. It's like a supercharged word. Yeah. So Fiscanti's tweeted this out.

I wish key eth people would be as outrage about most layer two security models being basically a multi-sig as they are about Lido getting bigger market share. If Fiscanties is showing a picture of layer 2B, which is actually saying the state showing the stage of decentralization of all of these layer 2s. The furthest along is arbitram stage 1. We've done an entire episode about this and how they're planning to get to stage 2. We've got optimism, which is still stage 0. They don't have fraud proofs fully implemented, right? And so he's saying, hey, the layer 2s you guys are talking about, they're not fully decentralized. Eminen from Avalanche also says this. it's taking a while, but finally people are beginning to realize that we all got into crypto for

decentralization, that's that word again, and trustlessness. And layer twos are leading us away from those central values. Okay? That's the take. My take was a little bit different, of course, being a layer two bull. I think layer twos are awesome. I think layer twos are becoming more decentralized over time. I think the community isn't, the Ethereum community is completely aware. That's why we have like layer two. Why we have this website to track it in the first place. Yes. And that all of the layer two teams, at least the legitimate layer two teams are working. They are in a competitive, you know, battle to actually become, to graduate up this chain and go from zero to stage two. And to do it first. Like there's a lot of social pressure on them. There's a lot of value unlock pressure on them.

And I think Ethereum is actually doing a fairly good job, self-regulating it. You know, we don't want this to go from zero to two right away, right? Because what if there's a hack? What if there's a bug? Right. Like, what if you have to do something? We have some steps in between there that make logical sense. But my take is people say otherwise, they might be trying to sell you something as my take. And that's a little feisty back to Emin. There's a tweet that went around the Twitter space from this Ignis D5 research account, which said, Avalanche, Thorchain, and Solana are more decentralized than Ethereum, which is in bold at the very top of the. tweet. So you know he knows that this is going to invite some critique. Yeah. And then he follows up

and goes, at least according to the Nakamoto coefficient. It's a measure of how many entities can collectively shut down a blockchain. Okay. So what is a Nakamoto coefficient? Is exactly how he said. It's this measure for the minimum number of entities that can come together to clue to shut down a blockchain. This was actually made by Satoshi Nakamoto. And it was, I think, more apt in the proof of work sense where you have large centralized mining operations. and if, you know, three of them can get above 51%, then you have a Nakamoto coefficient of three. Since the evolution of proof of work, the Nakamoto coefficient, in my mind, this is my opinion, is now more of a thought experiment, more than it is actually a measurable metric.

It's the thought experiment of how many entities, what is the minimum number of entities that come together that's needed to actually take down a blockchain and control a blockchain. And so it's not an actual applicable metric, but it's the thing that, the Salana community loves to measure with decentralization. And so he makes this tweet, Avalanche Thorchained Salana, more decentralized than Ethereum because of this Nakamoto coefficient. In order to produce a number out of the Nakamoto coefficient, you need to have extremely subjective interpretable metrics for what is actually a colluding entity.

Is it a, is Lido one entity or is it 32? Here, for example, where Ethereum scores so low, they rate Lido as one. It's just one colluding entity. which is a subjective opinion and you can make the argument going both ways and it really is nuanced between it's a little bit like one it's a little bit like 32 and it's somewhere in between these things how you determine what an entity is is also subjective yeah i think you could make the argument that let's say all the slana validators that receive some sort of funding from the slana foundation which many of them do also only count as well at all right i'm not saying that's the

case, I'm just saying you can make that argument. That's why this is such a subjective metric. So my take is that if your system for measuring decentralization puts Binance smart chain, Solana and Avalanche higher than Ethereum, then maybe it's actually your metric that's flawed. And this is exactly what I followed up and said with Ignis. Like, this just shows that this measure of decentralization is poor. And they asked, what alternative measures are more appropriate to measure decentralization? It is a great question. And I think we really want, we as an industry, we want to be able to define and parameterize decentralization. But if a system is actually decentralized, then it is unmeasurable because it's decentralized.

It's this weird catch-22 where something is decentralized. It's inherently hard to grasp or measure. If it is measurable, that means there is a centralization vector that you are measuring. If it's not measurable, then it's decentralized. True decentralized systems are impossible to parameterize. It's noble to try and do this. It's a good attempt to see a good thought experiments. There are lessons to be learned here.

But truly decentralized systems can only be measured in their decentralization through tests, acid tests, right? This is why Ethereum is so focused on censorship. We have this MEV watch website to show you how many transactions or blocks are being censored by people who don't want to violate OFACs agents post-tornado cash. That is one measure of ways you can test the decentralization of a system. Another way to test the decentralization of the system, can you download and verify a full node of that system? Can you also participate in consensus of that system?

Can you add blocks to the blockchain? Are you allowed to do that? How feasible is it? How easy is it for you to join the network and be a part of the network? There's no way to truly measure decentralization. You can only test it in various different ways. Yeah, I agree with that. That's kind of my take on it is actually I think we have to get out of,

this quest for a definition of this holy world word called decentralization, because every community is going to point to their set of features and be like, oh, here it is. We found decentralization. And the non-holy communities, the non-sacred communities will be those that don't have that feature set and are cut outside of it. And I think this applies to Bitcoiners who talk about like, you got to run a full archive note.

And they define an archive note as a very specific thing that, you know, Ethereum has kind of a different definition of what a full note is. And, you know, this was a debate in a religious war a couple of years ago, right? You know, Salon and other communities have Nakamoto coefficient. They score very highly on that. So they're like, this is what decentralization actually means. The worst thing about the Nakamoto coefficient is you can measure it in an interpretable way. It itself is not objective. Sure. It's on an objective system. And we will never come up with an objective measurement of decentralization. That's perfect.

So my take is similar to yours, David. We should just stop trying. Let's, we are beyond that again. We are beyond the narratives of what decentralization actually is, and now we're getting to fundamentals. Here's a fundamental. You brought it up. If you deploy something like tornado cash to your chain, some sort of privacy tech, and the smart contracts themselves are sanctioned by the most powerful government in the world, that is the United States government says, no, these smart contracts are illegal. Can the network still process that transaction? That's the question. Okay. This is the case for Tornado Cash on Ethereum. There are a list of addresses, smart contract addresses, and actual wallets that are blacklisted by OFAC. Can those transactions still go through? On Ethereum, the answer is yes. They can. Equivocally, yes. Here's an entire website that's a watchdog for this. It's called MEV watch. Not only can they go through, but actually, OFAC compliant blocks have gone down over time.

Okay. And like, there's a whole story here that we could get into. But the reality is Ethereum has now passed an acid test right now for coercion. Okay, because why do we even have decentralization so that we can resist corruption and coercion? This is coercion. A major government says you cannot process the transaction. The theorem network processes it anyway. The theorem network doesn't give a fuck. The decentralization test is passed. Okay. Thought experiment. If you had some sort of of tornado cash, smart contract, OFAC, sanctioned addresses on your chain, will the transactions still go through? Ethereum is really the only chain that's gone through that. Bitcoin really has, I mean, Bitcoin has also passed that test, but it doesn't have defy. So it's just like sending to you a Bitcoin address. It also passes that check.

But if the miners start to censor, David, that's where you get into. Oh, it's not passing the test here. Salana and Avalanche and many other networks have not gone through this, but that's something you can test. By the way, being tested is bullish. Because if you are being tested by nation states, it means you are threatening to nation states. And the tam of a nation state is under duress by that nation state. It means that Ethereum is now pushing up against something as large as the United States. And the United States is saying, I don't like this.

stop it. And Ethereum is like, well, the United States nodes will stop it, but I'm going going. Why? Because it's a protocol. Like TCPIB, does it decide? I mean, no, because it's a decentralized protocol, right? That's what your network should be. And by the way, if this ever becomes not the case, Ethereum is unable to process an OFAC sanction transaction, okay, then you'll know it's not decentralized. So these acid tests apply equally across all chains. And I think there's an acid test for how much MEV is being extracted by centralized parties in the future. We can start to measure those things on chain. MEP is a parameter for measuring the centralization of the blockchain supply chain. I think we can start to measure what's the uptime of your chain, right? Because that has to do

with censorship if a nation state can just disrupt, you know, your chain and throw it offline. Solana is approaching one year of 100% uptime in February. It will cross its one year mark. Congratulations, almost. In February, it was down for 18. hours. I'm just saying like, okay, and then, you know, last year, I mean, they're getting better. It's whatever. It's getting better. You know, we're chewing glass and stuff. It's getting better. But in an environment, Ryan, that is not antagonistic. Because Solana has not run up against as large of power of the United States as America. And so when it does run into that test, Solana is currently in a imagination environment, whereas it has not been faced with a reality environment. If something like

tornado cash got deployed on Solana, it might. invoke the ire of the nation state, and that would be a real test. But right now, we are in the joyous la-law land of no reality, only narrative. Everything's just like, you know, it's a sunny field of meadows of low transaction fees. Everything's great. Yes. And the proof will be not in the religious word of decentralization. How we define that? The proof will be, are we able to pass these assets? And by the way, it's not a given that Ethereum will be able to pass these either. It's really freaking hard to do this. It's really hard. Yeah. Like, I mean, look at the increasing of OFAC compliant blocks at the very beginning before Ethereum

took this problem extremely seriously. It was at 85 to 90% like OFAC's censorship. Now, that still means your transaction goes through, by the way, as long as you have any green, it just takes longer. But getting this down to like, what are we down to like? We're down to like 33%. So what does that mean? That means like if you process a tornado transaction, there's a 33% chance that your transactions gets. censored in the next block. And then there's a 33% chance that it gets censored in the next block after that. And so like, you know, in enough blocks and, and, you know, 33%, you know, one third chance, you're going to get that transaction verified pretty damn soon within a minute. And when it was

somewhere at like 85%, you might be waiting up to like five minutes. But it always goes through and eventually. And we like that number to be sooner rather than later. Yep. And by the way, if all of these kind of collapsed and we fail on any of our chains to pass these. these decentralization acid tests. And guess what, David? I think we've recreated tradfi. And we may as well just... There's less money in that world.

Yeah. And we may as well be very bullish on these more centralized, I guess, systems. There we go. That's a lot of takes. Anything to do with it? Yeah. I think part of this, just to frame where we are in this cycle and why this conversation is happening is because we are in the midst of a changing of the seasons.

This is a tweet that I liked from Chris Berniske, who goes, as a long-term investor, be loud in the bear and quiet in the bull. And I followed up and said, I know a Chris changing of the season's tweet when I see one. This is Chris saying, hey, like, I've been loud in the bear market. He was very loud about calling the bottom right after FTX collapsed. Congrats Chris, like great call. He's very loud about the growth of Solana over the next year. He's also that has painted numbers for him in the market. And now he's, I think he's kind of giving us a way.

wave goodbye. It's like, okay, that was the bear market. I'm going to be quiet now because it's the bull market. And so this is to me a changing of the seasons. And this is also why we have seen risk go down the market cap stack and because we are seeing people try to

price in the future. And so to conclude the show, this is the last tweet that we'll read out here, I say in bull markets, fundamentals are bearish and narratives are bullish. And why is this true? Because fundamentals ground you in reality and narratives are all about what you can imagine

the future to be hypothetical futures and the world the sky is the limit anything's possible until you're congano and you invoke smart contracts in the system they're also very fleeting right narratives move from from one place to another in like three month cycles right uh anyway i will start to quiet down i think a little bit when eth is more reasonably priced at 2.2k it is not recently price is hilariously undervalued for my perspective, at least in the bull market. Guys, this has been bankless takes. Thanks for staying with us. Got to end with this. Of course, risk and disclaimers, you know crypto is risky. You could definitely lose what you put in. Prices go up. They go down. But we are headed west. This is the frontier. It's not for everyone,

but we're glad you're with us on the bankless journey. Thanks a lot. And Ryan, we've gone on for about an hour in this episode. And I just did some little napkin math on my calculator here. in the hour that we've been recording, Ethereum has burned $440,000 and Solana has issued $450,000. And that is where we will leave this episode.