Is This the End for Ethereum?

Summary

In this episode of 'Bankless', hosts explore the underperformance of Ethereum (ETH) compared to Bitcoin (BTC) and Solana (SOL) with guest Kyle Sani, co-founder of Multicoin Capital. They delve into Ethereum's challenges, including Layer 2 interoperability issues, the impact of decentralization on its development, and the competition with other blockchains. Sani argues that Ethereum's focus on decentralization may hinder its ability to capture value, while also discussing the broader implications for crypto assets and the future of financial systems.

Takeaways

• 🧠 The conversation centers on Ethereum's (ETH) underperformance compared to Bitcoin (BTC) and Solana (SOL), with ETH down 50% against BTC over two years.
• 📉 Kyle Sani, co-founder of Multicoin Capital, attributes ETH's struggle to 'gravity,' meaning the challenge for large assets like ETH to sustain growth due to high market expectations.
• 💡 Sani suggests that ETH's value proposition is not clear, questioning whether decentralized applications (dApps) and settlement on the Ethereum blockchain provide significant value capture.
• 🔄 The discussion highlights the interoperability issues of Ethereum's Layer 2 (L2) scaling solutions, which may be driving users and developers towards more user-friendly blockchains like Solana.
• 🛠️ Sani criticizes Ethereum's L2-centric roadmap, arguing that it has outsourced valuable state and execution—key sources of value extraction—to L2s, weakening Ethereum's position.
• 💡 The episode touches on the importance of human capital in the crypto space, suggesting that Ethereum's larger pool of talented developers could be a significant advantage.
• 🏦 Sani emphasizes the role of centralized entities like exchanges and stablecoin issuers as the 'bridges to reality' for blockchain networks, impacting their success more than decentralization.
• 🤔 The conversation raises the question of whether Ethereum's focus on decentralization and censorship resistance is the right optimization, especially when compared to building functional financial markets.
• 🌐 Sani predicts that while L2s may exist on Solana, they are unlikely to replace a significant amount of economic activity, due to Solana's design choices favoring a unified ecosystem.
• 🚧 The episode suggests that Ethereum's development and governance model may not be as attuned to user and developer needs as Solana's, which could impact its long-term growth and adoption.
• 🌟 The intellectual capital and norms established by the Ethereum Foundation for stewarding a neutral system are acknowledged as a positive contribution to the blockchain ecosystem.

Q & A

Why has the price of Ethereum (ETH) been underperforming compared to Bitcoin (BTC) over the last two years?

The underperformance of ETH compared to BTC can be attributed to several factors including the challenges of scaling a large asset like ETH, which has a significant market cap, and the competition it faces from other blockchains like Solana that offer better performance in terms of speed and latency.

What is the significance of the 'gravity' concept mentioned by Kyle in the context of asset growth?

The 'gravity' concept refers to the difficulty large assets face in growing their valuation due to the law of large numbers. As assets increase in size, it becomes harder to sustain the same rate of revenue and profit growth, making it challenging for them to continue outperforming in the market.

What does Kyle believe is the core issue with Ethereum's current layer 2 (L2) scaling strategy?

Kyle believes that Ethereum's L2 scaling strategy is flawed because it outsources the execution and state, which are the sources of value capture, to L2s. This strategy leads to a loss of value capture for Ethereum's Layer 1 (L1), as the L2s become the primary drivers of value and mev (miner extractable value).

How does Kyle view Bitcoin's value proposition as a 'special snowflake'?

Kyle does not believe that Bitcoin is special, rejecting the idea that its value proposition as a store of value is unique. He argues against the concept of non-productive assets like Bitcoin and gold, stating that productive assets that generate yield are more valuable.

What is Kyle's perspective on the future of Ethereum if it continues on its current path?

Kyle anticipates that if Ethereum continues on its current path, it will struggle to compete with other blockchains like Solana that offer better user experiences and do not fragment the ecosystem into multiple L2s with interoperability issues.

What is the role of centralized entities like exchanges and stablecoin issuers in the functioning of blockchain networks?

Centralized entities play a crucial role as they act as bridges between traditional financial systems and blockchain networks. They are the primary validators of the state of the blockchain, and their operations are more important for the functioning of the network than the number of individual nodes.

Why does Kyle think that the Ethereum Foundation should engage more with its user base?

Kyle believes that the Ethereum Foundation should engage with its user base to understand their needs and expectations better. This engagement can help shape the development of Ethereum to better serve its users and maintain its competitive edge.

What is the significance of interoperability in the context of Ethereum's layer 2 scaling solution?

Interoperability is significant because it affects the user experience. The lack of seamless interoperability between different L2s can lead to a fragmented user experience, increased costs, and reduced adoption of Ethereum's L2 scaling solution.

What are the potential consequences of Ethereum's L2s capturing value instead of L1?

The potential consequences include a reduction in Ethereum L1's value capture, as the economic activity and the associated fees (mev) are captured by the L2s. This could lead to a decrease in the overall value of the Ethereum network.

How does Kyle perceive the difference in values between Ethereum and Solana communities?

Kyle perceives that the Ethereum community places a higher value on decentralization and the principles of a decentralized validator set, while the Solana community is more business-oriented, focusing on building functional financial systems and engaging with their user base.

What is the counter-argument Kyle presents for his own views on Ethereum?

Kyle acknowledges that Ethereum has a larger ecosystem and a pool of highly intelligent individuals contributing to its development. He also recognizes that Ethereum's regulatory status and the intellectual capital it has accumulated could potentially contribute to its success.