Compiled by TechFlow
Guest: Kyle Samani, Managing Partner and Co-founder of Multicoin Capital
Moderators: Ryan Sean Adams, Co-founder, Bankless; David Hoffman, Co-founder, Bankless
introduction
SOL/ETH is up 300% in the past year, while ETH/BTC is down 50% in the past two years. Why is this? Why is ETH underperforming?
Kyle Samani is the Managing Partner and Co-Founder of Multicoin Capital. Kyle and Multicoin have been one of Solana’s largest investors and supporters.
This episode isn’t about having a debate like Anatoly and Justin Drake. Ryan and David are more about listening to Kyle’s perspective and his analysis of why ETH has underperformed in this crypto cycle.
1. Independent Analysis of Ethereum
The impact of market gravity
● Kyle mentioned that Ethereum’s price drop is related to its market size. He explained that as the size of an asset increases, it becomes more difficult to maintain growth. Ethereum’s current market capitalization is approximately $300 billion, which makes it the 34th largest asset in the world. In comparison, Bitcoin’s market capitalization 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 about value capture mechanisms
Kyle further elaborated on the uncertainty of Ethereum's value capture mechanism. He believes that as a $300 billion asset, if there is no clear value capture mechanism, it will have a negative impact on its price. He pointed out that the market has doubts about Ethereum's basic mechanism, and this uncertainty has put pressure on Ethereum's performance over the past year.
David added that this “gravity” phenomenon is not unique to Ethereum, but a challenge that all large assets experience when they reach a certain scale.
The Peculiarity of Bitcoin
Kyle also mentioned that Bitcoin is a special exception in this regard because its value proposition is as a store of value and medium of exchange. Although he is personally critical of Bitcoin, he acknowledges that Bitcoin has a certain immunity in the market gravity theory. This shows that despite the many challenges facing Ethereum, Bitcoin's unique position allows it to exhibit different dynamics in the market.
2. Comparison between ETH and BTC
Bitcoin’s uniqueness and Ethereum’s functionality
Ryan brought up the differences between Bitcoin and Ethereum, stressing that Bitcoin is seen as a “special snowflake” whose value proposition lies in its status as a “sound money.”
Kyle agrees with this, noting that Bitcoin’s simplicity and low risk give it a unique position among cryptocurrencies. He believes that while he personally does not think Bitcoin is special, society generally accepts this view, so Bitcoin’s market performance is widely recognized.
Kyle further analyzed the functionality of Ethereum and Solana, believing that they are more like technology stocks or growth assets rather than simple value storage tools. He pointed out that Ethereum and Solana provide practical functions that can meet user needs and generate cash flow, which gives them different positioning in the market.
Differentiation of asset classes
Ryan discussed the differences between asset classes, distinguishing between capital assets, commodities, and store of value assets. He argued that capital assets generate cash flow, while commodities are consumer goods used to produce other products.
Kyle disagrees with the idea of classifying value storage assets separately, arguing that more attention should be paid to assets that can generate income. He mentioned that companies like Walmart and Amazon can still maintain their value in an inflationary environment.
Kyle believes that although Bitcoin and gold are considered inflation-resistant assets, many productive assets are also able to resist inflation in the long run. He questioned the value of Bitcoin, believing that its market performance does not necessarily reflect its intrinsic value.
Future trends and expectations
Kyle predicts that cryptocurrencies will play a greater role in global finance in the next 10 to 20 years as the financial system evolves. He believes that platforms such as Ethereum and Solana will become the infrastructure of the mainstream financial system, while Bitcoin may be seen as a useless digital asset. He said that eventually people will realize that the value of Bitcoin lacks practical functions and application scenarios compared to assets such as Ethereum.
Kyle said he would short Bitcoin in the short term when the time is right, but there is no clear time frame yet.
3. Layer 2 interoperability issues
Ethereum’s interoperability challenges
David raised multiple issues facing Ethereum, particularly regarding Layer 2 interoperability.
Kyle emphasized this point, pointing out that interoperability issues have a direct impact on Ethereum's price performance. He mentioned that many Ethereum users are frustrated with cross-chain operations, especially when they need to pay high fees and wait for confirmation when transferring assets. This experience makes users more inclined to use other platforms such as Solana, where operations are smoother.
The Importance of User Experience
Kyle pointed out that the actual user experience is the main factor affecting the flow of capital between Ethereum and other platforms such as Solana. He believes that as users become aware of Ethereum’s interoperability issues, they begin to move funds to Solana for a better experience. Factors such as bridging issues, slippage, and high fees that users experience on Ethereum significantly affect their emotions and decision-making.
Ethereum's solutions and future prospects
Ryan mentioned that Ethereum has plans to solve interoperability issues through different technical roadmaps, including Layer 2 integration and shared sorting. Kyle is skeptical, believing that even if standards are proposed, implementation is unlikely due to the lack of consistency and willingness to cooperate between different protocols. He believes that Ethereum has been around for nine years, but progress in interoperability is still slow, which has disappointed many users.
The impact of market sentiment
Kyle further elaborated on how user sentiment is reflected in the market. He believes that the phenomenon of capital flowing from Ethereum to Solana is precisely because users compared the experience of using the two and finally chose the better option. This change in sentiment is reflected in the price as a change in the ratio between Ethereum and other platforms.
Different rules for Bitcoin
Finally, Kyle pointed out that the situation with Bitcoin is different. Although Bitcoin's user experience is also unsatisfactory, the reasons why users buy 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 is given a special status in the market.
4. Value Capture
The value capture problem of Layer 2
Kyle raised the challenge of value capture in Ethereum Layer 2. He believes that Layer 2 is a parasite of Ethereum Layer 1, which means that they extract value from Layer 1 to some extent instead of adding value to it.
Kyle pointed out that the marginal cost of software approaches zero, while blockchain is designed to create scarcity, so the existence of Layer 2 makes Ethereum's value capture more complicated.
Transaction costs and market mechanisms
Kyle further explained that as technology develops, transaction costs are approaching zero, making Ethereum's execution and value capture no longer important. He believes that the core driving force of the market lies in MEV (miner extraction value), and Ethereum's current design transfers the capture of MEV to Layer 2, which has a negative impact on Layer 1's value capture.
Ethereum’s competitive environment
Kyle noted that Ethereum faces competition from other blockchains, such as Solana and Aptos, that may be more attractive in terms of user experience and efficiency. He believes that while Ethereum remains an important ecosystem, its special status is being challenged, especially as users and developers seek more efficient solutions.
The Ethereum as Currency Debate
Kyle emphasized that Ethereum will never be a currency used in people's daily lives because its volatility is too high compared to fiat currencies such as the US dollar. He believes that the currency that ordinary people understand is a stable asset used for daily transactions, and Ethereum does not meet this standard.
Kyle believes that although some people believe that Ethereum can gain a special status in Layer 2, it cannot be used as a real currency because it does not have a stable value.
Investor Emotions 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. If the user experience is poor, investor confidence will also be affected, and vice versa.
Future Outlook and Potential Solutions
Although Ethereum’s Layer 2 solutions are evolving, Kyle is cautious about the effectiveness of these solutions. He believes that as more Layer 2 projects come online, the complexity of the ecosystem may increase, while Ethereum’s core value capture mechanism may continue to be weakened.
5. What needs to be changed
Communication and collaboration in the Ethereum ecosystem
During the discussion, Kyle highlighted the lack of communication between the Ethereum development team and its core users. He mentioned that it was incredible to him that the developer of a top application like Aave (Mark Zeller) had never communicated with the core members of the Ethereum Foundation.
Kyle believes that the future development of Ethereum requires in-depth dialogue with the developers of these key applications to understand their needs and feedback.
Establishing interoperability standards
Kyle put forward a clear goal, hoping that Ethereum founder Vitalik will resume his role as a "benevolent dictator" and promote the establishment of an interoperability standard so that all Layer 2 projects can reach a consensus. This standard will help solve the current interoperability issues between Layer 2s, thereby improving user experience and the overall efficiency of the ecosystem.
Focus on user needs
Kyle emphasized that the development team needs to pay more attention to the needs of users. He believes that if communication with users and understanding of their ideas and needs had been started in 2020, some confusion and complexity in the current ecosystem might have been avoided. He mentioned that if users could be involved in the decision-making process, many potential problems could have been identified and solved in advance.
Combination 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 the scalability issues of Layer 1. He believes that it is the responsibility of the technical team to explore these issues rather than relying solely on external advice.
Kyle's point of view emphasizes the importance of communication and cooperation in the Ethereum ecosystem. He called on the Ethereum Foundation to communicate more with core users and developers to better understand their needs and promote the future development of Ethereum. This user-centric mindset may help Ethereum maintain its leading position in the highly competitive blockchain market.
6. Decentralization
Ryan brought up an important topic, decentralization. He believes that this word is often controversial in discussions about cryptocurrencies and even triggers a kind of "purity test." Nevertheless, decentralization is indeed a useful concept that is closely related to maintaining characteristics such as censorship resistance, inflation resistance, and resistance to corruption.
Ryan noted that Ethereum’s development decisions tend to align with decentralization goals, especially when it comes to pushing the rollup-focused roadmap.
Open Finance vs. Decentralized Finance
Ryan further explored 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 believes that the future financial world described by Kyle is more like a decentralized NASDAQ rather than a completely decentralized financial system.
The Values of Bitcoin and Ethereum
Kyle agrees with Ryan that there are fundamental differences in values between Bitcoin and Ethereum. The core value of Bitcoin lies in its fixed supply of 21 million, which provides a strong guarantee for Bitcoin's future monetary supply and inflation policy. Kyle believes that this 99% certainty of future supply is the main advantage of Bitcoin.
Ethereum’s Guaranteed Supply
In contrast, Kyle said Ethereum may offer higher guarantees in terms of future inflation, especially given its burning mechanism, but he believes that optimization beyond this level is unnecessary.
Decentralized validator set
Kyle believes that the core value of Ethereum lies in its decentralized validator set. He mentioned that maximizing the number of nodes (including family self-staking) is an important goal of Ethereum. However, he also pointed out that this optimization may not be the best choice because these systems are essentially financial systems.
The construction of financial markets
Kyle emphasized that the goal of Ethereum and Solana is to build the world's largest, permissionless financial market. He believes that although the decentralized validator set is important, in practice, many centralized entities (such as stablecoin issuers and centralized exchanges) play an important role in the functioning of these systems. These entities connect traditional finance with the cryptocurrency world by providing a bridge.
7. Solana
The Solana Community’s Business Orientation
David mentioned that he observed at the Solana conference that Solana builders tend to be more business-oriented, understand their customers and communicate with them. This is in stark contrast to Ethereum builders, who tend to be more focused on cypherpunk ideas, pursuing decentralization and censorship resistance.
David believes that Solana builders may not build a project like RAI because they are more focused on building a sustainable business, which may sometimes sacrifice decentralization for rapid development.
Differences in values
Kyle believes that David's observation is very accurate. He pointed out that there are fundamental differences in values between Bitcoin, Ethereum, and Solana. Bitcoin's core value lies in its fixed supply and censorship resistance, while Ethereum focuses more on a decentralized validator set. In contrast, Solana's builders may be more focused on building efficient financial markets rather than pursuing extreme decentralization.
Performance in crisis
Kyle mentioned that after the FTX collapse, Solana's validator count decreased, and its market capitalization and total value locked (TVL) also dropped significantly. However, he pointed out that Solana's consensus did not have problems during the crisis, which shows that in some cases, a decentralized validator set is not the only factor affecting network security. He believes that the C5 (centralized finance) bridge plays a vital role in connecting traditional finance and crypto finance.
Optimized Values
Kyle further elaborated on whether optimization for decentralization is really necessary. He believes that the pursuit of excessive decentralization may sacrifice the functionality and flexibility of the system. He questioned whether it is worth giving up the agility and value capture of the system for additional security. He believes that economic activities in the real world still mainly occur in the traditional financial system, and building an effective bridge is the key to the success of the new financial system.
Kyle and David’s discussion revealed fundamental differences in the values of Solana and Ethereum. Solana is more focused on business and functionality, while Ethereum emphasizes decentralization and censorship resistance.
Kyle emphasized that although decentralization is an important goal, in practice, it is equally important to understand the role and function of centralized entities. Ultimately, the value of optimization should take into account the overall functionality and flexibility of the system, rather than just pursuing the "extra nine 9s" of decentralization.
8. Strengthening the Argument for Ethereum
Ethereum’s Regulatory Advantages
Kyle pointed out that Ethereum’s privileged regulatory status is a major advantage over Solana. This regulatory status has given Ethereum greater 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.
The concentration of human capital
Kyle further emphasized that the Ethereum ecosystem has gathered more high-IQ talents. He believes that the key to promoting innovation is to have a group of smart, active and motivated people. Ethereum's developer community has attracted a large number of outstanding talents, which makes Ethereum more advantageous in technological innovation and ecosystem development. Although he admitted that Solana also has its own talents, overall, Ethereum has an advantage in this regard.
The driving force of innovation
Kyle emphasized that innovation is often driven by a small number of highly qualified people, and Ethereum has such a talent pool. Although Solana is also working hard to attract developers, Ethereum still has obvious advantages in the depth and breadth of innovation. This accumulation of human capital not only promotes Ethereum's technological progress, but also provides strong support for the expansion of its ecosystem.
Social and political impact of Ethereum
Kyle also mentioned that the Ethereum Foundation has played an important role in creating and maintaining a fair, transparent and decentralized system. He believes that Ethereum is at the forefront of developing norms and standards that have a positive impact on other blockchain projects. Ethereum's governance model and values set an example for the entire industry and promote the healthy development of other projects.
Overall, Kyle's views highlight Ethereum's advantages in regulation, human capital, and innovation. Although Solana has certain advantages in ease of use and business orientation, Ethereum still leads in terms of technical depth and the overall strength of the ecosystem. Ethereum's success relies not only on its technological innovation, but also on its established reputation and norms in the industry, which are key factors in driving its future development.
