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MEMO W23 JUN 2024

The reason you get attacked from all fronts is because you are the most relevant contender. - xh3b4sd

There was a beautiful discussion between Anatoly Yakovenko and Justin Drake published on the Bankless podcast, in which we got a pretty honest and fair assessment of Ethereum and Solana. Anatoly is the Co-Founder of Solana and Justin is an Ethereum Foundation researcher. Anatoly was joking in the intro of the podcast that there is no fourth best after BTC, ETH and SOL, referring to the infamous Michael Saylor meme "there is no second best". One super interesting aspect that Anatoly is prioritizing and trying to minimize in Solana is execution latency using validator hardware. I understand his argument for latency to be the most important thing in block building. The mantra for Solana is transacting at the speed of light. While speed above all else is often important for financial transactions, I think the prioritizing of speed to the extend Solana is doing it, is dependend on the intent and use case of the transacting party. I think there is a threshold for speed that enables technology to serve a specific purpose. That threshold creates some kind of goldy locks zone for economically viable use cases. The distinction on the topic of speed has to be made based on the context in which this speed matters, and for who this speed is relevant within said context. There is for instance the speed at which you as an entity gain access to information that you are interested in. Then there is the speed at which you yourself are able to act upon the information available to you. Let's create a shortcut for both concepts and call them access speed and execution speed. Execution speed for a blockchain network is defined by block times. As far as I know, Ethereum has a block time of about 12 seconds and Solana has a block time of roughly 400 milliseconds. Those stark differences in block times are deliberately chosen to maximize or minimize for certain aspects of the respective contexts inside of Ethereum and Solana. Execution speed for an offchain user is defined by their own hardware, software, bandwidth and access speed for that particular transacting entity. Access speed of onchain data that transacting entities are interested in are again dependend on block times. There are use cases that blockchain networks can serve and optimize for that heavily rely on the very best access and execution speeds. And there are use cases for blockchain networks in which the very best guarantees on those particular metrics are not the top priority. My understanding is that Solana optimizes for the very best access and execution speed, because it deems those related use cases important. That is fair and good. Solana is specializing for certain use cases that are time sensitive. At this point, let's remind ourselves that the world's finances operate on T+1 at best, which means a minimum of 24 delays for any serious settlement of value. The reason why I am structuring my thoughts about this topic here as outlined above is because there is a sense of competition between Solana and Ethereum that is often misplaced and wrong, in my opinion. While Solana as a blockchain network is optimizing for one thing, Ethereum as a blockchain network is optimizing for another thing. Knowing this, we cannot simply say whether Solana is better than Ethereum, because, better at what? Better based on which criteria? What we have here is the comparison of blockchain networks along the spectrum of specialization and generalization. Comparisons along those kinds of distributions are usually the proverbial apples and oranges. Solana can be successful in its own mission, and my believe is that it can be so without taking away from Ethereum, and vice versa. In today's world people will rightfully argue that speculative energy and market cap gains are scattered across all contenders in this industry. We are still early and narratives will probably always matter. Focussing here on Ethereum, I want to ultimately take away the following bottom line. The people start to wake up to the fact that Ethereum and Solana each for themselves are truly in a class of their own, given for what they are optimizing for. In the case of Solana that is access and execution speed, which caters to use cases like trading. In the case of Ethereum that is liveness and economic security, which caters to the guaranteed settlement of the most valuable things across the world economy.

We saw news that Van Eck is now staking 32,400 ETH with a value of roughly 125 million USD. Van Eck is one of the asset management firms that filed for spot BTC and spot ETH ETFs. Somebody made the case that there is only enough ETH supply to allow 3700 of such entities to own this specific amount. This kind of framing is somehow compelling. It just begs the question how many entities like Van Eck do in fact exist globally today. Van Eck is managing about 100 billion USD in assets. There are hundreds of such asset management firms globally with that particular size or larger. The order of magnitude here is hundreds, not thousands. When I read the take above the first time I was like, yeah, that's cool. But thinking about it, thinking through how the world works, while this is all very bullish and positive, we have to acknowledge that those kinds of statistics are often rather fabricated. And we often have to remind ourselves to what extend something that sounds good on the surface actually matters.

Somebody said Ethereum has a marketing problem. That's funny, because literally everyone is talking about Ethereum, all the time. Everyone is concerned with Ethereum and its stance in the world. Everyone tries to compete with Ethereum on one metric or another. If anything I am super curious about the upcoming TradFi marketing messages that BlackRock and the like are going to put out there in order to sell the ETH ETFs. Apart from being very good at selling financial products, those entities will define what Ethereum and by proxy what ETH actually is in the context of traditional finance investments.

Ethereum's issuance debate continues and I am quite bothered by the arguments put forth by those who tell us we should reduce staking rewards. I am neither for or against a change in issuance by itself. If there is a compelling reason that makes sense and is objectively better, then let's change the issuance curve. I am only against flawed and non-conclusive reasons for why something should happen. One of the arguments for why reducing Ethereum's issuance should be changed is "reduced hardware costs". Somebody still has to explain to me how that makes any sense at all. Lowering the staking rewards that validators collect will not reduce hardware costs for anyone. Less ETH staked will cause less validators to be active within the network, but that would be equivalent to killing one of your children in order to safe on groceries. Nobody would call that increased welfare. The validators securing the network are literally the army that fights our wars of economic security. If you want to reduce the issuance of the network you need to find a compelling reason for why our army is too big. And by proxy you need to make the case for what kind of wars we have to fight, now and in the future. In my opinion this is a lost cause because nobody will ever know what wars we still have to fight. All of the possible approximations here would still be always wrong. Some approximations may be better than others, but in this case there should be some kind of conclusive proof showing how and why one issuance curve is better than the other. The problem at heart here is that the issuance is always "wrong" to some extend and as consequence of its wrongness could be changed all the time. The question is then simply who decides those changes and once again, based on which criteria. The best solution for addressing the issuance problem would be to let the market do it by equilibrium. As far as I know such a solution is not known and has so far not been proposed. The act of taking something away from others, while claiming that the welfare of the system will be increased by doing so, without providing any credible reason, proof or evidence, is simply insufficient and leaves an authoritarian stench in my nostrils. The best we can do right now, is to do nothing, while we are trying to find a solution that is credibly neutral and driven by the market's equilibrium.

This past week, Base pushed OP Mainnet from the second rank in L2 TVL the first time with over 8 billion USD in TVL recorded. The number two spot is heavily contested right now by very small margins, meaning OP and Base go back and forth in holding and losing that second rank based on normal ecosystem fluctuations. The number one in L2 TVL by far is still Arbitrum with almost 20 billion USD. And then, there have now been recorded more than 100 active and upcoming L2 rollups on L2Beat. That is over 100 networks that source their economic security from Ethereum mainnet. The number of those L2 rollups is steadily growing, effectively expanding Ethereum's scalability and cultural domination. At last, I found it interesting that the uniswap app has been downloaded more than 1.5 million times already. The reach that Uniswap as a DeFi business alone can generate with its mobile app is pretty nice to see. Higher!

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