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MEMO W19 MAY 2024

There are only three letters in politics: MEV. - xh3b4sd

We have heard quite a bit of chatter about crypto's adoption and how not every baker and plumber is using it yet. While the latter is true, I think it somehow misses the point. Crypto does not have to be used directly by everyone in order to be successful. It might be like that, but I think crypto can become very successful and integral to everyone's life, without everyone actually directly using it themselves. The way I look at it is rooted in layers of abstractions. We do not like middlemen in crypto, but in layers of abstractions a middleman between the user and the blockchain might be some smart contract or trustless agent facilitating a transaction and all of it can be guaranteed to be credibly neutral anyway. The question for me is simply what layers of abstractions will be leveraged by ordinary people so that they one day are embedded in the cryptographically enabled world economy, without really knowing about it. Many very important things are not really used or known about by normal everyday people, and still those things are quite important, big and relevant in the real world. Politics is a subculture or ecosystem in and of itself. It defines the lives of everyone. Most people have nothing to do with politics and many people actually don't like it very much at all. And still, they are subject to it every waking hour and obey its rules, and quite frankly, sometimes even benefit from it, especially in western societies. Another more tangible example could be the New York Stock Exchange. We can make the case here for any exchange really, or even go as far as making the case for central banks. All of these institutions and facilities are not really used by Joe Shmoe directly, but their relevance and importance is almost unmatched across the modern societies of our day and age. The same applies to research labs in medicine and biotech. For decades mankind has been working on treatments for serious diseases, often without much to show for at all. But one day your cancer will be cured without you really understanding the Krebs Cycle. Mankind is working on blockchain networks for only over a decade now. And I am pretty optimistic that one day the world will be a better place with all of those advances that we are already working on today, without anyone out there really understanding why. We could say that it would have been quite valuable to be able to bet on the success of the New York Stock Exchange or maybe even to bet on the impact of the Federal Reserve. Those kind of opportunities, I believe, are available today to really anyone with an internet connection. All of those takes about how your baker next door is not using crypto is completely missing the point. Because why would they? One is in the business of selling food and the other is in the business of selling blocks. The point may simply be that the world economy is complex and not every thing has to be connected to every other thing in order to be relevant. Another point I will make here is that those negative arguments about how useless crypto is to them do mostly come from people who live a rather privileged life without much concern about their financial wellbeing or economic freedom as they perceive it. Those kind of people making those kind of arguments do not really understand how it is to live in an environment with for instance hyperinflation, which is a real problem for real people in the real world. And so it reminds me of that one Ricky Gervais joke in which somebody is super angry about something on the internet for no apparent reason. In the joke the mad man sees an advertisement about guitar lessons. The mad man calls the number on the advertisement and screams angrily into the telephone "I don't want guitar lessons". It's ok mate, don't worry about it. It's not for you then. You don't need to play the guitar. But that doesn't take away from the fact that playing the guitar is very meaningful to a lot of people out there. One day we have to realize that this here is a cryptographically enabled world, and we are just living in it.

Remotely related to the above topic, people often obsess about which token or blockchain is "better". Better here is usually translated into how much more money can somebody make than the other guy. I find the male urge to outperform somebody else rather nonsensical personally. To me it does not matter if my coin is up 20% more than your coin, given that the whole industry is up 3x from the bottom. The Crypto Twitter natives often make a huge drama about which coin is number one in any given category. To me that is like making it your top priority to figure out which stock is the biggest in the S&P500. What I would instead like to rather focus on is which blockchain networks are going to be crypto's equivalent of the Magnificent Seven. I think there are going to be a couple of relevant and successful projects of which either may dominate in their own particular category. Just to make up an example without articulating any kind of long term conviction here. Bitcoin might simply be digital gold, as dumb as that may seem to some people. Ethereum might simply be used for high value financial transactions, as useless as that may seem to some people. Solana might simply be used as a decentralized Robinhood, as irrelevant as that may seem to some people. All of those things can be true at the same time without cannibalizing substantial fractions of available market share. In such an alternative universe you might simply want to be allocated to all three. There are going to be new categories and category leaders, I am sure. So let's simply focus on what one thing is good for and stop comparing blockchain networks on rather meaningless metrics. At the end of the day you got to ask yourself why somebody prefers Solana over Ethereum in their personal usage or portfolio allocation. Looking at the matter from that contextual angle will show us that those reasons across different people tend to be vastly different. And the fact that they are different does again not automatically take away from the fact that either reason can be right on their own. One day the human brain has to realize that two statements can be true at the same time, even if they appear to be contrarian or opposed to one another at first. Study contrarians. Lesson in there.

A couple of more words on crypto's relevance in this US election cycle. The democratic party has apparently decided to make opposing this industry their partisan issue. Donald Trump picked up on it the other day and consequently we saw videos of Trump saying that he wants all various forms of crypto in the US. I think that it is a pretty big deal that the likely re-elected next president wants to have crypto in the US, while also understanding that there is more than just Bitcoin. The numbers we have regarding those voter issues in front of us are all over the place and may not be too accurate. Regardless, I think it is fair to say that about 10% of the total voter base in the US seem to at least have an opinion on the crypto industry, which is influencing voting behaviour. The interesting point I want to make here now is that crypto, not AI, has become politically relevant today. This in and of itself shows how misallocated the incumbents still are. If the vote in November between Biden and Trump is tied again, and if 10% of the voter base is influenced by the crypto issue, and if, say 10% of those 10% lean towards Trump for the reason of exactly this single issue, then we could argue that crypto became the king maker in this US election cycle. We could say we are indeed still early, because a lot of people out there do still not understand the potential impacts of a more friendly regulatory regime in the United States. Higher!

Lastly, on Ethereum L1 we see 5 gwei gas for quite some time now, all the while the L2 user base is near all time highs, with way over 5 million daily active addresses being recorded. All fees paid every day by the L2 rollups to the Ethereum L1 hovers somewhere around 70,000 USD. At the same time the amount of fees paid by users on L2 rollups is somewhere above 600,000 USD. The ratio between users paying fees and L2s paying fees is roughly speaking 10 to 1 today. With more scaling efforts already under way, my guess would be that this ratio may change to 100 to 1 in the next 3 years. The implication of those developments would be two fold in my eyes. First, running an L2 rollup secured by Ethereum is not only safe, but also profitable as far as infrastructure economics are concerned. And second, Jevons Paradox tells us that less economic friction increases economic activity, meaning that the demand for Ethereum's blockspace will only increase from here.

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