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

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

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Hoffman?

  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.

• 0:08Speaker 01

  Let's call it a nightmare, not a dream.

• 0:11David Hoffman?

  What do you do next? Welcome to Bankless. 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.

• 0:25Ryan Sean Adams?

  It's bad.

• 0:26David Hoffman?

  For at least a year.

• 0:27Ryan Sean Adams?

  It's bad.

• 0:28David Hoffman?

  Yeah. Just to put some numbers on it, sole ETH is up 300% year over year. ETH BTC 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're 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 Simon to answer this question.

• 0:53Ryan Sean Adams?

  You know ETH holders are in shambles when we go to Kyle to answer this question.

• 1:00David Hoffman?

  This episode of Bankless Nation is intended to be more of a listening episode. Ryan and I are here to kind of just sit back and hear Kyle's perspective into reasoning as to why ETH is underperforming, to see what there is to learn. 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 Bankless would have suggested, and we want to discover why.

• 1:24Ryan Sean Adams?

  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 ETH bulls in several different ways. And I think that's good medicine for you.

• 1:37David Hoffman?

  That's why.

• 1:38Ryan Sean Adams?

  I mean, listen to the counter case. 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 MultiCoin's investment advisor.

• 2:10David Hoffman?

  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 Samani. But before we do, we want to thank the sponsors that made it possible, including our recommended exchange, Kraken. Go create an account. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Kraken, one of the longest-standing and most-secure crypto platforms in the world. Kraken 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. Kraken's intuitive trading tools are designed to grow with you, empowering you to make your first or your 100th trade in just a few clicks. And there's an award-winning client support

• 2:53David Hoffman?

  team available 24/7 to help you along the way, along with a whole range of educational guides, articles, and videos. With products and features like Kraken Pro and Kraken NFT Marketplace and a seamless app to bring it all together, it's really the perfect place to get your complete crypto experience. So check out the simple, secure, and powerful way for everyone to trade crypto, whether you're a complete beginner or a seasoned pro. Go to kraken.com/banklist to see what crypto can be. Not investment advice, crypto trading involves risk of loss. The Uniswap extension is here. The self-custody wallet, created by the most trusted team in DeFi, Uniswap Labs, designed to make swapping feel effortless. This extension lives in your browser's sidebar, letting you swap, sign transactions, and send or receive crypto without ever losing your place on the internet. Plus, with human-readable

• 3:37David Hoffman?

  transaction messages, you'll always know exactly what you're signing. Navigate a multi-chain world effortlessly with support for 11 chains like Ethereum Mainnet, Base, Arbitrum, and Optimism. No more chain switching or token importing. All your assets are right where you need them to be. The Uniswap extension is designed to level up your swapping experience with other Uniswap Labs products as well. 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. Arbitrum is the leading Ethereum scaling solution that is home to hundreds of decentralized applications. Arbitrum's technology allows you to interact with Ethereum at scale with low Fees and faster transactions.

• 4:21David Hoffman?

  Arbitrum has the leading DeFi ecosystem, strong infrastructure options, flourishing NFTs, and is quickly becoming the Web3 gaming hub. Explore the ecosystem at portal.arbitrum.io. Are you looking to permissionlessly launch your own Arbitrum Orbit chain? Arbitrum Orbit allows anyone to utilize Arbitrum's secure scaling technology to build your own Orbit chain, giving you access to interoperable, customizable permissions with dedicated throughput. Whether you're a developer, an enterprise, or a user, Arbitrum Orbit lets you take your project to new heights. All of these technologies leverage the security and decentralization of Ethereum. Experience Web3 development the way it was always meant to be. Secure, fast, cheap, and friction-free. Visit arbitrum.io and get your journey started in one of the largest Ethereum communities.

• 5:04David Hoffman?

  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. They've been spearheading the integrated blockchain investment thesis even before the success of Solana completely redefined that corner of crypto. Kyle, welcome to Bankless.

• 5:24Speaker 01

  Hey, guys. Good to be on the show. It's fun to be here.

• 5:27David Hoffman?

  David, that was really nice of you to call it integrated blockchain rather than monolithic blockchain. I know that this is the word that Kyle prefers.

• 5:36Speaker 01

  Thank you very much. I feel very welcome at home.

• 5:38David Hoffman?

  Yeah, well done. So Kyle, since I kind of set the stage here, Sol 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 700s 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 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 Ethereum just in a vacuum. When you see the weaker price performance of Ether compared to its proximate competitors, what's the first thing that comes to mind as to explain this price action that has been in a trend for like over a year now?

• 6:23Speaker 01

  Yeah, I think... Probably the most important variable is, is what I'm gonna call gravity. Making a large asset go up is hard.

• 6:35Speaker 01

  And Ether is today what called 300 billion ish, 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.

• 6:54Speaker 01

  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 a large scale.

• 7:05Ryan Sean Adams?

  I've got a data point for you guys. So it's actually number four. You ever go to that, like, total crypto, or sorry, number 34? You ever go to that total assets, largest assets in the world kind of webpage? It's on like companies market cap. So it's number 34 in the world, whereas Bitcoin is number 10. There's only 33 assets that are larger than, you know, what is Ethereum right now? 320 billion.

• 7:31Speaker 01

  Right. Forgot, I think Visa'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 people probably don't appreciate is just like, it's just hard to grow at that size. Obviously, there are exceptions. Nvidia, like, is the most recent high-profile exception. They 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 law of large numbers. And then the other part of it is a tweet that I put out maybe a couple of 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.

• 8:12Speaker 01

  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 have held it to a higher standard. And so it's just hard to, you know, I think, given Ether 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 ETH is a fundamentally open question about is DA and settlement valuable? Or is consensus and execution valuable?

• 8:56Speaker 01

  I've been very clear about my views there and 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.

• 9:13David Hoffman?

  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 dollar level. No matter what, 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.

• 9:39Speaker 01

  Yes, that I don't 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. 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, but 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.

• 10:10Ryan Sean Adams?

  All right. So Kyle, this is why I want to dig in here. So, um, yes, it is an exception to the rule, but I will say that that this is kind of the expectation of the average ETH holder, bull case, uh, like proponent, including probably like David and myself, which is like, um, 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.

• 10:49Ryan Sean Adams?

  And it got to the trillions and the Bitcoin Bull 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 dollar 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?

• 11:33Speaker 01

  Yeah. So, 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, there's 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. So I, for now, I'm like, not interested in

• 12:14Speaker 01

  trying to convince the world that Bitcoin is not special. I will take on that fight at some point, but that time is not today. But like, look, for now, I'm under, I understand that everyone else thinks Bitcoin is special. So like, fine, whatever. That, 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, 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 fun things, you know, asset issuance and tokens and all these things. So like, they, the fundamental lens through which you talk about Ethereum and Solana is

• 13:01Speaker 01

  Like they are changing finance, like the rails of finance and the rails of payments. And so naturally, well, if you look at like BlackRock, 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 tech stocks 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 C corp and the CEO and the comp structure and all that stuff, but in terms of like,

• 13:43Speaker 01

  they have a function, they like, they have a product, there's needs that users have in the world, they serve those needs and like, they produce cash flows as a result of that. And so I think of Ethereum and Solana as equities in that kind of sense.

• 13:57Ryan Sean Adams?

  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 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 a finally store of 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, you know, throw off any cash. It's not a capital asset. It's not really used that much when it comes to,

• 14:42Ryan Sean Adams?

  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 quickly. I don't know how much this will come up again in the course of the rest of this, 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, sorry, 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?

• 15:27Ryan Sean Adams?

  And if the crypto world believes it's a special, and if Larry Fink starts believing it's special, and if the new incoming president of the United States starts believing it's special and puts it on the US 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 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?

• 16:12Speaker 01

  To answer your question, I need to actually refute something you said as part of it, which is you're talking about commodities, capital assets, and store value. Commodities are distinct. We have oil, we have wheat, we have whatever, all the obvious inputs into the basic economy. We have capital assets, things that just produce yield, right? And then you said store value is separate and distinct. And I reject the premise that their category should exist. Because I don't believe we should have a reason to have nonproductive assets. What 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 governments tell us it is. And like, I'm not here to fight the government.

• 16:55Speaker 01

  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 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. And 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.

• 17:40Speaker 01

  But like, if you believe that, you can buy a basket of retailers. But like, there are very obvious businesses, the obvious of 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 than certainly than Bitcoin does. It has Bitcoin is no effective anti-correlation with inflation over any long period of time.

• 18:23Speaker 01

  Gold arguably does, but like, I don't, 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.

• 18:37Speaker 01

  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'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 Fund for Multicoin Fund owns some Bitcoin,

• 18:55Speaker 01

  which I can get 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.

• 19:08David Hoffman?

  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, 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 that can actually, the productive asset framework can actually swallow the store of value framework.

• 19:34Speaker 01

  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 10 Trillions or something. I'll find the link and I'll send it to you guys. But basically that's the store of value thesis, the utility thesis, or the stablecoin thesis of like how to get crypto assets to that, to that kind of scale. It'll be fun to reflect on that from six years ago.

• 20:00Ryan Sean Adams?

  Yeah, and I think another way to think about what you said is you still believe that like humans will want to store their value. They'll 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 like an, kind of like an atheist, like 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,

• 20:42Ryan Sean Adams?

  I think that because store of value is such a memetic, human consensus type of game, it's like likely that we'll always have it. This is maybe just how humans are hardwired. Like, would you accept that, that idea, even though you're not into it personally? I guess this, this plays out in your fund in that you don't, you don't intend to short the store of value religion, do you, of Bitcoin? And you can understand why it goes up?

• 21:10Speaker 01

  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, that's still pretty far away. So I just sent you all the link to the utility hypothesis blog post. Y'all should 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 DeFi, all these other things, like, proof of work doesn't give you fast finality. So it's

• 21:53Speaker 01

  like, very hard to build a functioning financial system on top of Bitcoin. And then the story became, you know, because of the like, block size wars, like, digital money, hard gold, doesn't change, it's stable, like, cool. Bitcoin here, special snowflake, yay. Meanwhile, this 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 with different FX, and then you 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,

• 22:38Speaker 01

  and it is really fucking heterogeneous and it's really confusing. And they're, 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 it 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, you just have an arbitrary API to represent assets. Whether those assets are commodities, bonds, stocks, equities, fake tokens, meme coins, whatever, it doesn't matter. And it turns out that like, it's just much simpler to have a universal API for all assets. Right? Like it's just debt by definition is true.

• 23:22Speaker 01

  And, 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 of that happening now with their BlackRock Bitdefin 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, that will be a story you'll see over the next 20 years. Because crypto rails are just objectively 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.

• 24:07Speaker 01

  I don't know. I haven't really seen it yet, but maybe. D pin is definitely a thing and I think will continue to be a thing. And I think most of that stuff is going to happen on Ethereum and Solana. Or maybe Aptos or Sui or whatever else, some DeFi 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, Sui, Aptos, 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 they'll look at Bitcoin, and Bitcoin will be the same thing it is today, which is funny. It's just this digital, you know, rock that sits under your bed, doesn't do anything. And they'll start to wonder, they'll say, you know,

• 24:52Speaker 01

  these things have some common thread in 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 it'd be worth at that moment in time. And Solana or Ethereum's 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.

• 25:37Ryan Sean Adams?

  And at that point, you're gonna short Bitcoin at that point, Kyle. Not until.

• 25:43Speaker 01

  Yeah, like, I gotta see how the discourse evolves. But I do expect to put on a large Bitcoin short at some point.

• 25:50David Hoffman?

  This part of the conversation that we just have gone through in 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 gonna run through them. Maybe it's missing some, which you can bring up, Kyle. Maybe you think some are more important than others.

• 26:26David Hoffman?

  Pick one out of the six that I'm about to read and we'll pick, we'll, um, 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 twos force application developers to have to bet on the success of that layer two that they choose. Solana devs don't have to think about this at all. They just build on Solana. Number two, devs don't care about blockchains. They just care about speed and latency. Number three, the Solana virtual machine over the Ethereum virtual machine is just better to build on this Solana 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.

• 27:10David Hoffman?

  And then number six, broken layer two interoperability. There's perhaps more, uh, like I said, but like, which of these kind of like stands out to the bunch, which you want to unpack first?

• 27:20Speaker 01

  I, I think the one that's probably most directly impacting price is number six, which is the interoperability problem. And, and this, and like the derivative, or as I said, 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. And they have to, you know, every asset ledger is distinct. Your Binance asset ledger is distinct from Coinbase, which is distinct from Ethel one, which is distinct from Arbitrum and Base, which is distinct from Solana. These are all just asset ledgers. Um, each of 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.

• 28:02Speaker 01

  And then when you're on Ethereum, that's just not the case. Uh, obviously we have like Lifi and some other systems that like try and, you know, offer that. But like, for anyone who understands how Lifi or any of these other bridge aggregator things work, like you are paying slippage for the privilege of doing that. And like, that's a shitty feeling. Um, and so I think the lived experience of most crypto users today is interoperability sucks. I don't like it and like on Solana, 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 ETH position into their Sol position? Is there lived experience using both systems?

• 28:40Ryan Sean Adams?

  So an ETH bull might respond to that and say, yeah, but Kyle, Ethereum is 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 rollups. 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, there's a problem right now and I think most ETH bulls would concede, but it won't be a problem in the future.

• 29:23Speaker 01

  Yeah, few comments there. One, I don't think there is a solution to this problem. Because Polygon and Optimism and Starkware and Arbitrum and all these guys, they're all building their own little like interop standards within their own ecosystems, uh, which is obviously true. There is none that 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 is possible, given like how assets are short in the underlying bridge contracts between ZK Sing and Starkware and Optimism and Arbitrum. I'm not sure it's like possible to like get to a point where interop between all of them feels like Solana.

• 30:09Speaker 01

  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, but you need all of those guys to agree to implement it. And like, there's no guarantee that they're going to agree.

• 30:28Speaker 01

  So like you have a fundamental, like this is fundamentally a standards problem. And it turns, 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. It just turned nine like a few weeks ago, and that's a long time. For context, SpaceX like got their 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 six, was like six years, maybe six and a half years.

• 31:12Speaker 01

  On like a total of a hundred million dollars of capex or maybe 80 million dollars of capex. Like again, in that, in that general range, because Elon only had 180 million and he was the only money in SpaceX at that time. And, and you know, Ethereum is nine years old and there's like, I don't know how many billions have gone into crypto R and D. So I, I think there's like a fundamental, general sense of impatience of just like, guys, like, why is this 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, at when you have $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.

• 31:57David Hoffman?

  You made some emphasis on the lived experience of people. And this broken L2 interoperability is like, when, 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 much, how important do you think that part is in like actually pricing? Like the ETH Bitcoin ratio, the ETH Solana 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 face-ness about, about this experience on Ethereum actually shows up in the price?

• 32:42Speaker 01

  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 obviously, 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, basically since the launch of Solana. And the, I think, very obvious reason that capital has gone from 100-0 to, call it like 80-20 is like roughly the split in relative wealth is, I think, because of lived experience.

• 33:25Speaker 01

  I think, I think it took a long thought, people a long time to come to two conclusions. One, bother to use Solana and like have enough stuff to do there, enough NFTs, enough assets, enough stuff to play around with. They're like, it's even worth getting out of bed, 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 has 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 just a general progression of different people coming to

• 34:09Speaker 01

  that realization at different points in time over the last, call it, four years.

• 34:12Ryan Sean Adams?

  And once again, for Bitcoin, it's just like different rules apply. 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.

• 34:25Speaker 01

  Correct. Bitcoin is a special snowflake. Look, 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 will do some stuff. I don't understand how any Bitcoin L2 thing is going to compete with Solana or even Ethereum in their respective like long-term states.

• 34:46David Hoffman?

  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 wanna be put as the second most impactful on this whole like price laggardness.

• 35:01Speaker 01

  Yeah, I think the second would be the, I think it was number three, which is the DA is value capture, DA incentive value capture versus consensus and execution. Or maybe the way you framed it was like L2's capturing value instead of L1's or the parasitic thing. I have been very public and said on many occasions, L2's are parasitic to L1's. 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 like, that is the economic revolution of software is marginal cost of software is zero. And like, we all viscerally understand that.

• 35:43Speaker 01

  And then blockchains came around and we're like, ah, scarcity of throughput. Can't have marginally free software. We're gonna have fee 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 four TPS or whatever and like L1 was like seven or whatever it was.

• 36:04Speaker 01

  And so like, it had to be true. Given the like extreme technical inefficiencies of the V1's of these systems. Today, obviously, we're by no means in some perfect theoretical, you know, 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 Sweet or Aptos or ETH or whatever, or L2's.

• 36:41Speaker 01

  But like, for the purposes of valuation, the intellectually conservative approach is to model them as zero.

• 36:48Speaker 01

  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.

• 36:56Speaker 01

  So I don't believe DA, 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 knowledge of balance sheet, how much oil you're paying for gas, fine, but like 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 MEV.

• 37:32Speaker 01

  And MEV 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 MEV. That will always be true. There's obviously ways to mitigate MEV. You can direct the value capture of MEV to different places depending on system design. And there's a bunch of people working on that in both Ethereum land and Solana land these days. But MEV will always exist and I think MEV is the only value driver for L1 assets or L2 assets. And the L2 centric roadmap for Ethereum is very explicitly foregoing MEV. Now you might say this base rollup thing is going to solve the problem. I don't fully understand how base rollups work, but I kind of think it's path dependently unlikely to happen.

• 38:17Speaker 01

  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 arbitrary or whoever else. And like, they're not going to forego MEV back to ETH L1.

• 38:32Speaker 01

  So like, yes, the EF may make base rollups and like they may have some nice libraries and they may tell people, please come use my base rollup. But like the leading teams were building L2s today are not going to opt in. Because they would just destroy their own revenue. So to answer your question of like valuation, like that's the core thing that matters.

• 38:51David Hoffman?

  Yeah, and I don't think anyone can really deny like the just cash flows that are going into like the Arbitrum Treasury, the Optimism Collective, like we talk about the revenues that Coinbase is making off base on like the 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.

• 39:34David Hoffman?

  And the the argument that I think the Ethereum bull would 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. Is and that creates all of this entropy, like all, look at all this entropy that's like flying around optimism, Arbitrum, maybe they're fragmented, but nonetheless, they are still growing their 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.

• 40:19David Hoffman?

  But how would you like refute that or like, are you against that?

• 40:23Speaker 01

  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. The notion of paying an 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 terabyte hard drive for. You know, it's very close to, yeah, you have a replication factor of like 1000x or even 10,000x 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, like, what are the fees to support that asset? And the generic answer is, oh, ETH is money. And I'm like, all right, man. They said, look,

• 41:06Speaker 01

  you're not telling me it's special snowflake. It's Bitcoin. And like,

• 41:09David Hoffman?

  Right.

• 41:10Speaker 01

  It's not very circular. But the problem is, is that like Bitcoin, there's enough social consensus that it is a special snowflake. And like, it kind of is, like, reflexively fine. The problem with Ethereum is Ethereum faces competition. And like, there is Solana, and there is Aptos, and there is Sui, and there is A. And these other guys are like, look, my system is better. And like, you may disagree that it's better or not. But the point is, is there's something, that there's enough other things that exist that explicitly

• 41:37Speaker 01

  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 in the way that Bitcoin is.

• 41:50David Hoffman?

  Okay, so yeah, you kind of like skipped right to the end of that conversation, which, like, I was gonna bring up, like, Polenya 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 one 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. And 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 rollup-centric roadmap as like an architecture?

• 42:28Speaker 01

  Yeah, look, people can do rollups. There may very well be places for rollups. The most obvious of which may be a perp dex. So like, I'm not like fundamentally opposed to their existence.

• 42:40Speaker 01

  There may be a, there may be very bespoke applications that can like intelligently leverage them.

• 42:48Speaker 01

  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 L2 syndic 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 was a catastrophically bad decision. And like, it's, look, we don't know if the EF is gonna try and roll that decision back or try and like reverse course a little bit. It certainly is, but it's being discussed now in public purview. 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 like say, no, no, no, no, come back to L1 and we're going to fix all these things or whatever.

• 43:32Speaker 01

  I kind of think this the ship has sailed. Like all of these other teams are incentivized. Like if, if, if the EF is like, no, no, guys, everyone come back to L1. JK, 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 a way like right now, they're like kumbaya, we're friendly, ETH is good, whatever, fine. I, I've always said that's nonsense. I don't think it's true, but like, there's been this kumbaya thing. Like that kumbaya is gone.

• 44:05Ryan Sean Adams?

  I think what you're saying, Kyle, if I were to summarize it, it's like, and, and there is intellectual consistency to it. Like, at least from my perspective, what you're basically saying is that the Ethereum layer one has outsourced all of its MEV, all of its execution to layer twos. And that was a bad idea.

• 44:23Speaker 01

  Actually, sorry, sorry. One more important, it's not just MEV. It specifically is state. Like the source of MEV is, is state and that, that, that is very directly fungible assets. So stable coins, AVE, ETH, whatever. It's NFTs, it's LP positions, it's borrow lends. But the state of Ethereum is explicitly leaving and going.

• 44:44Ryan Sean Adams?

  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 outsourced 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 MEV, it's made from execution. So this entire game is about which chain can go acquire the most state to then like, like, extract rent, let's say, maybe that's a negative connotation, but in the form of MEV and pay back asset holders. That's what makes an asset worth value. And Ethereum 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.

• 45:30Ryan Sean Adams?

  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. 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 Eth bull line that, yeah, Ethereum has traded off this temporary cash

• 46:15Ryan Sean Adams?

  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 twos 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 as store of value or monetary premium. Am I capturing this?

• 46:50Speaker 01

  Yes, with one additional statement, which is money is what you buy coffee with. Like in, if you ask a normal person, like what is money? And like, you know, forget about getting to the intellectualization of like unit of account, medium of exchange, store of value. They're just like, I don't know, like I go to the coffee shop and I buy coffee. Like in like a very basic sense, that that is what people understand money as. And ETH will never be that because ETH is volatile against dollars. And like, if we're talking about the world where like dollars are no longer a thing, I'm like, all right, dude, that's, 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.

• 47:35Speaker 01

  So under the pretense that as a minimum US dollars exist, ETH is not money. It is psychologically incongruent for normal people to denominate.

• 47:46Speaker 01

  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 are done over time that have liabilities that are in the unit of fixed unit of account. Because that those then basically 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 denominated in RMB and stuff is like all under the same pretense. Daily lifestyle expenses and showing a major commodity inputs are not going to be denominated in ETH, which therefore means that it is financially incorrect to nominate your wealth in ETH, even if you choose to say ETH is money.

• 48:31Speaker 01

  Like you were just ignoring the reality of everything else that's happening around you.

• 48:36David Hoffman?

  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 two's are not Ethereum, they don't benefit ETH value capture is kind of like more of the 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 and 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 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 ETH price over the last few years? How much do you think this accounts for?

• 49:17Speaker 01

  Yeah, 80, 90% of those two variables. That sounds right to me.

• 49:20David Hoffman?

  New projects are coming online to the mantle layer two every single week. Why is this happening? Maybe it's because mantle has been on the frontier of layer two design architecture since it first started building mantle DA powered by technology from EigenDA. Maybe it's because users are coming on to the mantle layer two to capture some of the highest yields available in DeFi and to automatically receive the points and tokens being accrued by the $3 billion mantle treasury in the mantle reward station. Maybe it's because the mantle team is one of the most helpful teams to build with, giving you grants, liquidity support and venture partners to help bootstrap your mantle application. Maybe it's all of these reasons all put together. So if you're a And you want to build on one of the best foundations in crypto. Or you're a user looking to claim some ownership on Mantle's DeFi apps? Click the link in the show notes to getting started with Mantle.

• 50:05David Hoffman?

  The Obol Collective is up and running and is maybe one of the most important collectives that you've never heard of. Obol is bringing Distributed Validators, or DVs, to the Ethereum staking stack. Distributed Validators allow multiple parties of people running multiple nodes to create a single virtual Ethereum validator. Together, this makes participating in Ethereum consensus more accessible, more affordable, and more inclusive. It is a strict improvement to the Ethereum staking tech stack. With collaboration from Lido, EtherFi, Eigenlayer, and 50 other entities and thousands of individuals, the Obol Collective is working to scale and decentralize Ethereum using DVs. And now you can get involved, introducing the Obol Contributions Program. Visit obol.org/banklist to stake on DVs either through a partner staking protocol or at home.

• 50:50David Hoffman?

  Earn access to future governance and ownership in Obol while contributing to retroactive funding for 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 obol.org/banklist to get started. That's O-B-O-L dot org slash banklist. Launching a token? Don't let complex legal and tax issues slow you down. Toku provides specialized support to optimize your launch and ensure that you, as a founder, and your team, and your investors, get the most tax-efficient outcomes. The Toku team understands the crypto space inside and out and will ensure your token launch is fully compliant while maximizing tax efficiency. Toku can connect you with the best attorneys, if you need them, to make sure that you have the best advice. And Toku can help optimize your taxes so you pay the least possible amount of taxes

• 51:35David Hoffman?

  while still maintaining legal compliance. With Toku's guidance, you can concentrate on building your company while Toku handles the logistics. Token launches don't have to be complicated. Talk to Toku today to get a free initial token valuation. Okay, so 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.

• 51:55Speaker 01

  Let's call the nightmare not a dream.

• 51:59David Hoffman?

  What do you do next? What do you want to see changed to the Ethereum roadmap? How do you want to see the trajectory of Ethereum changed?

• 52:06Ryan Sean Adams?

  Wait, David, in the simulation, is he locked into those bags? Does he have to hold them?

• 52:10David Hoffman?

  He's locked in. He's locked in, no selling.

• 52:12Ryan Sean Adams?

  For something else.

• 52:12David Hoffman?

  No, no, no selling. 10-year vest.

• 52:18Speaker 01

  In that state of the world, I would ask Vitalik to reassume the role of medieval 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 interop standard.

• 52:40Speaker 01

  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.

• 52:53Speaker 01

  I was trying to figure out how to scale L1.

• 52:56Speaker 01

  I don't appreciate the mechanics of what, you know, Vitalik 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.

• 53:09Speaker 01

  But I would tell them, figure it out, and you need to figure it out now.

• 53:14Speaker 01

  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 Ethereum Foundation. I've never spoken to Vitalik. None of them have ever reached out to me." And like, 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.

• 53:49Speaker 01

  And I find that totally preposterous, like... How can the core people who were supposed to be building the future of Ethereum? Do so without talking to their core constituents? And like, Aave is, in my opinion, Aave and Uniswap are like the top two? And like, you're not talking to them? And I think that's insane. The Solana Foundation, there are people who are like, you know, the DeFi team and the DePin 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. 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 are like a directly a fun, like an output of those functional units out of the Solana Foundation.

• 54:34Speaker 01

  So I would tell the EF, talk to your fucking customers and like, listen to them and figure out what they want. I can tell you for sure, if you did that in 2020, then like Aave would have been like, wait a minute. You're gonna have 10 or 20 or 50 instances of Aave? Are there gonna be separate collateral pools? That's gonna be really weird and messy. And if you tell, called Uniswap, they would have been like, so they're gonna have a, I'm gonna have an ETH-USDC X Y K curve, but I'm gonna 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. Now, again, you could have chose to override them or not, but like,

• 55:19Speaker 01

  the fact that that engagement's not even happening, I think is pretty damning.

• 55:23Ryan Sean Adams?

  I think one of the reasons for all of this, Kyle, is, is this word that maybe I'd love to get your take on, which is decentralization. And I, I totally agree that this is a charged word. It, there's almost some like purity tests that occur with it. And yet it's not a useless word because it is a, 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.

• 56:08Ryan Sean Adams?

  And I think if you talk to an Ethereum bull, or even the EF, about the decisions that they made with respect to rollup-centric roadmap, it would come back to some form of this word. 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, 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 use case for blockchains earlier in the conversation,

• 56:52Ryan Sean Adams?

  when we were talking a little bit about Bitcoin, you were kind of describing this world that Ethereum promised. I think the, 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 is basically like, we're talking about this world of open AI, open financial AI, like, sorry, 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 Bitcoiner might describe them. Like they can't be censored or snatched up by the state.

• 57:37Ryan Sean Adams?

  I think you were describing something a bit more like NASDAQ plus all of TradFi. If it had one API that everyone, that was permissionless, that everyone could connect into. And so I think there might be a difference in, 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 DeFi, real decentralized finance versus just open finance, what do you, what do you say to this?

• 58:10Speaker 01

  I agree with your fundamental diagnosis, which is a difference in what I'll actually call values. And Ethereum, Bitcoin has a set of values. And like, you can, like, the promise of Bitcoin, there's like a few promises of like, central to persistence and transaction inclusion and stuff. But like, the defining promise of Bitcoin is 21 million. Like, that is like, if you were to sum up all of Bitcoin into one word, like, that is it. Fixed supply, 21 million. And Bitcoin definitively offers the strongest future guarantees about monetary supply, or in like inflation policy. If you wanted to get into like quantitative terms, you would say Bitcoin provides like

• 58:55Speaker 01

  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 nine, like, just like an exceptionally high amount of certainty about the supply schedule. And Bitcoin offers a higher guarantee about, a stronger guarantee about future supply schedule than any asset in human history, including gold. Because we don't know how many gold units are in the crust of 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

• 59:38Speaker 01

  around future 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 really 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, offers probably more, well, it probably offers 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. Ethereum offers probably a higher guarantee than Solana does. I agree with that statement. I think both of them are somewhere between two and four nines.

• 1:00:25Speaker 01

  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. When a 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, four, nines. Then the expression 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, you know, at home or at home staking or whatever.

• 1:01:07Speaker 01

  I'm not sure that's correct, but I think that's probably a fair characterization based on my understanding.

• 1:01:11Ryan Sean Adams?

  And I might add that the feature that corresponds with that maybe is censorship resistance and like no invalid kind of like state changes.

• 1:01:20Speaker 01

  Well, yeah, censorship resistant and valid 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 sequence or sets or whatever. But as of today, very definitively on the L2s, like they're N of one. 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 is, if your goal is to win, I think that is the wrong value to optimize for.

• 1:02:05Speaker 01

  These systems are financial systems at their core. From day one and until it was clear, decentralized NASDAQ, like we are here to build the world's best, most permissionless, accessible financial market in the world. And a byproduct of that is also you can just do payments. Cause like, what is, what is a financial market is like two atomic payments is like a trade. So like payments is implicitly included in financial market.

• 1:02:30Speaker 01

  For everyone in the world to access. And we will make, 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, but those are two different value sets. One is like about the validator set and that may potentially provide certain guarantees. Maybe it's around central resistance, although given the L2 roadmap, that's not the case. Maybe it's around valid state transitions, which is like, is fundamentally rooted, I think, correctly in, you know, increased validator account versus like, hey, let's build the

• 1:03:11Speaker 01

  best atomic state machine for financial markets so that everything just magically works atomically in a single state. And it's like, 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, there's 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. You can argue Ethereum is optimizing for, let's say nine nines of guarantees around state transition validity. Right. That's kind of implicit in this, this frame.

• 1:03:52Speaker 01

  This is again, one of those things that I think is intellectually and academically, like a way, a way to think about the world, but I think is like the incorrect way to think about the world. What matters, 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 stablecoin 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 TradFi fiat systems are going to exist for a while.

• 1:04:37Speaker 01

  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 stablecoin issuers and C5 exchanges. They very obviously provide those bridges. And like, the reasons 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 stablecoins, and then if you want to redeem a stablecoin for the dollars, then they'll send you the dollars.

• 1:05:21Speaker 01

  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, "Wait, what does my local blockchain node tell me about the state of the Solana network, or the state of the Ethereum network, or the state of the Arbitrum 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 2/3 threshold to get to that stake weight,

• 1:06:05Speaker 01

  so that you get the consensus finality. But like, once you get the consensus finality, they don't care if there's one other, there are five other people, or 5,000, or 5 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 reality, for all practical purposes. And so I believe that optimizing for the, 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.

• 1:06:34David Hoffman?

  Hal, I remember when I went to Solana Breakpoint in Amsterdam, not terribly long ago. It was my first foray into the Solana community, meeting what like a Solana 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 are Bitcoiners, Ethereum's are Ethereum's, and now Solonians are Solonians. I don't know, I don't know whatever, what word that is.

• 1:07:03David Hoffman?

  And like, one thing I've noticed is that like Solana and the builders on Solana tend to be much more business oriented. They, they understand their customers, they talk to their customers at that kind of archetype, as you've said, they, they, they do that very, very well. Whereas builders on Ethereum, like I'll pull out like Rune Christensen, for example, even though like eventually Maker Dow will 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, there's a cypherpunk ethos to some of the DeFi apps that you find built

• 1:07:48David Hoffman?

  on Ethereum that I don't think the Solana 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 maybe to even when, for example, when I think Rune Christensen proposed like the Maker Dow new path, the end game, part of it was spinning out a brand new blockchain and kind of like leaning in towards centralization. And that was the same day like Vitalik like sold all of his MKR as kind of like planting the flag of like, I don't really agree with these choices.

• 1:08:32David Hoffman?

  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 mode is truly optimized. Optimizing for security is like a file of Gadreel 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 Solana 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.

• 1:09:16David Hoffman?

  Like that was a bunch of vibes thrown at you like how reflect on on any of that as you see fit.

• 1:09:23Speaker 01

  I mean optimizing, actually this comes back very mechanically to the rant that is one about Coinbase and Circle. Like look, that's long as validator account decrease in the wake of F T I guess. Let's talk about crisis like. The valid account decrease. I assume the answer is yes. I don't actually know, but let's just say it's the answer for simplicity.

• 1:09:41Speaker 01

  Did the number of assets in market cap go down? Obviously by a lot. T V L went down by a lot. I think stablecoins should run 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 FUD on Twitter. Right in December of 22 of like huge amounts of solar being unstaked so that people presumably could sell it. There we internally were like, oh, my God, you know, huge amounts of solar coming unstaked. Is there going to be a consensus problem? Is the consensus going to fail? Is some other catastrophe? Is there 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 optimal, like optimizing for that. The solo staker at home. I don't think is like functionally useful.

• 1:10:24Speaker 01

  You obviously you want there to be bug free code. Obviously you want 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 be clear, ETH is actually a much more rigorous framework around that than sold. The soul 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.

• 1:10:56Speaker 01

  You know, like what what matters is what do the C fiber just think? Like that. That is actually the. The correct anchor of trust. In a blockchain, weirdly, is the C5 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 privileged state system. But it is incomplete because what matters is that these systems 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.

• 1:11:40Speaker 01

  And like, the bridges from the old rails to the new rails are paramount to the functioning of the new system. And so those players are the ones that matter. And so, coming back to like your whole values thing of like, well, like, 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 empirical evidence would support my side of that. Again, you can always say, well, there's rear 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, well, 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, is that the correct optimization?

• 1:12:25Ryan Sean Adams?

  Kyle, this has been really good. And I can already read the tweets coming out of this episode. This is going to be a bunch of ETH 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, that this marks the bottom of the ETH bear market. This is the bottom tick, okay? For you ETH bulls out there, now we're doing an episode with Kyle Simon 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

• 1:13:06Ryan Sean Adams?

  ether being squeezed between Bitcoin and the strength of its monetary premium type narrative and also... Yeah, yes, the snowflake-ness. Although I don't think Bitcoiners like to be called "snowflakes" David, so maybe we gotta revise that. They really don't. Yeah, and then the Solana side, which is coming out 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 gonna get you to do one last thing for us, Kyle, if you're willing, and that is to steel man the opposite argument for a second here. So if you're wrong about Ethereum 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?

• 1:13:51Speaker 01

  ETH has privileged regulatory status that Sol does not have. That's obviously correct.

• 1:13:59Speaker 01

  The total size of the Ethereum ecosystem is larger than Solana ecosystem. And specifically, actually, I think the size of TDL 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 Solana 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.

• 1:14:43Speaker 01

  Quite frankly, average people doing things does not like, 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. Ethereum has more of those people than Solana does. But I think the human capital argument is like, a legitimate one. Now, I think the human capital argument faces these constraints around system design that I think like fundamentally hinder the human capital. But like, the quantum of human capital is definitively still in favor of Ethereum. Yeah, those are probably the two, I think they're probably the two best ones.

• 1:15:17Ryan Sean Adams?

  Do you think there's anything to the layer twos? Do you think Solana's gonna start adopting layer twos in any form?

• 1:15:22Speaker 01

  People will ship layer 2s on Solana Eclipse. Well, I guess Eclipse is like bridging the ETH 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.

• 1:15:33Speaker 01

  Will they exist? Yes.

• 1:15:36Speaker 01

  Will they be used in any meaningful scale? I'm quite skeptical, but like their permissionless system, so obviously they will exist. I suspect they will find, I suspect they will find some niches. I actually think that's like reasonably likely outcome.

• 1:15:51Speaker 01

  I am quite skeptical. They will replace a meaningful amount of the total economic activity.

• 1:15:58David Hoffman?

  Kyle, what's your favorite Ethereum layer 2?

• 1:16:03Speaker 01

  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, 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. And like the, so like their functionally, they're fungible, they're fungible to me.

• 1:16:24David Hoffman?

  Kyle, David is trying to get you to say something nice about Ethereum towards the end. So, so why do we end with that question? Say something nice about Ethereum, okay? At least Vitalik. Say something nice.

• 1:16:38David Hoffman?

  I like the intellectual capital part. That was pretty nice.

• 1:16:41Speaker 01

  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 at least 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,

• 1:17:24Speaker 01

  like Charles versus Vitalik, was like corporate versus like nonprofit-y kind of a thing, right? And I think that they made the, definitely the right decision at that fork in the road moment in time and created a lot of the, the norms and standards that are. Valid and that most L1 foundations have adopted and should adopt.

• 1:17:46Speaker 01

  And I think that was actually quite prescient.

• 1:17:49Ryan Sean Adams?

  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 ethball 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.

• 1:18:04Speaker 01

  Guys, thanks for letting me come on the show and pollute the minds of all your audience.

• 1:18:09Ryan Sean Adams?

  Well, we've 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.