Versus BTC

I would argue that it’s not really ETH’s fault that the ETHBTC and ETHSOL ratios had a difficult 2023. Both Bitcoin and Solana had major exogenous developments that propelled them over the year.

For Bitcoin I believe the main determinant of the rally from 15k to 45k+ was the ETF, naturally, at least the last leg from the 20s to 45k. The remainder was mean reversion after the credit crunch worked itself out and the bankruptcies were sorted, as well as the end of the hiking cycle and the re-injection of liquidity into the markets. A Bitcoin ETF will only come once and it’s the biggest development in the history of Bitcoin (in my opinion). The market is clearly anticipating structural long term flows that are unlocked by an ETF. These are indeed quite material and I think we could see $20b in net new flows into Bitcoin ETFs (not counting flows OUT of GBTC) this year. This will take some time as the big wirehouses, financial advisors, and brokerages need to do their diligence on the asset, see its volatility profile, validate client demand etc. This generally takes a while so don’t expect those flows immediately (although – we did have a very hot launch that was successful by virtually any metric). The ETF really does represent a meaningful legitimation of Bitcoin, it’s a massive victory over the SEC (perhaps the first), and it gets multiple trillion dollar asset managers on our side, some of whom had not been Bitcoin boosters historically. All of this is to say that this is a massive development for Bitcoin, so it doesn’t surprise me that ETHBTC sold off throughout the process of the market coming to grips with this reality.

ETH may get an ETF of its own later in the year, but I believe it will also require litigation (the SEC was very careful to specify that Bitcoin was the only cryptoasset they felt was a commodity). An ETH ETF is also more complex as it involves staking, and ETH is also just factually more centralized than Bitcoin (even if I personally think it’s “sufficiently decentralized” at this point). So the ETH ETF battle will be a long one. But ETH doesn’t need this as much in my opinion, because they’re not really chasing institutional acceptability or the “sovereign” buyer and they’re not really trying to be a SoV the way Bitcoin is (sorry Bankless guys).

Overall the two narratives are very different but I think ETH has a more active set of near term technical catalysts which people could get excited about. It will be hard to match Bitcoin’s post-ETF flows this year. To a certain extent it really depends on whether activity heats up in crypto and we see a big explosion of usage and tx fees. In that case, ETH will do very well.

Versus SOL

SOL recovered well this year because it shed the SBF affiliation/hangover and surprised to the upside: people thought it was basically a dead chain, and when it wasn’t, it had a nice recovery. SOL is also able to sell itself effectively against ETH because it has lower fees and it has a monolithic structure which means liquidity doesn’t get fragmented between a bunch of L2s. Even a big swimming pool can eventually be filled though, and I think SOL will one day reach physical capacity and will have to renege on its implied promise of low fees permanently. I also think there will be a dissilusionment with the monolithic approach, especially as the rollup-centric roadmap is executed on. This really is the fundamental question of blockchains though, which I don’t think people have the answer for – is the composability loss associated with the L2/rollup approach worth the tradeoff? This is one of the hardest questions I think that exists, but my intuition is that “biting the bullet” (aka pursuing rollups and L2s) is the right thing to do. Take your medicine, accept that it’s painful, but scale in a more sustainable way long term. This is the same tradeoff that Bitcoin made as well (instead of just naively increasing block size). I align with that, which is why I also prefer ETH’s design philosophy.

This isn’t to say I’m bearish SOL - in fact we have been pretty active there recently too - but I think the narrative is a little played out and ETH has been a little hated this year. I think the bigger threat to ETH is newer L1s that have a ton of venture backing and lots of excitement. I think it’s an easy bet all things considered for ETH to have an up year versus SOL.

General ETH commentary

I think the biggest problem ETH has is that it’s caught between two minds. Trying to provide a seamless, cheap and fast user experience, versus trying to create a cashflow machine and one that returns capital. These are at tension with each other. I wrote about this here: https://www.coindesk.com/policy/2021/09/17/ethereums-design-choices-are-inherently-political/

I wrote at the time that the imposition of EIP1559 (which I do find elegant) set the interests of users against those of tokenholders. High fees and lots of MEV = value returned to ETH tokenholders. But those of course are not “good” things for users. So there’s a tension there, post 1559. I wrote at the time that ETH competitors like Solana would do well relatively speaking, and we’ve certainly seen that play out. The other thing is the monolithic approach which is certainly more convenient from a DeFi user perspective than an ETH user that is constantly shuttling between various different rollups and L2s.

I think ETH is at a time of transition, where leadership is asking themselves whether they want to cultivate an efficient low fee experience, to combat the pressure from Solana and others,

The other big problem is cannibalization of ETH value from L2s. They all have their native tokens, and I believe these are siphoning significant amounts of value that would otherwise be resting in ETH itself. The ETH stake yield isn’t sufficiently attractive to move the needle here, especially not relative to an L2 token that could rally by 100%s of percent in relatively short order. It’s a weird feature of the ETH ecosystem that everything has a token (unnecessarily so in my opinion) and so this creates an idea of mercenary capital that’s constantly chasing the next thing, whether it’s an ETH L2 or a new L1 like Celestia or Monad etc. The other problem is that while L2s on ETH do make the transactional experience better, they are kind of parasitic in that their tokens redirect flows that might have gone into ETH, and they don’t pay super high fees (and this is also going to be reduced with EIP 4844), so they don’t burn a lot of ETH.

All of that said, if we do re-enter a crypto bull market, the fees and MEV will juice yield and get capital flows to enter ETH, and ETH is still a prime form of collateral on DeFi (even if stablecoins are taking over). The emergence of ETH-backed stables like Ethena is interesting though, and a clever way to use USD while holding ETH.

Conclusion

I do expect ETH to do well against both BTC and SOL this year. I think Bitcoin has lots of tailwinds from the ETF, but I think ETHBTC and ETHSOL can both end positive this year. The key is for the market to realize that ETH has a distinct and realizable roadmap, and that it’s worth the short term pain of the non-monolithic roadmap in order to eventually achieve Vitalik’s rollup-centric vision (which I think ETH is executing on). From my perspective, ETH is the only L1 that has really found a way to charge for usage and return that capital to tokenholders. While they are having a bit of a midlife crisis right now in terms of whether to lean into capital return or to lower fees overall to compete (and it seems like they’re going in the low fees direction now) they have been executing well on their roadmap for longer than anyone and remain the dominant smart contract L1 and de facto center of the universe.