Compilation | Deep Tide TechFlow
Guest: Kyle Samani, Managing Partner and Co-founder of Multicoin Capital
Hosts: Ryan Sean Adams, Co-founder of Bankless; David Hoffman, Co-founder of Bankless
Introduction
SOL/ETH has risen by 300% in the past year, while ETH/BTC has dropped by 50% in the past two years. Why is this? Why is ETH's performance so disappointing?
Kyle Samani is the Managing Partner and Co-founder of Multicoin Capital. Kyle and Multicoin have always been one of the biggest investors and supporters of Solana.
This episode is not meant to be a debate like Anatoly and Justin Drake's. Ryan and David are more about listening to Kyle's views and his analysis of the reasons for ETH's poor performance in this round of the cryptocurrency cycle.
I. Independent Analysis of Ethereum
Impact of Market Gravity
Kyle mentioned that Ethereum's price decline is related to its market size. He explained that as the asset size grows, maintaining growth becomes more difficult. Ethereum's current market value is about $300 billion, making it the 34th largest asset globally. In comparison, Bitcoin's market value ranks 10th.
Kyle pointed out that the market has higher expectations for large assets, so Ethereum needs to face greater pressure to achieve growth. In addition, Kyle also mentioned that the market's expectations for Ethereum's future performance have affected its price performance.
Uncertainty of Value Capture Mechanism
Kyle further elaborated on the uncertainty of Ethereum's value capture mechanism. He believes that as a $300 billion asset, the lack of a clear value capture mechanism would have a negative impact on its price. He pointed out that the market has doubts about Ethereum's fundamental mechanism, and this uncertainty has put pressure on Ethereum's performance in the past year.
David added that this "gravity" phenomenon is not unique to Ethereum, but rather a challenge that all large assets face when reaching a certain scale.
Uniqueness of Bitcoin
Kyle also mentioned that Bitcoin is an exception in this regard because its value proposition is as a store of value and medium of exchange. Although he personally has a critical view of Bitcoin, he acknowledges that Bitcoin has a certain exemption in the market gravity theory. This indicates that despite facing many challenges, Bitcoin's unique status in the market exhibits different dynamics compared to Ethereum.
II. Comparison between ETH and BTC
Uniqueness of Bitcoin and Functionality of Ethereum
Ryan raised the differences between Bitcoin and Ethereum, emphasizing that Bitcoin is seen as a "special snowflake" with its value proposition as a "sound money."
Kyle agreed with this point and pointed out that the simplicity and low risk of Bitcoin give it a unique position in the cryptocurrency space. He believes that although he personally does not consider Bitcoin special, society generally accepts this view, so Bitcoin's market performance is widely recognized.
Kyle further analyzed the functionality of Ethereum and Solana, stating that they are more like tech stocks or growth assets rather than simple store of value tools. He pointed out that Ethereum and Solana provide practical functions, meet user needs, and generate cash flow, giving them a different positioning in the market.
Distinction of Asset Categories
Ryan discussed the distinction of asset categories, differentiating between capital assets, commodities, and store of value assets. He believes that capital assets can generate cash flow, while commodities are used to produce other products.
Kyle objected to holding store of value assets as a separate category, believing that more attention should be paid to assets that can generate income. He mentioned that companies like Walmart and Amazon can still maintain value in an inflationary environment.
Kyle believes that although Bitcoin and gold are seen as inflation-resistant assets, in the long run, many productive assets can also resist inflation. He questioned the value of Bitcoin, believing that its market performance does not necessarily reflect its intrinsic value.
Future Trends and Expectations
Kyle predicted that as the financial system evolves, cryptocurrencies will play a greater role in global finance in the next 10 to 20 years. He believes that platforms like Ethereum and Solana will become the infrastructure of mainstream financial systems, while Bitcoin may be seen as a useless digital asset. He stated that ultimately, people will realize that Bitcoin lacks practical functionality and use cases compared to assets like Ethereum. He mentioned that he would short Bitcoin at the right time in the short term, but there is no specific timeframe at the moment.
III. Interoperability Issues of Layer2
Interoperability Challenges of Ethereum
David raised several issues that Ethereum faces, especially regarding the interoperability of Layer 2.
Kyle emphasized this point, stating that interoperability issues directly affect Ethereum's price performance. He mentioned that many Ethereum users are frustrated with cross-chain operations, especially when it comes to paying high fees and waiting for confirmations during asset transfers. This experience makes users more inclined to use other platforms like Solana, where operations are smoother.
Importance of User Experience
Kyle pointed out that the actual user experience is the main reason affecting capital flow between Ethereum and other platforms (such as Solana). He believes that as users gradually realize Ethereum's interoperability issues, they begin to transfer funds to Solana for a better user experience. Factors such as bridging issues, slippage, and high fees on Ethereum significantly affect users' emotions and decisions.
Ethereum's Solutions and Future Prospects
Ryan mentioned that Ethereum plans to address interoperability issues through different technical roadmaps, including the integration of Layer 2 and shared ordering. Kyle expressed skepticism about this, believing that even if standards are proposed, the likelihood of implementation is low due to the lack of consistency and willingness to cooperate between different protocols. He believes that despite Ethereum's existence for nine years, progress in interoperability has been slow, leaving many users disappointed.
Impact of Market Sentiment
Kyle further explained how user sentiment is reflected in the market. He believes that the phenomenon of capital flowing from Ethereum to Solana is due to users comparing the user experience of the two and ultimately choosing the better option. This change in sentiment is reflected in the price as a shift in proportion between Ethereum and other platforms.
Different Rules of Bitcoin
Finally, Kyle pointed out that the situation with Bitcoin is different. Although the user experience of Bitcoin is also unsatisfactory, the reasons for users purchasing Bitcoin are different from Ethereum and Solana. Bitcoin is seen as a special asset, and despite its poor user experience, users are still willing to hold it because it has been given a special status in the market.
IV. Value Capture
Value Capture Challenges of Layer 2
Kyle raised the challenges of value capture for Ethereum Layer 2. He believes that Layer 2 is a parasite of Ethereum Layer 1, meaning that they extract value from Layer 1 to some extent rather than adding value to it.
Kyle pointed out that the marginal cost of software tends towards zero, while blockchain is designed to create scarcity, making value capture for Ethereum more complex with the existence of Layer 2.
Transaction Costs and Market Mechanism
Kyle further explained that as technology advances, transaction costs are approaching zero, making the execution and value capture of Ethereum less important. He believes that the core driver of the market is MEV (Miner Extractable Value), and Ethereum's current design shifts the capture of MEV to Layer 2, negatively impacting the value capture of Layer 1.
Competitive Environment of Ethereum
Kyle pointed out that Ethereum faces competition from other blockchains, such as Solana and Aptos, which may be more attractive in terms of user experience and efficiency. He believes that while Ethereum is still an important ecosystem, its special status is being challenged, especially as users and developers seek more efficient solutions.
Debate on Ethereum as a Currency
Kyle emphasized that Ethereum will never become a currency used in people's daily lives because its volatility is too high compared to fiat currencies like the US dollar. He believes that the currency understood by the general public is a stable asset used for daily transactions, and Ethereum does not meet this standard.
Kyle believes that although some people think Ethereum can gain a special status in Layer 2, it cannot be used as a real currency due to its lack of stable value.
Investor Sentiment and User Experience
David mentioned that user experience and investor sentiment complement each other and may account for 80% to 90% of Ethereum's price lag phenomenon. If the user experience is poor, investor confidence is also affected, and vice versa.
Future Prospects and Potential Solutions
Although Ethereum's Layer 2 solutions are constantly evolving, Kyle is cautious about the effectiveness of these solutions. He believes that as more Layer 2 projects go live, the complexity of the ecosystem may increase, and Ethereum's core value capture mechanism may continue to be weakened.
V. Areas for Change
Communication and Collaboration in the Ethereum Ecosystem
In the discussion, Kyle emphasized the lack of communication between the Ethereum development team and its core users. He mentioned that developers of top applications like Aave (Mark Zeller) have never communicated with core members of the Ethereum Foundation, which he finds very surprising.
Kyle believes that the future development of Ethereum requires in-depth conversations with these key application developers to understand their needs and feedback.
Establishing Interoperability Standards
Kyle proposed a clear goal, hoping that Ethereum's founder Vitalik would reassume the role of a "benevolent dictator" and push for the establishment of interoperability standards to reach consensus among all Layer 2 projects. This standard will help address the current interoperability issues between Layer 2 solutions, thereby improving user experience and overall ecosystem efficiency.
Focus on User Needs
Kyle emphasized the need for development teams to pay more attention to user needs. He believes that if there had been communication with users in 2020 to understand their thoughts and needs, many of the current ecosystem's confusion and complexity could have been avoided. He mentioned that involving users in the decision-making process could help identify and address many potential issues in advance.
Integration of Technology and Users
Kyle also pointed out that although he does not have a deep technical background, he believes that the Ethereum development team should find technical solutions to address Layer 1 scalability issues. He believes that the technical team has a responsibility to explore these issues rather than relying solely on external suggestions.
Kyle's views emphasize the importance of communication and collaboration in the Ethereum ecosystem. He calls for the Ethereum Foundation to engage in more communication with core users and developers to better understand their needs and drive the future development of Ethereum. This user-centric mindset may help Ethereum maintain its leading position in the competitive blockchain market.
VI. Decentralization
Ryan raised an important topic, decentralization. He believes that this term is often controversial in cryptocurrency discussions and may even trigger some kind of "purity test." Nevertheless, decentralization is indeed a useful concept, closely related to characteristics such as resistance to censorship, inflation, and corruption.
Ryan pointed out that Ethereum's development decisions often align with the goal of decentralization, especially in pushing the rollup-focused roadmap.
Open Finance vs. Decentralized Finance
Ryan further discussed the difference between open finance and decentralized finance (DeFi). He believes that Kyle may be more inclined to support open finance rather than decentralized finance. Ryan thinks that the future financial world described by Kyle is more like a decentralized NASDAQ rather than a fully decentralized financial system.
Values of Bitcoin and Ethereum
Kyle agreed with Ryan's point, believing that there are fundamental value differences between Bitcoin and Ethereum. The core value of Bitcoin lies in its fixed supply and resistance to censorship, while Ethereum focuses more on the decentralized validator set. In contrast, the builders of Solana may be more focused on building an efficient financial market rather than pursuing extreme decentralization.
Performance in Crisis
Kyle mentioned that after the FTX crash, the number of Solana validators decreased, and market capitalization and total value locked (TVL) also decreased significantly. However, he pointed out that Solana's consensus did not have any issues during the crisis, indicating that in some cases, the decentralized validator set is not the only factor affecting network security. He believes that C5 (centralized finance) bridges play a crucial role in connecting traditional finance and the crypto world.
Optimized Values
Kyle further elaborated on whether excessive decentralization is really necessary. He believes that pursuing excessive decentralization may sacrifice the functionality and flexibility of the system. He questions whether it is worth sacrificing the agility and value capture of the system for additional security. He believes that real-world economic activities still primarily occur in traditional financial systems, and building effective bridges is crucial for the success of the new financial system.
Kyle and David's discussion revealed the fundamental differences in values between Solana and Ethereum. Solana is more focused on business and functionality, while Ethereum emphasizes decentralization and resistance to censorship.
Kyle emphasized that while decentralization is an important goal, understanding the role and function of centralized entities is equally important in practice. Ultimately, optimized values should consider the overall functionality and flexibility of the system, rather than just pursuing "nine extra 9s" of decentralization.
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VIII. Strengthening the Case for Ethereum
Regulatory Advantage of Ethereum
Kyle pointed out that Ethereum has a privileged regulatory position compared to Solana. This regulatory status gives Ethereum higher legitimacy and recognition in many countries and regions, which is crucial for attracting developers and users. In contrast, Solana's disadvantage in this regard may limit its development potential.
Aggregation of Human Capital
Kyle further emphasized that the Ethereum ecosystem has attracted more high-caliber talent. He believes that the key to driving innovation lies in having a group of intelligent, proactive, and motivated individuals. The developer community of Ethereum has attracted a large number of outstanding talents, giving Ethereum an advantage in technological innovation and ecosystem development. While he acknowledges that Solana also has its own talent, overall, Ethereum holds the advantage in this aspect.
Drive for Innovation
Kyle emphasized that innovation is often driven by a small group of high-quality talent, and Ethereum has such a concentration of talent. While Solana is also working to attract developers, Ethereum's advantage in the depth and breadth of innovation remains evident. This accumulation of human capital not only drives technological advancement for Ethereum but also provides strong support for the expansion of its ecosystem.
Social and Political Influence of Ethereum
Kyle also mentioned that the Ethereum Foundation has played an important role in creating and maintaining a fair, transparent decentralized system. He believes that Ethereum is at the forefront of setting standards and norms, which have a positive impact on other blockchain projects. The governance model and values of Ethereum set an example for the entire industry, promoting the healthy development of other projects.
In summary, Kyle's views emphasize Ethereum's advantages in regulation, human capital, and innovation. While Solana has certain advantages in usability and business orientation, Ethereum still holds a leading position in terms of technical depth and overall strength of the ecosystem. Ethereum's success relies not only on its technological innovation but also on the good reputation and standards it has established within the industry, which are key factors driving its future development.
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