Dialogue with Multicoin Co-founder: Why has ETH/BTC fallen 50% over the past two years?

Compile | Shenzhen TechFlow

Guest: Kyle Samani, Managing Partner and Co-founder of Multicoin Capital

Host: Ryan Sean Adams, Co-founder of Bankless; David Hoffman, Co-founder of Bankless

Introduction

SOL/ETH has pumped 300% in the past year, while ETH/BTC has dropped 50% in the past two years. Why is that? Why has ETH’s performance been so disappointing?

Kyle Samani is the managing partner and co-founder of Multicoin Capital. Kyle and Multicoin have always been one of Solana’s biggest investors and supporters.

This episode is not intended to have a debate like Anatoly and Justin Drake. Ryan and David are more about listening to Kyle’s point of view and his analysis of the reasons for ETH’s poor performance in this round of the cryptocurrency cycle.

I. Independent Analysis of Ethereum

The influence of market gravity

● Kyle mentioned that the price drop of Ethereum is related to its market capitalization. He explained that it becomes more difficult to maintain the rise as the asset scale increases. The current market capitalization of Ethereum is approximately $300 billion, making 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 rise. 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 the value capture mechanism of Ethereum (ETH). He believes that as a $300 billion asset, the lack of a clear value capture mechanism will have a negative impact on its price. He pointed out that there are questions in the market about the fundamental mechanism of Ethereum, 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 a challenge that all large assets will experience when they reach a certain scale.

The uniqueness of BTC

Kyle also mentioned that BTC is a special exception at this point, as its value proposition is as a store of value and Medium of Exchange. Despite his personal criticism of BTC, he acknowledges BTC’s exemption in the market gravity theory. This indicates that despite facing many challenges, ETH, Bitcoin’s unique position, exhibits different dynamics in the market.

2. Comparison between ETH and BTC

The uniqueness of BTC and the functionality of ETH

Ryan proposed the difference between BTC and ETH, emphasizing that BTC is considered a “special snowflake,” and its value proposition lies in its status as a “sound money”.

Kyle agrees and points out that the simplicity and low risk of BTC give it a unique position in the cryptocurrency space. He believes that while he personally does not see BTC as special, the general acceptance of this view in society leads to widespread recognition of BTC’s market performance.

Kyle further analyzed the functionality of Ethereum and Solana, considering them more like technology stocks or growth assets rather than mere store of value tools. He pointed out that Ethereum and Solana provide practical functions that can meet users’ needs and generate cash flow, which gives them a different positioning in the market.

Differentiation of Asset Categories

Ryan discussed the differences in asset classes, distinguishing between capital assets, commodities, and store of value assets. He believes that capital assets can generate cash flow, while commodities are goods used to produce other products.

Kyle disagrees with holding store of value assets separately and believes that assets that can generate income should be more followed. He mentioned that companies like Walmart and Amazon can still maintain their value in an inflationary environment.

Kyle believes that, although BTC and gold are considered as assets resistant to inflation, in the long run, many productive assets can also resist Inflation. He questions the value of BTC, believing that its market performance does not necessarily reflect its Intrinsic Value.

Trends and Expectations for the Future

Kyle predicts that as the financial system evolves, Cryptocurrency 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 BTC may be seen as a useless digital asset. He states that eventually people will realize that BTC lacks practical functionality and use cases compared to assets like Ethereum.

Kyle said he would short Bitcoin in the short term at the right time, but there is no specific timeframe at the moment.

Three, Interoperability Issues of Layer2

Interoperability Challenges of Ethereum

David raised several issues facing the Ethereum network, particularly regarding the interoperability of Layer 2.

Kyle emphasized that interoperability issues directly affect the price performance of Ethereum. He mentioned that many Ethereum users are frustrated with Cross-Chain Interaction 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 reason affecting the capital flow between the ETH network and other platforms (such as Solana). He believes that as users gradually become aware of the interoperability issues of the ETH network, they begin to transfer funds to Solana for a better user experience. Factors such as bridge issues, slippage, and high fees encountered by users on the ETH network significantly affect their emotions and decisions.

Ethereum’s Solutions and Future Prospects

Ryan mentioned that Ethereum has plans to solve interoperability issues through different technical roadmaps, including the integration of Layer 2 and shared ordering. Kyle expressed doubts about this, believing that even if standards were proposed, the likelihood of implementation is low due to lack of consistency and willingness to cooperate between different protocols. He believes that Ethereum has existed 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 users’ emotions are reflected in the market. He believes that the phenomenon of capital flowing from Ethereum to Solana is due to users comparing the usage experience of the two and ultimately choosing the better option. This change in sentiment is reflected in the price ratio between Ethereum and other platforms.

Different Rules of BTC

Finally, Kyle pointed out that the situation of BTC is different. Although the user experience of BTC is also unsatisfactory, the reason why users buy BTC is different from Ethereum and Solana. BTC is seen as a special asset, and although its user experience is poor, users are still willing to hold it because it is given a special status in the market.

4. Value Capture

Value Capture Issues of Layer 2

Kyle raised the challenge of value capture in Layer 2 of Ethereum. He believes that Layer 2 is a parasite of Ethereum Layer 1, which means 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 toward zero, while the design of blockchain is to create scarcity, so the existence of Layer 2 makes the value capture of Ethereum more complex.

Transaction Cost and Market Mechanism

Kyle further explained that with the development of technology, Transaction Cost is approaching zero, making the execution and value capture of Ethereum no longer important. He believes that the core driver of the market is MEV (Miner Extractable Value), and Ethereum’s current design transfers the capture of MEV to Layer 2, which has a negative impact on the value capture of Layer 1.

Competition Environment of Ethereum

Kyle pointed out that Ethereum is facing competition from other blockchains such as Solana and Aptos, which may be more attractive in terms of user experience and efficiency. He believes that although Ethereum is still an important ecosystem, its special status is being challenged, especially as users and developers seek more efficient solutions.

The debate over Ethereum as a currency

Kyle emphasized that Ethereum (ETH) will never become 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 understood by the general public is a stable asset used for daily transactions, which Ethereum (ETH) does not meet.

Kyle believes that, although some people think that Ethereum can gain special status in Layer 2, due to its lack of stable value, it cannot be used as a real currency.

Investor Emotions and User Experience

David mentioned that the user experience and investor sentiment are complementary, potentially accounting for 80% to 90% of the lagging phenomenon in the price of Ethereum. If the user experience is poor, investor confidence will also be affected, and vice versa.

Future Outlook and Potential Solutions

Despite the continuous development of Ethereum’s Layer 2 solutions, Kyle is cautious about the effectiveness of these solutions. He believes that with more Layer 2 projects going live, the complexity of the ecosystem may increase, and Ethereum’s core value capture mechanism may continue to be weakened.

5. Areas that need to be changed

Communication and Collaboration in the Ethereum Ecosystem

In the discussion, Kyle emphasized the lack of communication between the ETH 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 ETH Foundation, which he finds very unbelievable.

Kyle believes that the future development of Ethereum requires in-depth conversations with developers of these key applications to understand their needs and feedback.

Establish Interoperability Standards

Kyle has put forward a clear goal that he hopes Vitalik, the founder of Ethereum, will re-assume the role of a “benevolent dictator” and promote the establishment of an interoperability standard to enable all Layer 2 projects to achieve Consensus. This standard will help solve the interoperability issues between current Layer 2 solutions, thereby improving user experience and the overall efficiency of the ecosystem.

follow user demand

Kyle emphasized that the development team needs to follow the users’ needs more. He believes that if they had started communicating with users and understanding their thoughts and requirements in 2020, it might have avoided some of the confusion and complexity in the current ecosystem. He mentioned that if users can participate in the decision-making process, many potential issues can be identified and resolved in advance.

The combination of technology and users

Kyle also pointed out that although he does not have a strong technical background, he believes that the Ethereum development team should find technical solutions to solve the Layer 1 scalability issues. 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 emphasizes the importance of communication and collaboration within the ETH ecosystem. He calls for more communication between the ETH Foundation and core users and developers to better understand their needs and drive the future development of ETH. This user-centric mindset may help ETH maintain a leading position in the competitive blockchain market.

Six, Decentralization

Ryan raised an important topic, that is Decentralization. He believes that this term often has controversiality in the discussion of Cryptocurrency, and may even trigger some kind of “purity test”. Nevertheless, Decentralization is indeed a useful concept, closely related to maintaining censorship resistance, resistance to inflation, and resistance to corruption.

Ryan pointed out that the development decisions of Ethereum often align with the goal of Decentralization, especially in promoting the rollup key roadmap.

Open Finance vs. Decentralization Finance

Ryan further explores the difference between open finance and Decentralized Finance (DeFi). He believes that Kyle may be more inclined to support open finance rather than DeFi. Ryan envisions the future financial world described by Kyle as more like a decentralized NASDAQ, rather than a completely decentralized financial system.

The Values of BTC and Ethereum

Kyle agrees with Ryan’s view that there are fundamental differences in values between BTC and Ethereum. The core value of BTC lies in its fixed supply of 21 million, which provides a strong guarantee for future currency supply and inflation policies. Kyle believes that this 99% certainty about future supply is the main advantage of BTC.

Ethereum’s Supply Assurance

In contrast, Kyle said that Ethereum may provide a higher guarantee for future inflation, especially considering its burning mechanism, but he believes that optimizations beyond this level are unnecessary.

Decentralization的validators集

Kyle believes that the core value of Ethereum lies in its validation of Decentralization. He mentioned that maximizing the number of Nodes (including self-staking at home) is an important goal for Ethereum. However, he also pointed out that this optimization may not be the best choice, as these systems are essentially financial systems.

Construction of the financial market

Kyle emphasized that the goal of Ethereum and Solana is to build the world’s largest permissionless financial market. He believes that while the validators of Decentralization are important, in practice, many centralized entities (such as stablecoin issuers and centralized exchange) play crucial roles in the functionality of these systems. These entities bridge the gap between TradFi and the Crypto Assets world.

Seven, Solana

Solana’s Business Orientation in the Community

David mentioned that he observed during the Solana conference that Solana builders are more inclined towards commercial orientation, understanding their customers and communicating with them. This is in stark contrast to Ethereum builders, who often focus more on the cyberpunk ideology, pursuing decentralization and censorship resistance.

David believes that the builders of Solana may not create projects like RAI because they are more focused on building sustainable businesses, and sometimes they may sacrifice decentralization for rapid development.

Differences in values

Kyle believes that David’s observation is very accurate. He points out that there are fundamental differences in values ​​between BTC, Ethereum, and Solana. The core value of BTC lies in its fixed supply and censorship resistance, while Ethereum focuses more on the validator set of decentralization. In contrast, the builders of Solana may be more focused on building efficient financial markets rather than pursuing extreme decentralization.

Performance in Crisis

Kyle mentioned that after the FTX crash, the number of Solana validators decreased, and the market capitalization and total value locked (TVL) also dropped significantly. However, he pointed out that Solana’s Consensus did not have any issues during the crisis, indicating that the validators’ set of Decentralization is not the sole factor affecting network security in certain situations. He believes that the C5 (CeFi) bridge plays a crucial role in connecting TradFi and encryption finance.

Optimized Values

Kyle further elaborated on whether optimizing 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 giving up the agility and value capture of the system for additional security. He believes that economic activities in the real world still primarily occur in the TradFi system, and establishing effective bridges is the key to the success of the new financial system.

Kyle and David’s discussion revealed the fundamental differences in values between Solana and Ethereum. Solana focuses more on following business and functionality, while Ethereum emphasizes decentralization and censorship resistance.

Kyle emphasizes that while Decentralization is an important goal, in practical operation, it is equally important to understand the role and function of centralized entities. In the end, the optimized values 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 arguments for Ethereum

Regulatory Advantages of Ethereum

Kyle pointed out that the privileged regulatory status of Ethereum is a major advantage over 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 attracts more highly intelligent talents. He believes that the key to promoting innovation is to have a group of smart, proactive, and motivated people. The Ethereum development community has attracted a large number of outstanding talents, which makes Ethereum more advantageous in technological innovation and ecosystem development. Although he acknowledges that Solana also has its own talents, overall, Ethereum has an advantage in this regard.

Innovation Driven

Kyle emphasized that innovation is often driven by a small group of high-quality talents, and Ethereum is precisely where such talents gather. While Solana is also striving to attract developers, Ethereum still has obvious advantages in terms of depth and breadth of innovation. This accumulation of human capital not only promotes the technological progress of Ethereum, but also provides strong support for the expansion of its ecosystem.

The Social and Political Impact of Ethereum

Kyle also mentioned that the Ethereum Foundation has played an important role in creating and maintaining a fair and transparent Decentralization system. He believes that Ethereum is at the forefront of setting standards and norms, which have had a positive impact on other blockchain projects. The governance model and values of Ethereum have set an example for the entire industry and promoted the healthy development of other projects.

Overall, Kyle’s point emphasizes the advantages of ETHereum in regulation, human capital, and innovation. Although Solana has certain advantages in usability and business orientation, ETHereum still occupies a leading position in overall technical depth and ecosystem strength. The success of ETHereum depends not only on its technological innovation, but also benefits from its well-established reputation and standards in the industry, which are key factors driving its future development.