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

Kyle let's I want to give you a simulation all of your bags magically turn into eth the only thing that you hold now is eth that's called a nightmare not a dream what do you do next welcome to Bist we explor the frontier of Internet money and internet finance and today on the show we are exploring the frontier of why the eth price action has sucked so bad for at least a year it's bad yeah just to put some numbers on it soul eth is up 300%

year-over-year eth BTC is down 50% over the last two years losing 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 were 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 Sani to answer this question you know e holders are in shambles when we go to Kyle to answer this question this episode bankl station 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 and to reasoning as to why eth is underperforming to see what what there is to learn right now the current valuation around the price action of salana suggests that Kyle and the salana investment thesis has been more correct than what earlier years of banlists would have suggested and we want to discover why I said this at the end of the episode and I think I want to say it again uh I think this is probably going to be a frustrating episode for eth

Bulls in uh several different ways and I think that's good medicine for you 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 set suggest someone else to uh 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 multi-coin that they need us to say Although our guest this

week is a managing partner of a registered investment adviser nothing in this podcast should be considered an offer of multicoin investment 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 Sani but before we do we want to thank the sponsors Bank list Nation happy to introduce you to Kyle Sani the managing partner and co-founder of multicoin capital Kyle and multicoin have been one of the largest investors in and proponents of salana have been in spearheading the integrated blockchain

investment thesis even before the success of salana completely redefined that corner of crypto Kyle welcome to bankless hey guys good to be on the show it's fun to be here David that was really nice of you to call it integrated blockchain rather than monolithic blockchain it's I I know that this is the word that Kyle prefers thank thank you very much I feel very welcome at home yeah well done so KY kind of set the stage here soul 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 700th day down in a row I mean it has had some depth days but really the trend is the trend is strongly downwards uh and so talking about like ethereum first we'll bring in the conversation of just like how salana has impacted the ethereum valuation but I want to start perhaps with like ethereum just like in a vacuum when you see the weaker price performance of ether compared to it's like proximate competitors what's like the first thing

that comes to mind as to like to explain this price action that is been in a trend for like over a year now yeah I think probably the most important variable is is well I'm going to call gravity um making a large asset go up is hard um and ether is today what call 300 billion is 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 um and law of large numbers is a thing and like most companies or you know things as they get to that size it just gets harder to to sustain Revenue growth and and profit growth at at Large Scale I've got a data point for you guys so it's actually number four you ever go to that um like total crypto or sorry number 34 you ever go to the uh total um assets largest Assets in the world kind of web page it's on like companies market cap so it's number 34 in the world whereas

uh um Bitcoin is number 10 there's only 33 assets that are larger than you know what what is ethereum right now 320 billion yeah right for 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 eth people probably don't appreciate it's just like it's just hard uh to grow at at that size um obviously there are exceptions Nvidia like is is the most recent high-profile exception the went from like 200 billion to 2 trillion like real fast um but like you

you're Fighting Gravity 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 uh and then the other part of it is a tweet that I put out maybe a couple weeks ago uh 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 um 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 who makes $50,000 a year like obviously um and the

same is true of of market caps of companies or of equities or of tokens um you should have hold it to a higher standard and so um it's just hard to to you know I I think given Etha call it 300 billion which is pretty exceptional it's number 34 in the world as Ryan just said and then you you know if you're at that scale you want to really have a pretty clear understanding of what the risks are at to support an asset of that scale and in my opinion like e as a fundamentally open question about is Da and settlement valuable or or is

consensus and execution valuable I've been very clear about my My Views there we can dive into that um but like from my vantage point being a $300 billion do asset and like not having Clarity around your basic mechanism of value capture to me is is very tenuous and and I think that's really weighed on on eth for the last year or two just to P put a pin in that first conversation about gravity that's 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 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 like go through this trial of like trying to figure out how to get to the first T level yes that I think about it as a valley is just like it's hard to grow from a base of 300 than from a base of 50 mathematically that must be true the only actually weird exception to that is is Bitcoin um because bitcoin's whole thing is like a store value medium like and so weirdly it's like the special snowflake again I have my 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 the kind of not perfectly exempt but I'd say at least partially exempt from the the gravity Theory all right so Kyle this is why I want to dig in here so um yes uh 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

myself which is like um Bitcoin is number 10 in the world right ethereum is 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 force is on the world with large market cap assets 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 doll 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 uh 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 uh get you to respond why is this possible for

Bitcoin and not ethereum yeah so so the entire value opposition of Bitcoin is that it is a special snowflake it's you know sound money um it's the the first one it 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 I for now I'm like not interested in 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 salana are obviously not Bitcoin um

and like they are not special in in in the way that Bitcoin is um like very definitively and ethereum and salana are explicitly discussed as like functional things and we're talking about finance and we're going to reshape Global finance and democratization of access and like all these other fun you know asset insurance and tokens and all these things so like they the fundamental lens through which you talk about eum and salana um is like they are changing Finance like the rails of finance and

the rails of of payments and so naturally uh well if you look at like Black Rock Visa stripe there's all these obvious companies that are like relevant in in the discourse of you know those two major parts of of the economy and so uh it's quite reasonable to think of ethereum and salana 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 salana

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 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 produced cash flows as a result of that um and so I think of ethereum and salana as equities in in that kind of sense 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 uh produce cash flow so these are things like equities or maybe 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 uh Commodities and these are consumption type Goods so these are generally used in the course of making another product and then uh you have finally store value uh types of assets and these are things that are the special snowflakes of the world so gold is a special snowflake uh 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 um you know uh commodity types of ingredients to build other products uh and it's mainly valuable because people think it's valuable I I actually want to just double click on that really quick like I 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 it's worth asking because you are a bear at Bitcoin it sounds like at a1. uh2 trillion doll market cap I assume you'd be a bare uh

of Bitcoin sorry at uh like a 10 trillion Doll Market cap as well like you'd be even more bearish but like then my question to you Kyle is like um 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 and if the crypto World believes it's a special and if Larry think starts believing it's special and if the the the new incoming president of the United States starts believing it's special and puts it on uh the US

Treasury Bal bance 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 if is it this explanation that would account for the like 1.22 trillion in Bitcoin right now and are you like disputing that kind of um I guess law that we've seen in uh asset markets uh to date do do you think that there's something wrong with it this to

answer your question I I need to actually refute something you said as part of it which is talking about Commodities Capital assets and store value um Commodities are distinct we have oil we have wheat we have whatever all obviously inputs into the basic economy uh we have Capital assets things that just produce yield right and then use that store value is separate and distinct and I reject the premise that the third category should exist because I I don't I don't believe we should have a reason to have nonproductive assets uh with the one exception is is like cash because you need to denominate 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 but I reject the premise that store value should be separate um the the fundamental argument that like gold is valuable or Bitcoin is valuable is it the government can't print more of it and I'm like okay yes I understand but I I think that's that's a silly way to think of store value because um there are plenty of assets that are naturally inflation resistant um and that produce

yield um the most obvious of which in just in the context of United States would be Walmart and Amazon um if the price of goods go up like they raise the prices of the goods um and so like there 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 but like you if you believe that you can buy a basket of retailers but like there are are very obvious businesses um the most obviously are

retailers that are intrinsically inflation resistant in like the scope of what they do um again not in exactly the same way that gold is or bit Bitcoin theoretically is but in a way that is like very mechanical and tangible to how the businesses operate um and I I I think of like the theory that like gold or Bitcoin are inflation resistant is like strictly on a mic basis and like yeah like the gold chart like has some more reverse correlation with inflation than certainly than Bitcoin does it has

Bitcoin has no effective anti-correlation with inflation over any long period of time gold arguably does but like I don't I cannot tell you why that must hold true um 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 I think will fall apart um so I I reject the premise of the sov as a standalone C again I understand other people you know believe it and like I don't really care you do it 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 mcoin fund owns some Bitcoin um which I can get it separately but I am intellectually short Bitcoin on that premise I'm not mechanically financially short but I'm I'm an intellectually short Bitcoin um at 1.2 trillion I will continue to be intellectually short Bitcoin at 10 trillion um if there's something a little bit like Buffet like about that in that investment strategy which is like very value driven like I I think you're you're just like a uh 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 correct yes absolutely and and by the way I I I wrote a blog post about this in 2018 I think it was called paths to 100 trillion or paths to tens of trillions or something I'll find the link and I'll send it to you guys but basically I that's the the store value thesis the utility thesis or the stable coin 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 yeah and I I think another way to 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 story of value like I I get that and I get that that's kind of like your world and

uh 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 uh kind of like an atheist like um 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 I think that because story value is such a mimetic uh human consensus type of game it's like likely that will always have it uh this is maybe just how humans are hardwired like would you

accept that uh that idea even though you're not into it personally uh I guess this this plays out in your Fund in that you don't you don't intend to short the story value religion do you of of Bitcoin and you can understand why it goes up I mean I think at some point we will short Bitcoin in size definitely not in the foreseeable future but like on Long some the long enough Horizon I expect to have a massive Bitcoin short um but that's that's still pretty far away so I I just sent you all the link to the utility hypothesis blog post so y

should probably include it for the the podcast when it goes out it's six years old so I'm sure a lot of the terminology is going to read read pretty weird and stuff um 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 half dependency that happened which is like Bitcoin came out and like it is kind of functionally incomplete um low transaction throughput no defi all these other thing like proof of work doesn't give you fast finality so it's like very hard to build a functioning Financial system on top of Bitcoin and then the story became uh you know because of like

block size Wars like digital money hard gold doesn't change stable like cool Bitcoin here special snowflake yay meanwhile there's an ethereum thing happened um like some number of years later and ethereum's thing was like we can make Finance better um because it turns out that having heterogeneous Financial rails for payments of different sizes like whether it's a versus credit cards versus wires and then obviously across all the various countries of different fs and then they have all the asset markets Bond stocks equities Commodities all of those things

that I just rep you know alluded to are all managed on separate rails like they are separate database servers with separate apis and it is really [ __ ] heterogenous and is really confusing and there none of them are 247 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 um and it turns out that

like when you have this cryptography thing with this permissionless consensus you just have an arbit and you have an arbitrary API to represent assets um whether those assets are Commodities bonds stocks equities fake tokens meme coins what 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 de by definition is is true um and and so I 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 roils um and it will take 10 to 20 years to basically get the rest of the world to acknowledge we have better Financial rails um and to start moving assets over we can see just the beginnings of that happening now with their black rock bidle fund and Hamilton Lane and PayPal and you're starting to see this in in you know little increments here and there and I think that that will that will be a 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 was a thing I don't know I haven't really seen it yet but maybe dpin is definitely a and I think will continue to be a thing um and I think most of that stuff is going to happen on ethereum and salana or maybe Aptos Oru or whatever else some defi smart contract thing and I think at some point it you know call it five years from now maybe 10 years from now U most people in the world will look at ethereum salana Su Aptos whatever and they'll say wow like this clearly runs

the world in in in like a very literal sense like all of the world's assets and and and finances will be represented on these systems and then look at Bitcoin and Bitcoin will beat the same thing it is today which is funny it's just this digital you know rock it sits under your bed doesn't do anything and they'll start to wonder they'll say you know these things have some common thread and that like the assets don't you know like live in the dtcc and don't come from that World um and like we they use a lot of the same terminology cryptography

permissionless consensus like hum like I don't know like why is Bitcoin special special and it does nothing and it's worth 2 trilon 5 trillion 10 trillion whatever be worth at that moment in time and Salon or ethereum is 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 um and at some point that I think will become the consensus view I I don't think we're anywhere near that moment in

time uh that point you're going to short Bitcoin at that point time yeah like I got to see how the discourse evolves but I I do expect to put on a large Bitcoin short at at some point this part of the conversation that we just uh have gone through the last like 20 minutes actually wasn't uh 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 um the 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 e try sucking eggs over the last like two years uh there's like a a list of reasons as to ethereum shortcomings that I think might be relevant here and I'm just going to run through them maybe it's missing some which you can bring up Kyle maybe you think some are more important than others um 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 and I think is the most interesting first and then we can pick through the rest as we so choose afterwards um number one is

ethereum layer 2's forced application developers to have to bet on the success of that layer two that they choose salana devs don't have to think about this at all they just build on salana number two devs don't care about blockchains they just care about speed and latency number three the salon of virtual machine over the ethereum virtual machine is just better to to build on this Lana of 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 scaling plan actually is because 4844 is insufficient by several

orders of magnitude and then number six broken layer to interoperability um there's perhaps more uh like I said but like which of these kind of like stands out to you the most which which you want to unpack first I I think the one that's probably most directly impacting price is number six which is the interoperability problem um and and this and like the derivative or I should say the downstream impact of that is a lot of people use ethereum obviously and they hate bridging and they hate paying the fees U 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 E1 which is distinct from arbitrum and Basse which is distinct from salana 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 salana like everything just works um and then when you're on ethereum that's just not the case obviously we have like lii and some other systems that like try and you know offer that um but like for anyone who

understands how lifi or any of these other bridge 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 inoperability sucks uh I don't like it and like on Salon 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 sole position is their lived experience using both systems so and eth bull might

respond to that and say yeah but Kyle ethereum is going to fix that in fact there's a there's a road map to fixing that and they could name a number of different things on the road map they could talk about you know different layer twos creating their own you know super chain some consolidation in layer twos they could talk about uh shared sequencing they could talk about um based rollups you know vitalic 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 uh 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 this a there's a problem right now and I think most eth BS would concede but it won't be a problem in the future yeah few comments there one I don't think there is a solution to this problem um because polygon and optimism and starkware and arbitra and all these guys they're all building their own little like interop standards within their own ecosystems uh which is obviously true uh there is none that I understand Works

across all of them yeah none that I'm aware of uh and like even if like vitalic proposes one which by the way I'm not actually sure is possible given like how assets are stored in the underlying Bridge contract between ZK syn and starkware and optimis and arbitrum I'm not sure it's like possible to like get to a point where interop between all of them feels like salana um I I I could be wrong there but like it's it's just extremely difficult uh but even if that

proposal exists there's no guarantee that it's going to get implemented and manifest because you need all of those guys to agree to implement it and like there's no guarantee that they're going to agree um so like you have a fundamental like this is fundamentally a standards problem and it turn 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 um and then the third and actually arguably maybe the most important is uh ethereum is N9 years old they just turned nine like a few weeks ago and that's a long time forgot that SpaceX like got the first rocket out in like six years I think like the successful one not I think the first three blew up like the fourth one which was successful was six was like six years maybe six and a half years on like a total of $100 million of capex or maybe $8 million of capex like again in

that in that General range um because Elon only had 180 million and he was the only money in SpaceX at the time um and you know ethereum is nine years old and there's like I don't know how many billions have gone into crypto R&D so I I think there's like a 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 dollars in market cap behind you um so it's no longer just five researchers running around in London like you know Devcon zero kind of a thing you made uh some emphasis on the lived experience of people uh and this uh broken L2 inter operability 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 salana 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 yourr faceness about um about this experience on ethereum actually shows up in the price 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 salana and obviously I want in some sense 100% of capital was ethereum and not salana like if you go to like prior to the salana chain launching and like that that ratio has like adjusted generally speaking in One Direction Over basically since the launch of salana and and the I think very obvious reason that Capital has gone from 100 Z to call it like 8020 is is like roughly the split in in relative wealth is I think because

of lived experience um I think I think it took a long a lot of people a long time to come to two conclusions one bother to use salana and like have enough stuff to do there enough nfts enough assets enough stuff to play around with they 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 uh and then to realize like very definitively one is just a better experience than the other and then the second is to then also look