Bankless - Why is ETH Down So Bad this Cycle? | Kyle Samani

Episode Date: August 26, 2024

SOL/ETH is up 300% YoY and ETH/BTC is down 50% over the last 2 years. Why is that? Why is ETH underperforming so bad? Kyle Samani is the Managing Partner & Co-Founder at Multicoin Capital. Kyle and Multicoin have been one of the largest investors and proponents of Solana. They have been spearheading the ‘integrated blockchain’ investment theses even before the success of Solana redefined that corner of crypto. This episode is not intended to be a debate like the Anatoly vs Justin Drake one. Ryan and David are mostly going to sit back and hear Kyle’s perspective and reasoning as to why ETH has been down so bad in this crypto cycle. Enjoy! ------ 🎬 DEBRIEF | Ryan & David Unpacking the Episode: https://www.bankless.com/debrief-the-kyle-samani-interview  ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24  https://bankless.cc/spotify-premium  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    ⁠ 🦄UNISWAP | BROWSER EXTENSION https://bankless.cc/uniswap  ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum  🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle    🌐 OBOL | STAKE ON DVs, SCALE ETHEREUM https://bankless.cc/obol  🗣️TOKU | CRYPTO EMPLOYMENT  https://bankless.cc/toku  ------ ✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/53  ------ TIMESTAMPS 0:00 Intro 5:40 Ethereum in a Vacuum 10:10 ETH Vs. BTC 25:50 Broken Layer2 Interoperability 34:46 Value Capture 51:46 What Needs to Change 55:23 Decentralization 1:06:34 Solana 1:12:25 Steelmanning Ethereum 1:17:49 Closing & Disclaimers ------ RESOURCES Kyle Samani https://x.com/KyleSamani  Multicoin Capital https://multicoin.capital/   Paths To Tens Of Trillions Blog Post https://www.linkedin.com/pulse/paths-tens-trillions-kyle-samani/   ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠  

Kyle, I want to give you a simulation. All of your bags magically turn into ETH. The only thing that you hold now is ETH. That's called a nightmare, not a dream. What do you do next? Welcome to Bakelis. We're exploring the frontier of internet money and internet finance. And today on this show, we are exploring the frontier of why the ETH price action has sucked so bad for at least a year.

It's bad. Yeah. Just put some numbers on it. Seoul ETH is up 300% year over year. ETHBTC is down 50% over the last two years, losing a half of its market cap valuation versus Bitcoin in the last two years. And we went on a quest to answer the question, why? And so we were looking around, me and Ryan, we were like, all right, who's the right guest to help answer this question? And a light bulb just came to one of us, and turns out it's Kyle

Samarthe to answer this question. You know, Eid holders are in shambles when we go to Kyle to answer this question. This episode, Bankless Station is intended to be more of a list. episode, Ryan and I are here to kind of just sit back and hear Kyle's perspective and to reasoning as to why ETH is underperforming to see what there is to learn. This isn't Anatoly versus Drake. This isn't Ryan and David versus Kyle. Right now, the current valuation around the price action of Solana suggests that Kyle and the Solana investment thesis has been more correct than what earlier years of banklets would have suggested. And we want to discover why.

I said this at the end of the episode, and I think I want to say it again. I think this is probably going to be a frustrating episode for Eath Bulls in several different ways. And I think that's good medicine for you. That's why. I mean, listen to the countercase. This is why we are doing this episode. I don't think it's the end of the conversation. So I think there can be future debates, maybe with Kyle. Perhaps the community could suggest someone else to enumerate Kyle's points and have a follow-up episode on the counter side. So I don't think this is the end of the conversation. Also, an investment disclaimer from Multicoin that they need us to say. Although our guest this week is a managing partner of a registered investment advisor, nothing in this podcast should be considered an offer

of MultiCoins investment advisory services or should otherwise be confused for investment tax, legal, or financial advice. They wanted us to say that. All right, guys, let's get right to the episode with Kyle Simani. But before we do, we want to thank the sponsors that made it possible, including our recommended exchange, Cracken, go create an account. If you want to crypto trading experience backed by world-class security and award-winning support teams, then head over to Cracken, one of the longest-standing and most secure crypto platforms in the world. Cracken is on a journey to build a more accessible, inclusive, and fair financial system, making it simple and secure for everyone, everywhere to trade crypto.

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Easily onboard to the extension using the Uniswap mobile wallet to begin managing your assets across platforms and take advantage of smooth, seamless synergies with the Uniswap web app. So go and download the Uniswap extension today by clicking the link in the show notes. Just another way Uniswap is helping you swap smarter. Bankless Nation, happy to introduce you to Kyle Samani, the managing partner and co-founder of Multicoin Capital. Kyle and Multicoin have been one of the largest investors in and proponents of Solana. I've been spearheading the integrated blockchain investment thesis even before the successive Solana, completely redefined that corner of crypto. Kyle, welcome to bankless.

Hey, guys. Good to be on the show. So it's fun to be here. David, that was really nice of you to call it integrated blockchain rather than monolithic blockchain. It's very kind. I know that this is the word that Kyle prefers. Thank you. Thank you very much. I feel very welcome at home. Yeah, well done. So Kyle says that kind of set the stage here. Soul ETH is up 300% year over year. meanwhile, ETH BTC is down 50% over the last two years. Like the Bitcoin ETH ratio, I think, is on its like 700th a day down in a row. I mean, it has had some depth days, but really the trend is strongly downwards. And so talking about like Ethereum, first we'll bring in the conversation of just like

how Solana has impacted the Ethereum valuation. But I want to start perhaps with like Ethereum, just like in a vacuum. When you see the weaker price performance of ether compared to its like proximate competitors, What's like the first thing that comes to mind as to like to explain this price action that has been in a trend for like over a year now? Yeah, I think probably the most important variable is what I'm going to call gravity. Making a large asset go up is hard. And ether is today what called 300 billion, is plus or minus. There are not that many assets in the world worth 300 billion.

You know, like I don't know, like if you exclude commodities, but like just look at like equities, there's like 20, maybe 40. there's just not that many. And law of large numbers is a thing. And like most companies or things as they get to that size, it just gets harder to sustain revenue growth and profit growth at large scale. I've got a data point for you guys. So it's actually number 34. If we go to that total assets, largest assets in the world kind of web page,

it's unlike company's market cap. So it's number 34 in the world, whereas Bitcoin is number 10. So there's only 33 assets that are larger than. you know what is the theorem right now 320 billion right for god i think vsa's 400 or 500 right so it's kind of like in the same general ballpark something like that so like i think that's actually the thing that each people probably don't appreciate is just like it's just hard to grow at that size obviously there are exceptions and vedia like is the most recent high profile exception that went from like 200 billion to 2 trillion like real fast but like you're fighting gravities and

that's kind of one part of it is i'll call it the gravity is just a function of size or a law of large numbers and then the other part of it is a tweet that i put out maybe a couple weeks ago, which is like, with the higher your market cap, by definition, the higher the market's expectations of you to produce incremental performance in the future. Or very, very simply, like someone who makes $200,000 or makes $500,000 a year, you expect them to be more economically productive than someone makes $50,000 a year, like obviously. And the same is true of market caps of companies or of equities or of tokens. You should hold it to a higher standard. And so it's just hard to, I think given Ethan, call it $300 billion, which is pretty exceptional. It's number 34 in the world, as Ryan just said.

And then, you know, if you're at that scale, you want to really have a pretty clear understanding of what the risks are to support an asset of that scale. And in my opinion, like, either is a fundamentally open question about is D.A. and settlement valuable or is consensus and execution valuable. I've been very clear about my views there. We can dive into that. But like, from my vantage point, being a $300 billion asset and like not having clarity around your basic. mechanism of value capture to me is very tenuous. And I think that's really weighed on ETH for the last year or two. Just to put a pin in that first conversation about gravity, that's not anything exclusive to Ethereum. You're just saying anything of that size is going to experience difficulty passing some sort of like, you know, $300,500 billion level. Correct. No matter where like, it's not exclusive to Ethereum. It just happens to be that Ethereum is in this like valley that like all assets that will eventually have to be like go through this trial of like trying to figure out how to get to the first T level.

Yes, that I want to think about it as a valley is just like, it's harder to go from a base of 300 than from a base of 50. Mathematically, that must be true. The only, actually, weird exception to that is Bitcoin. Right. Because Bitcoin's whole thing is like, oh, store value, medium. And so weirdly, it's like the special snowflake. Again, I have my views of Bitcoin, which I think Bitcoin is nonsense.

That's a whole separate thing. But like, if you subscribe to Bitcoin's value proposition, then it is actually the only thing that is exempt from the kind of, not perfectly exempt, but I'd say at least partially exempt from the gravity. theory. All right. So, Kyle, this is why I want to dig in here. So yes, it is an exception to the rule, but I will say that this is kind of the expectation of the average ETH holder bull case, like, proponent, including probably like David myself, which is like Bitcoin is number 10 in the world, right? Ethereum's number 34. And its market cap at the time of recording is like $1.2 trillion

with a T. It reversed gravity. or entropy or whatever external forces on the world with large market cap assets, and it got to the trillions. And the Bitcoin bowl says it's actually on track to surpass the number one asset on this chart in the world, which is gold at a $16.7 trillion market cap. And so it's on that trajectory. And I think a lot of eth bulls have been, well, if Bitcoin, you know, can achieve these heights, then why not Ethereum? Because Ether is like Bitcoin, except better, except more programmable. I guess maybe this gets into your take on whether Bitcoin is actually worth $1.2 trillion. But I'll just open up that question and get you to respond. Why is this possible for Bitcoin and not Ethereum?

Yeah. So the entire value proposition of Bitcoin is that it is a special snowflake. It's, you know, sound money. It's the first one. It's simple. It doesn't do anything. Risk of breaking. is low. Proof of work is like objective, whereas proof of stake is fundamentally subjective. You can like slice this cat in a bunch of ways, but like the net of all of them is Bitcoin is special. And even like among crypto people, it is generally taken for granted that Bitcoin is special. I reject that premise. I don't think Bitcoin is special. But like I understand that I am the weird one and that everyone else in the world thinks Bitcoin is special. For now, I'm like not interested in trying to convince the world that Bitcoin is not special. I will. I will.

We'll take on that fight at some point, but that time is not today. But like, look, for now, I understand that everyone else thinks Bitcoin is special. So, like, fine, whatever. That is what it is. Like, don't hate the player, hate the game. Like, that's the game that everyone thinks. Like, cool, fine. It is what it is.

Ethereum and Solana are obviously not Bitcoin. And, like, they are not special in the way that Bitcoin is, like, very definitively. And Ethereum and Solana are explicitly discussed as, like, functional things. And we're talking about finance. Or we're going to reshape global finance and democratization of access. and like all these other funding, you know, asset issuance and tokens and all these things. And the fundamental lens through which you talk about Ethereum and Solana is like they are changing finance,

like the rails of finance and the rails of payments. And so naturally, well, if you look at like Black Rock, Visa, Stripe, there's all these obvious companies that are like relevant in the discourse of, you know, those two major parts of the economy. And so it's quite reasonable to think of Ethereum and Solana as text. or as growth assets that are competing against in weird different ways, the list of names I described as well as some others. And so I think it is fundamentally correct to think of Ethereum and Solana as equities, not in the literal sense of like the Seacorp and the CEO and the comp structure and all that stuff, but in terms of like they have a function, like they have a product,

there's needs the users have in the world, they serve those needs and like they produced cash flows as a result of that. And so I think of Ethereum and Salana as equities in that. And so I think of Ethereum and as equities in that kind of sense. Yeah, one framing that David and I have used in the past for this is just like you have the difference between capital assets which produce cash flows. So these are things like equities or maybe you have property and just like kind of rental income. And so that asset is a productive asset. It's a capital asset, right? And then you have other types of assets like commodities and these are consumption type goods. So these are generally used in the course of making another product. And then you have finally store a value.

types of assets, and these are things that are the special snowflakes of the world. So gold is a special snowflake, you might say, because it doesn't throw off any cash. It's not a capital asset. It's not really used that much when it comes to, you know, commodity types of ingredients to build other products. And it's mainly valuable because people think it's valuable. I actually want to just double-click on that really quick. I don't know how much this will come up again in the course of the rest of this episode, but I think it's worth asking because you are a bear at Bitcoin, it sounds like, at a $1.2 trillion market cap. I assume you'd be a bear of Bitcoin at like a $10 trillion market cap as well. Like, you'd be even more bearish. But like then my question to you, Kyle, is like,

isn't it enough to have the narrative and the story for an asset like Bitcoin if enough people believe that it is a special snowflake and if the crypto world believes it's a special and if Larry thinks starts believing it's special, and if the new incoming president of the United States starts believing it special and puts it on the U.S. Treasury balance sheet, like in a permanent way and starts purchasing it, if enough people think an asset is special, then it actually becomes special. And this is like a reflexive loop that, like, it's pretty hard to deny, isn't it? Like, is it this explanation that would account for the like 1.2 trillion in Bitcoin right now? And I, and I, Are you disputing that kind of, I guess, law that we've seen in asset markets to date? Do you think that there's something wrong with this? Yeah. So I want to answer your question. But to answer your question, I need to actually refute something you said as part of it,

which is talking about commodities, capital assets, and store value. Commodities are distinct. We have oil. We have wheat, whatever, all these inputs into the basic economy. We have capital assets, things that just produce yield, right? And then use that sort of value of separate and distinct. And I reject the premise to the third category should exist. because I don't believe we should have a reason to have non-productive assets.

With the one exception is, is like cash because you need a denominator to like denominate things. People need to know coffee is $2 and not four bushels of wheat or whatever. It's actually useful to have an abstract concept that is a universal unit of account, which happens to be what the government's tell us it is. And like, I'm not here to fight the government. But I reject the premise that store value should be separate. The fundamental argument that like gold is valuable or Bitcoin is valuable is the government can't print more of it. And I'm like, okay, yes, I understand.

But I think that's a silly way to think of store of value because there are plenty of assets that are naturally inflation resistant and that produce yield. The most obvious of which in just the context of the United States would be Walmart and Amazon, if the price of goods go up, like they raise the prices of the goods. And so like excluding AWS, I'm talking just like the retail business. Like it's not a perfect hedge in the sense that like they could become more competitive or less competitive against other retailers. Like sure. but like if you believe that you can buy a basket of retailers, but like there are very obvious businesses, the most obviously are retailers that are intrinsically inflation resistant

in like the scope of what they do. Again, not in exactly the same way that gold is or Bitcoin theoretically is, but in a way that is like very mechanical and tangible to how the businesses operate. And I think of like the theory that like gold or Bitcoin are inflation resistant is like strictly on a memetic basis. And like, yeah, like the gold chart like has. some more reverse correlation with inflation, certainly than Bitcoin does.

It has, Bitcoin is no effective anti-correlation with inflation over any long period of time. Gold arguably does. But I cannot tell you why that must hold true, other than, like, hopefully we all keep doing that same trade over and over again in the markets

at many trillion dollar scale, which I think will fall apart. So I reject the premise of the SOV as a standalone. Again, I understand other people, you know, believe it and like, I don't really care. You do it. It's fine.

I just, for my own balance sheet management, don't believe that to be the case. Having said all that, I own some Bitcoin, and the phone Malticoin Fund owns some Bitcoin, which I can get it separately, but I am intellectually short Bitcoin. On that premise, I'm not mechanically, financially short, but I'm intellectually short Bitcoin.

At $1.2 trillion, I will continue to be intellectually short Bitcoin at $10 trillion. Maybe it gets there. There's something a little bit like Buffett-like about that in that investment strategy, which is like very value-driven, like I think you're just like a productive asset kind of guy. Like, you understand value. and that's just kind of like the frame of reference that you invest in.

And you kind of think that the productive asset framework can actually swallow the store of value framework. Correct. Yes, absolutely. And by the way, I wrote a blog post about this in 2018. I think it was called Paths to 100 trillion or paths to tens of trillions or something. I'll find a link and I'll send it to you guys. But basically, the store of value thesis, the utility thesis or the stable coin thesis of like how to get crypto assets to that kind of scale. It'll be fun to reflect on that from. six years ago. Yeah, and I think another way to think about what you said is you still believe

that humans will want to store their value. They're just kind of spread it over those two other asset classes of like, you know, capital assets, and it'll kind of be built into the price of capital assets and also commodity assets. And we don't need a distinct separate category of all of these assets that have this one function, which is a store of value. Like, I get that, and I get that that's kind of like your world and, you know, Kyle's way of thinking about it. And it's also Warren Buffett's way of thinking about it as well. But it strikes me a little bit, like it's almost kind of like an atheist going and telling all of the religious people like there is no God. You just, you have to convince them of that, right? And so like I think that because store of value is such a memetic human consensus type of game, it's like likely that will always have it. This is maybe just how humans are hardwired. Like would you accept that idea even though you're not into it personally? I guess this plays out in your fund in that you don't intend to short the store of value religion, do you?

of Bitcoin and you can understand why it goes up. I mean, I think at some point we will short Bitcoin in size. Definitely not in the foreseeable future, but like on some long enough horizon, I expect to have a massive Bitcoin short, but that's still pretty far away. So I just take all the link to the utility hypothesis blog post. So you probably include it for the podcast when it goes out. It's six years old. So I'm sure a lot of the terminology is going to read pretty weird and stuff because it's pretty old.

But I think it actually kind of captures the core of the belief, which is that crypto is funny in that like we have this weird path dependency that happened, which is like Bitcoin came out and like it is kind of functionally incomplete. Low transaction throughput, no defy, all these other things. Like proof of work doesn't give you fast finality. So it's like very hard to build a functioning financial system on top of Bitcoin. And then the story became, you know, because of like the block size wars like digital money, hard gold doesn't change.

It's stable. Like cool. Bitcoin here, special snowflake. Yay. Meanwhile, there's an Ethereum thing happened like some number of years later. And the Ethereum's thing was like, we can make finance better because it turns out that having heterogeneous financial rails for payments of different sizes, like whether it's ACH versus credit cards versus wires, and then obviously across all the various countries, different FX, and then they have all the asset markets, bonds, stocks, equities, commodities, all of those things that I just, you know, alluded to are all managed on separate rails. Like there are separate database servers with separate APIs, and it is really fucking heterogeneous and it is really confusing. and none of them are 24-7, and obviously you have time zones.

And so, like, when you need to move between them across time zones, it, like, gets very slow and miserable and terrible. And crypto, like, naturally is global and, like, the APIs are permissionless. And you have this, like, core notion of ownership via cryptography. And it turns out that, like, when you have this cryptography thing with this permissionless consensus, and you have an arbitrary API to represent assets, whether those assets are commodities, bonds, stocks, equities, fake tokens, meme coins, whether it doesn't matter.

And it turns out that like it's as much simpler to have a universal API for all assets, right? Like it's just debt by definition is true. And so I think the story of crypto when we look back 20 years from now will be this Bitcoin thing came out and we're like, oh, digital gold, cool. But really the story will be we built better financial rails. And it will take 10 to 20 years to basically get the rest of the world to acknowledge we have better financial rails and to start moving assets over. We can see just the beginnings that happening now with their BlackRock

Biddle Fund and Hamilton Lane and PayPal and you're starting to see this in, you know, little increments here and there. And I think that that will be a story you'll see over the next 20 years because crypto rails are just objectively way, way, way, way better than the traditional rails. And so as more and more of that activity moves over to crypto. And then we're also going to have like maybe gaming crypto gaming is a thing. I don't know. I haven't really seen it yet.

But maybe D-Pen is definitely a thing. And I think we'll continue to be a thing. And I think most of that stuff is going to happen on Ethereum and Solana or maybe Apdos or Sway or whatever else, some DFI smart contract thing. And I think at some point, you know, call it five years from now, maybe 10 years from now, most people in the world will look at Ethereum, Solana, Sue, Apdos, whatever. And they'll say, wow, like, this clearly runs the world in like a very literal sense. Like all of the world's assets and finances will be represented on these systems.

And then look at Bitcoin and Bitcoin will be the same thing as today, which is funny. It's just this digital, you know, rock. It sits under your bed. It doesn't do anything. And they'll start to wonder and they'll say, you know, these things have some common thread and that like the assets don't, you know, like live in the DTCC and don't come from that world. And like they use a lot of the same terminology, cryptography, permissionless consensus. Like, hum.

Like, I don't know. Like, why is Bitcoin special? And it does nothing. And it's worth $2 trillion, $5 trillion, $10 trillion, whatever, do worth of that moment in time. And Salon or Ethereum is here. It's worth $300 billion or $50 billion or whatever. At some point, I think people will say, wait a minute, like, one of these is a super set of the other, and one of them is dumb and one of them is useful. And at some point, that I think will become the consensus view.

I don't think we're anywhere near that moment in time. But I think that will happen. And at that point, you're going to short Bitcoin at that point, Kyle. Not into. Yeah. Like, I've got to see how the discourse evolves. But I do expect to put on a large Bitcoin short at some point. This part of the conversation that we just have gone through the last like 20 minutes, actually,

wasn't an intended part of our agenda, but I think it actually kind of does frame how you think and how you model things, and I think will help illustrate the meta question that we're trying to answer here, which is like, according to this valuation framework and understanding of how crypto will evolve, why is the ETH price sucking eggs over the last, like, two years? There's like a list of reasons as to Ethereum shortcomings that I think might be relevant here, and I'm just going to run through them. Maybe it's missing some, which you can bring up, Kyle. Maybe you think some are more important than others. Pick one out of the six. that I'm about to read, and we'll start with that one first, whichever one comes to mind,

and I think is the most interesting first, and then we can pick through the rest as we so choose afterwards. Number one is Ethereum Layer 2's force application developers to have to bet on the success of that Layer 2 that they choose. Salana devs don't have to think about this at all. They just build on Solana. Number two, devs don't care about blockchings. They just care about speed and latency. Number three, the Salina Virtual Machine over the Ethereum virtual machine is just better to build on this, Salana Virtual Machine. Number four, layer twos are not Ethereum, and they do not benefit Ethereum's value capture. Number five, a lack of clarity on what Ethereum's scaling plan actually is because 4844 is insufficient by several orders of magnitude,

and then number six, broken layer two, interoperability. There's perhaps more, like I said, but which of these kind of like stands out to the most, which you want to unpack first. I think the one that's probably most directly impacting price is number six, which is the interoperability problem. And like the derivative, or the downstream impact of that is, A lot of people use Ethereum, obviously. And they hate bridging and they hate paying the fees. And they hate waiting and they're waiting for the thing to confirm to get over there. Every asset ledger is distinct.

Your finance asset ledger is distinct from Coinbase, which is distinct from Ethel 1, which is distinct from Arbitrame and Base, which is distinct from Solana. These are all just asset ledgers. These are those systems keeps track of what you own. And it turns out to be really convenient that when you're on Solana, like, everything just works. And then when we're on Ethereum, that's just not the case. Obviously, we have, like, Li-Fi and some other systems that, like, and offer that.

But like, for anyone who understands how Li-Fi or any of the other bridge aggregator things work, like you are paying slippage for the privilege of doing that. And like, that's a shitty feeling. And so I think the lived experience of most crypto users today is interoperability sucks. I don't like it. And like on salon, I don't have to deal with it. And I think that's probably the root cause of what's caused a lot of people to rotate their each position into their sole position.

Is there lived experience using both? systems. So Anith Bull might respond to that and say, yeah, but Kyle, Ethereum's going to fix that. In fact, there's a roadmap to fixing that. And they could name a number of different things on the roadmap. They could talk about, you know, different layer twos, creating their own, you know, super chains, some consolidation in layer twos. They could talk about shared sequencing. They could talk about based roll-ups. You know, Vitalik put out a tweet and he said, hey, we're actually pretty close. All we need is kind of the adoption of a few EIP-type standards to just make the wallet experience smooth and for this to feel like the same Ethereum chain? How do you respond to that? Do you think

Ethereum will, yeah, this is a problem right now. And I think most Heath Bulls would concede, but it won't be a problem in the future. Yeah, a few comments there. One, I don't think there is a solution to this problem because Polygon and optimism and Starkware and Arbishop and all these guys, they're all building their own little like interop standards within their own ecosystems, which is obviously true. But there is none that I, I understand works across all of them. Yeah, none that I'm aware of. And like, even if like Vitalik proposes one, which by the way, I'm not actually sure

it's possible given like how assets are short in the underlying bridge contracts between ZK Singh and Starkware and Optimism and Arbitrim, I'm not sure it's like possible to like get to a point where interot between all of them feels like Solana. I could be wrong there, but like it's just extremely difficult. But even if that proposal exists, there's no guarantee that it's going to get implemented and manifest, because you need all of those guys to agree to implement it. And, like, there's no guarantee that they're going to agree. Like, this is fundamentally a standards problem.

And the problem with standards is you have to get everyone to agree to the standard. And, like, there's actually very obvious incentives why people will not agree to the same standard. So I don't take it for granted that it's even doable. Even to the extent it is doable, there's very obvious diverging economic incentives of why it won't get implemented. And then the third and actually arguably maybe the most important. is Ethereum is nine years old. They just turned nine like a few weeks ago. And that's a long time. For context, SpaceX, like, at the first rocket out in like six years, I think. Like the successful one, not that I think the first three blew up. But like the fourth one, which was successful,

was like six years, maybe six and a half years on like a total of $100 million of CapEx or maybe $80 million, like again, in that general range. Because Elon only had 180 million and he was the only money in SpaceX at that time. And, you know, Ethereum is nine years old and there's like, I don't know how many billions have gone into crypto R&D. So I think there's a fundamental general sense of impatience of just like guys like why is it taking so long like we've been here forever, you know. And then the second part of it is like it's not in production. And like I think if you're a $300 billion asset, like don't tell me, show me. And like why should I, you know, it's like that's the bar that you have to operate at when you have a $300 billion of market cap behind you. So it's no longer just five researchers running around in London like, you know, DevCon Zero kind of a thing.

You made some emphasis on the lived experience of people, and this broken L2 interoperability is like when users come to touch the chain, this is the thing that they like run into. It's in their face. It's like a choice that they are confronted with. And so it's very much like, you know, it's the part of the iceberg that's like above the surface. How important do you think that part is in like actually pricing like the ETH Bitcoin ratio, the Eth Salon ratio, the Eth dollar price when it comes to like actually being like the emotional way like users. actually engage with these chains and like the frustration that they feel when they see like slippage and bridging frictions. Like how much of that actual like in your faceness about this experience on Ethereum actually shows up in the price? I think that is the largest input is dollars that are in crypto or I should say wealth that is in crypto that is using Ethereum and is using Solana. And in some sense, 100% of capital was Ethereum and not Solana like if you go to like prior to the Solana chain launching. And like that ratio has like adjusted, generally speaking in one direction over the basically

since the launch of Solana. And the, I think very obvious reason that capital has gone from 100 zero to call it like 80-20 is like roughly the split in relative wealth is I think because of lived experience. And I think it took people a long time to come to two conclusions. One, bother to use Solana and like have enough stuff to do there, enough. FTs, enough assets, enough stuff to play around with. It's even worth getting out of bed to set up a wallet and go do it. And again, different people have different thresholds for experimentation at which they will bother to go do those things.

And then to realize, like, very definitively, one is just a better experience than the other. And then the second is to then also to look at the roadmap of Ethereum and say, well, I can see why Ethereum is all of these advantages. But I cannot understand how it's going to compete with Solana in my basic lived experience. And I think there's been a judge to general progression of different people coming to that realization at different points in time over the last call it four years. And once again for Bitcoin, it's just like different rules apply. Yes. Because I don't know if any users are like using the actual Bitcoin chain or using Bitcoin wallets. But it's just like it's not very pleasant.

But people are buying Bitcoin for other reasons. Correct. Bitcoin is a special snowflake. I don't think it is like intellectually, but like I understand why socially it is. And again, like I'm not going to fight people on that today. We can go into Bitcoin L2 thing. I think they're interesting. I think they'll do some stuff.

I don't understand how any Bitcoin L2 thing is going to compete with Solana or even Ethereum in their respective long-term states. Okay, so that was the broken L2 interoperability part of this conversation. I named five others. I can rename them if you want, but you know off the top of your head, like which one you might want to be put as the second most impactful on this whole like price laggardness. Yeah, I think the second would be, I think it was number three, which is the DA is value capture, DA and settlement as value capture versus consensus and execution.

or maybe the way you framed it was like L2's capturing value instead of L1s or the parasitic thing. I have been very public and said on many occasions L2s are parasitic to L1s. I stand by that claim. We all use software all day every day. I mean, if you're listening to this podcast, you're obviously on an iPhone or on your computer or whatever, you're using software. The lived experience of everyone who uses software all day every day is that the marginal cost of software is zero and software is free and beautiful and accessible. And that is the economic revolution of software is zero. and like we all viscerally understand that.

And then blockchains came around. Then we're like, ah, scarcity of throughput can't have marginally free software. We're going to have few markets. And like, that was like very obviously had to be economically true, especially in the earliest days when like the scalability was absolute garbage. Bitcoin is like 4 TPS or whatever and like L1 was like 7 or whatever was. And so like it had to be true given the like extreme technical inefficiencies of the V1s of these systems. today obviously we're by no means in some perfect theoretical state where like transaction costs are zero but very clearly transaction costs are going towards zero and like the whole point of L2 is oh it's cheaper than L1

it's like getting close to zero obviously I believe transaction costs I model them as zero for the purposes of valuation obviously today they are mechanically not zero on Solana or Sway or Aptos or Eith or whatever or LTs but like for the purposes of valuation the intellectually conservative approach is to model is zero because that is the history of software and the lived experience of using software every day is that the marginal cost of software is zero. So under that pretense, I don't believe execution is worth anything and I don't believe DA is worth anything. And like, yeah, look, maybe I'm like being a little hyperbolic and like the costs don't

get to zero. They're like asymptotically approaching zero. But like whatever. It's like you're close enough to zero that doesn't matter. Just model it as zero for the purposes of finances. Now if you're a market maker, you need to balance you to how much hole you're paying for gas. fine. But as a sole versus

ETH holder and the valuation model for those assets, model transaction cost is zero. It's the conservative assumption. The only other fundamental input to valuation is MV. And MVV is just a function of entropy in financial markets. And entropy will always exist in financial markets. And the

more assets you have and the more people are trading assets, the more entropy, the more MEP. That will always be true. There's obviously ways to mitigate MIV. You can direct the value capture of MEP to different places depending on system design. And there's a bunch of people working on that in both Ethereum land and Salonaland these days, but MV will always exist. And I think MV is the only value driver for L1 assets or L2 assets.

And the L2 center roadmap for Ethereum is very explicitly foregoing MV. Now you might say this base roll-up thing is going to solve the problem. I don't fully understand how base drawlips work, but I kind of think it's path-dependently unlikely to do happen because we have all these big L2 teams now. They raised all this money. They have resources. They have brand. They have assets.

They are now attracting customers. whether it's base or arbitraumer or whoever else. And like, they're not going to forego MEV back. The EF may make base roll-ups and, like, they may have some nice libraries and they may tell people, please come use my base roll-up. But like the leading teams we're building L2s today are not going to opt in because they would just destroy their own revenue. It's correct your question of like valuation.

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projects that are actively decentralizing Ethereum. This is your opportunity to secure inclusion in one of the most important projects working to scale Ethereum's foundation for future growth. Visit obel.org slash bankless to get started. That's OBO.OL.org slash bankless. I don't think anyone can really deny the cash flows that are going into like the Arbishop Treasury, the optimism collective. We talk about the revenues that Coinbase is making off base on like the weekly roll-up, like, at least once a month. And whether or not it is stealing this value away from the Ethereum layer one is, like, I think perhaps like up for debate, I think the way that like an Ethereum bull, the way that we have framed it is that we are creating like induced demand,

right? This is actually net new economic activity that has been created for these layer twos that, like, Ethereum wouldn't have been able to capture in the first place. Yet nonetheless, like, totally take the point that like it's a one-way street. And the argument that I think the Ethereum Bull would make is that like, well, we've got base, we've got Arbitrum, we've got optimism. And then soon we're going to have like all of the ZK EVMs, like the Polygon, the ZK Sync. Like eventually the whole idea of like Ethereum just turns into a blockchain for blockchains. And that creates all of this entropy.

Like look at all this entropy that's like flying around optimism, Arbitrum. Maybe they're fragmented, but nonetheless they are still growing their revenue. They are cash flow positive. and just by in proxy of just like producing this network, ETH has a value associated with it. That's kind of like the Ethereum like thesis in a nutshell, perhaps like not to perfectly articulated, but how would you like refute that or like are you against that?

Well, yeah, I mean, hey, you're not capturing the MEV. The MEV is going to all of the L2s. And that's my fundamental problem. And I believe transaction costs go to zero. In Ethereum transaction is what like 50 bytes of data, 100 bytes of data? I mean, it is truly a rounding error given what you can buy a tariff. by hard drive for.

It's very close. And yeah, you have a replication factor of like a thousand X or even 10,000 X like on the network, but like it doesn't matter. Like it's still zero.

And so I don't understand how the transaction fees support the value. It's a $300 billion asset. So like what are the fees to support that asset? And the generic answer is, oh,

eat his money. And I'm like, all right, man. I said, look, you're not telling me it's special snowflake. It's not very circular. But the problem is

is that like Bitcoin, there's enough social consensus that it is special snowflake and like it kind of is like reflexively fine. The problem with Ethereum is Ethereum phases competition and like there is Solana and there is Apdos and there is Sway and there is A and these other guys are like, look, my system

is better and like you may disagree that is better or not but the point is that there's enough other things that exist that explicitly reject the framework that ETH is a special snowflake because these systems are functionally equivalent and like I think that's the empirical proof that ETH is not a special snowflake

and I don't think anyone thinks ETH is a special snowflake. And I don't think anyone thinks ETH is a special snowflake. in the way the Bitcoin is. Okay, so yeah, you kind of like skipped right to the end of that conversation, which, like, I was going to bring up, like, Polenia has developed this thesis of, like, all the execution moves to layer twos, and then ETH becomes a unit of account that exists in all these layer twos. And even though Ethereum Layer 1 value capture isn't all that high, the unit of account,

its value is money. They would say that, like, money is, like, the biggest value that exists. But, like, we already went through 20 minutes of this first entire podcast, where we determined that you do not accept that valuation whatsoever. And so do you just fundamentally disagree with the roll-up-centric roadmap as like an architecture? Yeah, look, people can do roll-ups. There may very well be places for roll-ups, the most obvious of which may be a perp-dex. So, like, I'm not like fundamentally opposed to their existence. There may be very bespoke applications that can like intelligently leverage them. TBD, if that is the case or not, the most obvious category to me is a perp-dex. So, like, they may exist.

betting the farm on the L2Cyndra roadmap for Ethereum, and then specifically making a bunch of design decisions that forego scaling the L1 with an explicit intention of pushing activity to L2, I think it was a catastrophically bad decision. And like, look, we don't know if the EF is going to try and roll that decision back or try and like reverse course a little bit. It certainly is at least being discussed now in public review.

Who knows what decisions will end up being made? But even to the extent they, like, assume they got the fairly aggressive case of like they meaningfully try and undo that and say no no no no come back to l1 and we're going to fix all these things and whatever i kind of think this chip is sailed like all of these other teams are incentivized like if the eF is like no no guys everyone come back to l1 jkk l2 roadmap not going to happen if they say that well now all of the l2 teams are now in explicitly direct conflict with l1 in the way like right now they're like kumbaya we're friendly eat this whatever fine I've always said that's nonsense. I don't think it's true. But there's been this kumbaya thing. Like, that kumbaya is gone in that state of the world. I think what you're saying, Kyle, if I were to summarize it, it's like, and there is intellectual consistency to it, like, at least from my perspective. What you're basically saying is that the theorem layer one has outsourced all of its MEV, all of its execution to layer two.

And actually, sorry, one more important. Is that an MV? It's specifically a state. Sure. Like the source of MEV is state. And that is very, very, very important. I'm not. It's a state. directly, fungible assets. So stable coins, AVE, ETH, whatever, it's NFTs, it's LP positions, it's borrow lens. But the state of Ethereum is explicitly leaving and going to other places. It's execution state specifically. So that includes smart contracts. That includes assets, all of this. And that is the source of MEV. And it's outsource that to layer twos. And that was a bad idea, like according to your telling, because all of the money, if you value these assets as cash-flowing

assets. All of the value is made from block ordering. It's basically made from M.A.V. It's made from execution. So this entire game is about which chain can go acquire the most state to then, like, extract rent, let's say, maybe that's a negative connotation, but in the form of MEV and payback asset holders. That's what makes an asset worth value. And Theorem just woke up one day and said, hey, this cash cow, we're giving that to other chains. And you think that was a bad idea. And even if they swing the pendulum the other way, and Ethereum basically says, okay, we did the L2 thing, now we're going to bring execution back to main net. You know, we're going to enshrine some ZK, EVM, or something like that. Your point will be, well, now you've just empowered a whole bunch of different chains that actually don't want that to happen.

And they have kind of an adversarial relationship. So that's going to be a hard thing to get through. And anyway, that's not in the near term roadmap. map. And because you don't believe Ether is money and you don't believe in the notion of monetary premium for any like asset period, whether it's gold or crypto or anything else, you don't take the Ethible line that, yeah, Ethereum has traded off this temporary cash flow position in exchange for being the monetary unit in the Ethereum economy. And what's the Ethereum economy? It's all of these layer twos. And eth as an asset will have special status in those layer

too is because they have to pay settlement fees, DA fees back in ETH. And so it's kind of like a form of a tax, as it were. And it's the only kind of decentralized, neutral money in these systems. And therefore, it will elevate to the status of the asset that receives monetary premium. You think that's all hogwash because there's no such thing really is store of value or monetary premium. Am I capturing this? Yes, with one additional statement, which is money is what you buy coffee with. Like, if you ask a normal person, like what is money? like forget about getting to the intellectualization of like unit of account, meaning of exchange, short value.

They're just like, I don't know, like I go to the coffee shop and I buy coffee. In like a very basic sense, that is what people understand money as. And Eath will never be that because ETH is volatile against dollars. And like, we're talking about the world where like dollars are no longer a thing. I'm like, all right, dude, that's a different world. And you can talk about the state of the world. I'm not interested in that state of the world. I don't want to live in that state of the world.

I think in that state of the world, we have a lot of big problems. So under the pretense that at a minimum, U.S. dollars exist, ETH is not money. It is psychologically incongruent for normal people to denominate daily lifestyle expenses in an asset that is volatile against what they perceive to be the asset that they denominate their wealth in, which is dollars. This is actually further codified in terms of the contracts which have done over time that have liabilities that are in the fixed unit of account because a network effect of money is long-term contracts denominated in that asset.

And there's been a lot of discussion of like, oh, China's trying to get like oil contracts and nominated in R&B and stuff is like all under the same pretense. Daily lifestyle expenses and certainly major commodity inputs are not going to be denominated in ETH, which therefore means that it is financially incorrect to denominate your wealth in ETH,

even if you choose to say ETH is money. Like you were just ignoring the reality of everything else that's happening around you. So I actually think that these two topics that we've brought up so far, the first, the broken layer two, interoperability, which is users' lived experience. And then layer twos are not Ethereum. They don't benefit ETH value capture is kind of like more of the wealth and investment, the underbelly of the

iceberg part of the conversation. These two actually kind of pair pretty well, because it's like users and how they feel and it's investors in how they value. And when you pair these things, how much do you think this explains the whole entire story? Because there's like four other things that I also listed. But if we were to just to talk about these two, like are we talking about 80% of the story behind the lagging Eath price over the last two years? How much do you think this accounts for? Yeah, 80% of those two variables. That sounds right to me. Okay, so Kyle, I want to give you a simulation. All of your bags magically turn into Eith. The only thing that you hold now is Eith. That's called a nightmare, not a dream.

What do you do next? What do you want to see change to the Ethereum roadmap? How do you want to see the trajectory of Ethereum changed? Wait, David, in the simulation is he locked into those bags? Does he have to hold them? He's locked in. He's locked in. No selling for something. No selling. You can't sell, Kyle. Ten year vest. In that state of the world, I would ask Vitalik to reassume the role of benevolent dictator and to attempt to build an interoperability standard that figure out how to get all of the L2 guys to agree on a common introp standard.

That would be objective number one. And then the other thing I would do is I would... Actually, no, I take that back. That's incorrect. I was trying to figure out how to scale L1. I don't appreciate the mechanics of what, you know, Fatalic and EF core, how they would approach that technically.

I'm not here to prescribe the technicals to those guys because they're way more technical than me. But I would tell them, figure it out, and you'd figure it out now. And then the other thing I would do is I would talk to your customers. Mark Zeller just went on, I think, the Bell Curve podcast, like recently, like in the last week or something. I just listened to it yesterday.

And in the podcast, he said, I've never spoken to anyone who works at the Ethereum Foundation. I've never spoken to Vitalik. None of them have ever reached out to me. And he today is like the primary person stewarding AVE. And AVE is the number one application on Ethereum in terms of like sheer dollars in the system. It's like 20 billion TVL or something. It's a massive number.

And I find that totally preposterous. Like how can the core people who are supposed to be building the future of Ethereum do so without talking to their core constituents? And like, in my opinion, Avey and Uniswap, or like the top two and like you're not talking to them and I think that's insane. The Salon Foundation, there are people who are like, you know, the defy team and the depend team and the stablecoin team. And like, it's like very obvious like groups of people who like are designed to interface with all these various stakeholder groups to like take their input and figure out what you need to

build and stuff. And you see that manifests very clearly with like token extensions and other things that they've launched or like a directly like an output of those functional units out of the salon of foundation. So I would tell the EF, talk to your fucking customers and like, listen. into them and figure out what they want. I can tell you for sure if you did that in 2020, then like AVE would have been like, wait a minute,

you're going to have 10 or 20 or 50 instances of Ave, and they're going to be separate collateral pools. That's going to be really weird and messy. And if you tell you, I'll go old uniswap, they would have been like, so I'm going to have an ETHUSDC XYK curve, but I'm going to have 50 of them and not one. They would have been like, what are you talking? No, that's not good.

And like, look, maybe you would have ended up going in the L2 roadmap. I don't know, but I can promise you, just like very objectively from the perspective of those two applications, they would have been like, this is bad for the functioning of my app. No, again, you could have chose to override them or not. But like the fact that that engagement's not even happening, I think it's pretty damning. I think one of the reasons for all of this, Kyle, is this word that maybe I'd love to get your take on, which is decentralization. And I totally agree that this is a charged word. There's almost some like purity tests that occur with it. And yet it's not a, useless word because it is a term and a feature that does have some function when it comes to preserving censorship resistance or inflation resistance or some sort of corruption resistant. Those are the actual valuable features that I think fall out of a concept like decentralization.

And I think if you talk to an Ethereum bull or even the EF about the decisions that they made with respect to roll-up-centric roadmap, it would come back. to some form of this word. It's basically like, we're looking to preserve a decentralized validator set. We can't let the node requirements get too large. Execution and state, and many of these things, are a heavy task. So we're put in this position to outsource that to layer twos and have them, like, use Ethereum as a, you know, like, DA.

Like, we all know kind of how we got here. And it strikes me that when you were kind of describing the user, you know, case for blockchains earlier in the conversation when we were talking a little bit about Bitcoin, you're kind of describing this world that Ethereum promised. I think the phrase that came to mind, I was typing in David in chat, was like, Kyle very much believes in open finance, but I'm not sure that he believes in decentralized finance. And here's kind of what I mean by that. It's basically like we're talking about this world of open AI, open financial API, where all of the apps and all of kind of the atomic units could, you know, talk to one another. But I'm not sure that you were

describing a world that was, like, decentralized and had, like, property rights imbued in the way that a bitconer might describe them, like they can't be censored or snatched up by the state. I think you were describing something a bit more like NASDAQ plus all of TradFi if it had one API that was permissionless that everyone could connect into. And so I think there might be a, you know, difference in vision here. But I'll just get you to kind of respond to that line of thought. This idea of decentralization that's embedded in Ethereum and the concept of defy, real decentralized finance versus just open finance. What do you say to this? I agree with your fundamental diagnosis, which is a difference in what I actually call values. Bitcoin has a set of values.

The promise of Bitcoin, there's like a few promises of like censorship resistance and transaction inclusion and stuff. But like the defining promise of Bitcoin, is 21 million. If you were to sum up all of Bitcoin into one word, like that is it. Fix supply, 21 million. And Bitcoin definitively offers the strongest future guarantees about monetary supply in like inflation policy. If you wanted to get into like quantitative terms, you would say Bitcoin provides like nine

nines of certainty about the future supply schedule. It can't be 100% because like whether there's a bug in the system or some crazy shit happens. But like call it nine. like just like an exceptionally high amount of certainty about the supply schedule. And Bitcoin offers a stronger guarantee about future supply schedule than any asset in human history, including gold. Because we don't know how many gold units across the earth and we don't know if we're going to mine gold from asteroids. So like definitively Bitcoin offers a higher guarantee around supply schedule than anything else. And it's very clear in that promise.

Now I take contention with that because I think optimizing for nine-nines of guarantee around future supply schedule. supply schedule is just unnecessary. Like each incremental nine of certain future certainty you provide is by definition 10x less important than the prior nine because you're asymptotically approaching 100%. And like, I don't know if the correct answer is two nines or three nines or four nines. I don't really know. I don't particularly care. I think Ethereum and Solana today both offer somewhere between two and four nines of certainty about future supply schedule. And yeah, I think Ethereum to be clear, it probably offers a higher degree of certainty around future inflation. Obviously, given the burn dynamics and stuff, you don't know what the other side of it is.

but let's ignore the burn side for a second. Just talk about the inflation side. If you're an offer is probably a higher guarantee than Solana does. I agree with that statement. I think both of them are somewhere between two and four nines. And I think that's a good enough. And I think optimizing beyond that for guarantees around future supply schedule is just unnecessary.

It's the wrong optimization. You do need a base level of certainty because otherwise it's like, well, now we're just back to fiat and people are fucking randomly printing money and stuff. And that's obviously bad. So I'm going to couch all that in the context of values. Bitcoin's value is clear. Ethereum and Solana, I think, on that arc or, you know, in that range, two to four of nines. Then the next version of other values beyond supply schedule.

And it seems like the core value that drives Ethereum is decentralization of validator set. And like, if you wanted to maybe capture that in one word, you'd probably call it like solo staking or at home staking or whatever. I'm not sure that's correct, but I think that's probably a fair characterization based on my understanding of what drives. And I might add the feature that corresponds with that maybe is censorship resistance and like no. invalid kind of like state changes. Well, yeah, censorship resistant and invalid state changes are mechanically very different things. Like obviously the L2s, there's currently today single entities that are controlling all censorship for all of those, obviously.

And they may change. We'll see if they figure out the decentralized sequencer sets or whatever. But as I have today, very definitively on the L2s, like they are n-of-1. I don't want to get into that semantics. My point is that, like, it seems like Ethereum's core value prop is maximal node count, which includes at-home solo staking for, validation of the L1 chain thing. That is a value to like optimize for.

I think that if your goal is to win, I think that it's the wrong value to optimize for. These systems are financial systems at their core. From day one, and it totally was clear, the centralized NASDAQ, like we are here to build the world's best, most permissionless, accessible financial market in the world. And a byproduct that is also due payments. Because like, what is the financial market? It is like two atomic payments is like a trade.

So like payments is implicitly included in financial market for everyone in the world to access. And Solana has been very explicitly designed making decisions architecturally to try and be the world's largest global financial exchange with permissionless access and, you know, cryptographically secured asset ownership and all that stuff. And like those are two different value sets. One is like about the validator set. And that may potentially provide certain guarantees. Maybe it's their own censorship resistance. although given the L2 roadmap, that's not the case. Maybe it's around valid state transitions,

which is fundamentally rooted, I think, correctly and, you know, increase that ledger account versus like, hey, let's build the best atomic state machine for financial markets so that everything just magically works atomically in a single state. And so one's a very user-centric perspective of like functionally what do users want or we think they may want.

And one is like this more abstract notion of like CR and state transition validity. One final. comment I'd make there is, like I just said, Bitcoin offers, let's say, nine-nines of certainty around future supply schedule, which I believe is unnecessary. Argue Ethereum is optimizing for, let's say, nine-nines of guarantees around state transition validity. Right. That's kind of implicit in this frame.

This is, again, one of those things that I think is intellectually and academically, like a way to think about the world, but I think is, like, the incorrect way to think about the world. the most important actors as it pertains to the validity of the state of any chain are the centralized entities that interact with the chain. So that was primarily stable coin issuers and centralized exchanges. Because like those are the people who are taking user deposits, crediting the user account and then letting the users withdraw Fiat or anything else that's off chain. And so like those entities have a very important place in the functioning of these systems because Trad FI Fiat systems are going to exist for a while. Maybe not in 50 years. Who the fuck knows? I don't know. But like for the foreseeable

future, let's say minimum five, I mean, minimum probably 10, if not 20 years and who knows how much longer, those other systems are going to exist. And the majority of wealth in the world will be denominated in those other systems. And we have this crypto thing. And the crypto thing is growing, obviously. And like, there's a very important bridge that connects those two things. And like, the two most important stakeholder groups are stable coin issuers and C5 exchanges that very obviously provide those bridges. And like the reason Coinbase runs a node to accept your deposits and then ultimately allow you to withdraw dollars to a bank account or the reason Circle runs nodes to accept stable coins and then if you want to redeem a stable coin for the dollars, then they'll send you the dollars. Coinbase and Circle do not care how many other nodes there are. They only care about what the state of their local node says as it pertains to consensus.

And the business logic of all of those organizations is explicit in that. They have some Web2 database that keeps track of whatever. And they say, way, what does my local blockchain note tell me about the state of the Salon Network or the State of the PDRM Network or the State of the Arbiturne Network or whatever? And they use that to determine what will go in or out. And they don't care how many other nodes. Well, they care about consensus. Obviously, the state needs to be updated.

So you do care about the two-thirds threshold to get to that stake weight so that you get the consensus finality. But like once you get the consensus finality, they don't care if there's five other people or five thousand or five million other people who agree with them so long as they know they're on the tip of the chain. And those people are the bridge to do reality for all practical purposes. And so I believe that optimizing for my ability at home to know my own valid state is the incorrect variable to optimize for given the need for this bridge thing back to Tradfi. Kyle, I remember when I went to Salon of Breakpoint in Amsterdam not terribly long ago. It was my first foray into the Salana community meeting what like a Salana builder was like.

And understanding the archetypes of these different crypto tribes is like one of the more fascinating things that I think this crypto industry offers people like Bitcoiners or bitcoins, Ethereums or Ethereums. And now Salon, Salonians, Salonans are Salonans. I don't know whatever, what word that is. And like one thing I've noticed is that like Solana and the builders on Salana tend to be much more business oriented. They understand their customers.

They talk to their customers at that kind of archetype. as you've said, they do that very, very well. Whereas builders on Ethereum, like, I'll pull out, like, Rune Christensen, for example, even though, like, eventually MakerDAO fork. Like, it's been a little bit more of a cypherpunk archetype where trying to actually, like, maybe, for example, I don't think you would ever see Rye being built on Solana. Like, why would you build Rye on Solana? This super governance minimized, like, censorship-resistant, not stable, stable coin.

For those who know what Rye is. And there's, like, the cypherpunk ethos to some of the defy apps that you use. find built on Ethereum that I don't think the Salana builder would build because I think they're more interested in building a business on Solana and starting to like chop away at some of the nines away from decentralization, moving it slightly towards centralization because it allows them to move fast and break things. And that's kind of, I think, like the Solana culture with one I think you're kind of like alluding to. And even for example, when I think Rune Christensen proposed like the Maker Dow new path, the end game, part of it was spinning out.

out a brand new blockchain and kind of like leaning in towards centralization. And that was the same day like Vitalik sold all of his MKR as kind of like planting the flag of like, I don't really agree with these choices. There's an old article of Vitalik in defense of Bitcoin maximalism, which he wrote on April 1st, which he talked about like having these nine nines for security, which I think Ethereum is truly optimizing for security, is like a file of Gagriel where it's a light that will light the dark for you when all other lights go out. And so, I think maybe this is kind of like the values difference between the Salana builder that I think the Ethereum critiquer would say like you can only build Solana when times are good. But when times get

dark, you need Ethereum and you need like kind of the cypherpunk values because those extra nines of security are going to like make or break whether the network actually like operates and whether the apps on top of Ethereum actually operates. Like that was a bunch of vibes thrown at you. Like reflect on any of that as you see fit. Actually this comes back very mechanically to the rant that is one about coin-based and circle. Like, look, did Solana's validator account decrease in the wake of FTA? Like, let's talk about crisis. Like, did the valid account decrease?

I assume the answer is yes. I don't actually know, but let's just say it's yes for simplicity. Did the number of assets in market cap go down? Obviously, by a lot. TVL went down by a lot. I think stable coins issued on that. Like, a lot of things went down. A lot of soul was unstaked.

If you look in like the December period, this actually was like a huge amount of thud on Twitter, right, in December of 22, of like huge amounts of solo being unstaked so that people presumably could sell it. We internally were like, oh my God, you know, huge amounts of solar coming on stake. Is there going to be a consensus problem? Is there going to be a consensus going to fail? Is there going to be some sort of, you know, cascading failures or whatever? None ended up happening.

And so I guess my point to you is like, it's like optimizing for that. The solo staker at home, I don't think is like functionally useful. You obviously, you want there to be bug free code, obviously. You want things to like collapse and break. if there are things around like rate of unstaking that can impact consensus safety, you want to understand those. And like to declare ETH there's actually a much more rigorous framework around that than Seoul.

Sol has no framework around that. It's actually very primitive around unstaking and consensus safety. Turns out at least so far empirically, that's not that important. Maybe that changes in some future crisis. I don't know. But like we demonstrably lived through one and like it was irrelevant. And you know, like what matters is what do the C-5 just think? the correct anchor of trust in a blockchain, weirdly, is the C-Fi bridges.

And that's a very unintuitive thing to tell crypto people, because we all want to believe it's like, no, our consent. It's like, it's endogenous to like this crypto economic security of our system and the consensus and all this shit. And like in a very mechanical sense that is true, obviously, because like the network has to come to consensus, which is strictly an endogenous function of the state of the network based on a proof of stake system. But it is incomplete because what matters, this isn't to live in isolation. they live in the context of planet Earth in 2024, and the vast majority of economic activity is happening in the old rails. And the bridges from the old rails to new rules are paramounts to the functioning of the new system. And so those players are the ones that matter.

And so coming back to your whole values thing of like, well, you can optimize those values and like fine, but I just don't think that's the functionally relevant set of values to optimize for. I think there's generally a most imperilful evidence would support my side of that. Again, you can always say, well, those weird tail risks and whatever. and like, yes, you can keep getting down, going down the nines towards the asymptotic failure cases. But like there's also a certain point of like, if we're trading off functionality and we're trading off value capture and we're trading off ecosystem agility as a whole for like the fifth nine and the sixth nine and the seventh nine or whatever you're trying to guarantee, like, is that the correct

optimization? Kyle, this has been really good. And I can already read the tweets coming out of this episode. It's going to be a bunch of Heath Bulls that were super mad at David and myself for not pushing back at various times during this episode. And I actually think the purpose of this episode, and maybe, by the way, this marks the bottom of the Eith Bar Market. This is the bottom tick, okay? For you, Heath Bulls out there. Now we're doing an episode with Kyle Somani, and he's telling us what we got wrong about Ethereum. So maybe there's hope here. But I think the purpose of this episode was just to get kind of your take on it because like the markets right now, at least at this point in the cycle, are sort of showing ether being squeezed between Bitcoin and the strength of

its monetary premium type narrative and also. Snowflakeness. Yeah. Yes, the snowflakness. Although I don't think Bitcoiners like to be called snowflakes, David. So maybe we've got to revise that. No, they really don't. And then the slonicide, which is coming at with like meme coins and utility and it's easy

to use and there's no fragmentation. So this has been very helpful from that perspective. I'm going to get you to do one last thing for us, Kyle, if you're willing. And that is to steal man the opposite argument for a second here. So if you're wrong about Ethereum and the story. and the strength of its roadmap and the value of ether as an asset. How might you be wrong? What are the best arguments against yours?

Eth has privileged regulatory status that Seoul does not have. That's obviously correct. The total size of the Ethereum ecosystem is larger than Salon ecosystem. And specifically, I think size of TVL is actually not like what I think matters. What matters is human capital. and like there's clearly more raw IQ points in the Ethereum camp than there is in Salana camp just as a function of like number of people. I'm not making any comments about medians or averages.

That I don't know or even think is actually the relevant variable. But there's just like clearly way more super high IQ people in Ethereum than there are in Solana. That has been true and is still true today. I'm not sure it will be true tomorrow, but it's true today. And look, like what drives the world forward is like super smart people like doing things. Quite frankly, average people doing things does not what drives incremental progress in the world. It's like super fucking smart, aggressive, motivated people working really hard and making shit happen. That is like how innovation happens.

And Ethereum has more of those people than Solana does. So I think the human capital argument is like a legitimate one. Now I think that human capital argument faces these constraints around system design that I think are like fundamentally hindered human capital. But like the quantum of human capital is definitively still in favor of Ethereum. Do you think there's anything to the layer two? Do you think Salana's going to start adopting layer twos in any form? People will ship, well, layer two on Salana, eclipse. Well, I guess the eclipse is like bridging the ether or whatever.

But like there's people working on Solana L2s. We've obviously got a bunch of pictures for them. We've passed on all of them. Well, will they exist? Yes. Will they be used in any meaningful scale? I'm quite skeptical. But like their permissional system, so obviously they will exist.

I suspect they will find some niches. I actually think that's like reasonably likely outcome. I am quite skeptical. they will replace a meaningful amount of the total economic activity. Kyle, what's your favorite Ethereum layer two? They're all, to me, the same, which is actually, I think, like, one of the most damning things about all of them. It's like, they, like, spend all this energy trying to be different. And, like, dude, they're all, like, almost 100% the same EVM with the same apps.

So, like, they're fundable to me. Kyle, David is trying to get you to say something nice about Ethereum towards the end. So why do we end with that question? Say something nice about Ethereum, okay? At least Vitalik. Say something nice. I like the intellectual capital part. That was pretty nice.

I think the EF... These assets are not... Like, I talked about thinking about them in terms of equities in the context of valuation, which I do think is the correct way to think about them. But, like, there are very real social and political and mechanical differences between being a steward of an L1 or an L2 versus being the CEO of a company.

And I think the EF very much led the way in creating a lot of the correct norms and standards around being the steward of a system that is ostensibly credibly neutral, or this credibly neutral-ish. I think they went too far in a lot of them. But like, I mean, like the original split of the core Ethereum founders like Charles versus Vitalik was like corporate versus like non-profity kind of a thing, right? and I think that they made definitely the right decision at that fork in the road moment in time and created a lot of the norms and standards that are valid and that most L1 foundations have adopted and should adopt. And I think that was actually quite impression. Well, Kyle, thank you so much for joining us on bankless today. This has been a fun episode.

We appreciate you giving your take as an ethel bull myself. I hope this is the bottom tick. But you never know. Of course, these are opposing thesis. but thank you so much for spending some time with us today. Guys, thanks for letting me come on the show and pollute the minds of your audience. Well, got to end with, of course, our usual disclaimers. None of this has been financial advice.

Crypto is risky. You could lose what you put in, 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.