Podcast Summary
Ethereum size and gravity: Ethereum's large size and market cap make it challenging to maintain rapid growth and contribute to its weaker price performance compared to smaller competitors like Solana.
The size and gravity of Ethereum (ETH) as a large asset class can make it harder to sustain revenue and profit growth at scale, contributing to its weaker price performance compared to its competitors like Solana in the crypto market. With a market cap of around 300 billion, ETH is only the 34th largest asset in the world, and the laws of large numbers make it challenging for large assets to maintain rapid growth. This is not to say that exceptions don't exist, such as the rapid growth of companies like Visa, but the trend for Ethereum has been downwards for over a year, with ETH BTC down 50% over the last two years. The gravity of Ethereum's size is a significant factor in its underperformance, and it's important for investors to consider this when evaluating the crypto market.
Ethereum vs Bitcoin: Ethereum, as a functional part of finance and a competitor to major players, is seen as an equity, while Bitcoin, as a store value asset, is considered a special case. The belief in an asset's specialness can impact its value.
The larger the market capitalization of an asset, be it a company, equity, or token, the higher the expectations for incremental performance in the future. This is true for Ethereum, which aims to be a functional part of finance and reshape global finance, and is currently competing against other major players like Black Rock, Visa, and Stripe. Ethereum and similar projects are seen as equities because they have a function, serve user needs, and produce cash flows. However, Bitcoin, as a store value asset, is considered a special case due to its perceived uniqueness and the belief that it is a special snowflake. The belief that an asset is special, if widely held, can make it so in practice. But Kyle, a Bitcoin skeptic, argues that the value of an asset should be based on its productivity or usefulness, and rejects the idea of non-productive assets like gold or Bitcoin.
Productive assets as stores of value: Productive assets like retail businesses, such as Walmart and Amazon, can serve as inflation-resistant stores of value due to their ability to raise prices in response to inflation.
The speaker believes that while store value assets like gold and Bitcoin have their place, they are not necessary as a separate category. Instead, he suggests that productive assets like retail businesses, such as Walmart and Amazon, can serve as inflation-resistant stores of value due to their ability to raise prices in response to inflation. He also acknowledges the meme-driven nature of the belief in gold and Bitcoin as stores of value and questions the idea that they are inherently different from other assets. The speaker, who is intellectually short on Bitcoin, also believes that crypto assets will eventually be integrated into the financial system as better financial rails, making separate categories for store of value assets unnecessary. He concludes by expressing his belief that the value of crypto assets will come from their utility and functionality rather than their status as stores of value.
Blockchain interoperability: The lack of interoperability between Ethereum and other networks causes user frustration, high fees, and long confirmation times, potentially impacting Ethereum's price.
The interoperability issue between different blockchains, particularly Ethereum and other networks like Solana, is a significant factor impacting the price of Ethereum. The lack of seamless interoperability leads to user frustration, as they encounter slippage, high fees, and long confirmation times when moving assets between different ecosystems. This issue is not unique to Ethereum, as various layer 2 solutions and other networks are also building their own interoperability standards. However, achieving a universal solution is challenging due to the standards problem and the diverging economic incentives of different players in the ecosystem. The impatience of investors, given the long history and significant resources invested in Ethereum development, further adds to the pressure for tangible progress. Ultimately, the user experience and the ease of moving assets between different networks could play a significant role in determining the relative success and pricing of different blockchain networks.
Solana vs Ethereum: The shift to Solana from Ethereum is due to its superior user experience, approaching zero transaction costs, and the importance of MEV in capturing value in blockchain space.
The shift in capital from Ethereum to Solana can be attributed to the superior user experience on Solana, as well as the approaching zero transaction costs and the value capture of MEV in the blockchain space. The user experience on Solana has been found to be more appealing, leading to a higher threshold for experimentation and eventual realization of its advantages over Ethereum. Additionally, the transaction costs on Solana and other blockchains are decreasing, making the intellectual assumption of modeling them as zero for valuation purposes a conservative one. Lastly, MEV, a function of entropy in financial markets, is the only value driver for L1 and L2 assets. The L2 growth map for Ethereum explicitly focuses on capturing MEV. Despite the potential of base rollups, leading L2 teams are unlikely to opt in due to the revenue implications.
Ethereum's Role and Value: Critics argue that Ethereum's focus on layer 2s and foregoing L1 scaling has led to a loss of MEV and potential value capture, and Ethereum's value is not deserving of a monetary premium.
The Ethereum network's outsourcing of state and execution to layer 2 solutions has led to a significant loss of MEV (Maximal Extractable Value) and potential value capture for Ethereum as a network. This has raised concerns about Ethereum's future role as a special snowflake or unique asset in the face of competition from other blockchains. Critics argue that Ethereum's decision to focus on layer 2s and forego scaling the L1 was a catastrophic choice, as it has created an adversarial relationship between L1 and L2 teams. Additionally, the critic's perspective is that Ethereum's value is derived from its cash flow position and its role as the monetary unit in the Ethereum economy, which includes all layer 2s. However, the critic disagrees with this notion, believing that Ethereum's value does not warrant a monetary premium.
Ethereum challenges: Ethereum's success depends on addressing its volatility, interoperability, and stakeholder disconnect issues to deliver a functional and valuable decentralized blockchain network
Ethereum, as it currently stands, is not perceived as money by the average person due to its volatility against the US dollar. This psychological incongruence makes it difficult for people to denominate their daily expenses and wealth in Ethereum. Furthermore, the lack of interoperability between different Ethereum Layer 2 solutions and the perceived disconnect between Ethereum's core developers and its key stakeholders are significant challenges. These issues, when combined, may explain a significant portion of the price disparity between Ethereum and other assets over the past few years. If Ethereum's core developers were to prioritize addressing these challenges, they could potentially bring about a more functional and valuable Ethereum ecosystem. In short, Ethereum's success hinges on overcoming these obstacles and delivering on the promise of a decentralized, interoperable, and financially functional blockchain network.
Bitcoin vs Ethereum value sets: Bitcoin prioritizes certainty around future supply schedule while Ethereum prioritizes decentralization of validator set, representing different value propositions in crypto
While Bitcoin focuses on providing a high degree of certainty around its future supply schedule as its core value, Ethereum prioritizes decentralization of its validator set. Bitcoin offers a stronger guarantee about the future supply schedule compared to any other asset in history, but Ethereum argues that this level of guarantee is unnecessary. Instead, Ethereum aims for a decentralized network with maximal node count, focusing on censorship resistance and validator changes. Bitcoin and Ethereum represent different value sets – Bitcoin as a digital gold with a clear and unchanging value proposition, and Ethereum as a decentralized financial system with a more flexible and evolving value proposition. Centralized entities like stablecoin issuers and centralized exchanges play a crucial role in connecting the traditional financial system with the crypto world. They provide the bridge between the two systems and determine the state of their local nodes based on consensus, not the number of other nodes. Therefore, optimizing for the ability to know one's own valid state is less important than ensuring the stability and decentralization of the network. Ethereum's focus on decentralization makes it a more suitable platform for building a global financial exchange with permissionless access and cryptographically secured asset ownership.
Solana vs Ethereum: Solana's focus on business and efficiency sets it apart from Ethereum's more decentralized ethos, but Ethereum's additional layers of security and larger ecosystem may prove crucial during crises.
While both Ethereum and Solana have their unique strengths and cultures, the focus on business and efficiency in the Solana ecosystem may set it apart from Ethereum's more cypherpunk and decentralized ethos. However, during times of crisis, Ethereum's additional layers of security and decentralization may prove to be more crucial. Despite the current market trends and the perceived advantages of Solana, Ethereum's larger ecosystem and human capital may continue to drive its innovation and growth. It's essential to consider the different values and priorities of each blockchain and understand their relevance in various contexts.
Ethereum's Human Capital Advantage: Ethereum's larger community of developers and users, despite design constraints, significantly impacts its lead in the crypto industry. Foundational influence and intellectual capital contribution set it apart.
Ethereum currently has a larger community of developers and users compared to Solana. This human capital advantage, despite facing constraints in system design, is still significant. Regarding Layer 2 solutions, while they are being developed for Solana, it's uncertain if they will reach meaningful scale. Kyle, a guest on the podcast, acknowledges the intellectual capital contribution of the Ethereum Foundation in setting the norms and standards for blockchain systems. Despite some criticisms, the decision to establish Ethereum as a non-profit foundation has had a lasting impact on the crypto landscape. Overall, Ethereum's impact on the crypto industry, driven by its human capital and foundational influence, sets it apart from other platforms.