Kyle Samani: Why Solana will surpass Ethereum

Speaker: Kyle Samani, Co-founder of Multicoin Compiled by Shan Ouba, Golden Finance

With the rapid development of blockchain technology, Ethereum has been a leader in the industry and has made great achievements. However, after 9 years of development, Ethereum took 5 years to determine the expansion plan and another 7 years to complete the transformation from Proof of Work (PoW) to Proof of Stake (PoS). Ethereum has never been clear about what it wants to be. The expansion plan keeps changing and there is no clear direction.

Compared to Ethereum's confusion, Multicoin Co-founder Kyle Samani delivered a keynote speech "Why SOL Will Flip ETH" at the Token2049 Conference held on September 19, full of expectations for the future of Solana. The entire community has come together around a common vision - "Decentralized Nasdaq", and everyone is moving in the same direction. Good morning, everyone! I’m Kyle Samani, co-founder and managing partner of Multicoin. Today I’m going to discuss why we think Solana will surpass Ethereum. Some people may already agree with this view, some may think it’s too radical, or think it’s unlikely to happen. My goal is to get everyone to at least rethink the driving factors.

Today's speech is divided into three parts. First, I will briefly review the history of Ethereum, because it is very important to understand its current state and problems. Next, I will talk about why Solana is in a favorable competitive position. Finally, we will analyze some key indicators together, which show that Solana has surpassed or is close to surpassing Ethereum, which are on-chain data that Multicoin pays close attention to.

Before I start, I need to make two legal statements. First, today's remarks only represent my personal opinions and have nothing to do with Multicoin. Second, the content of this speech does not constitute investment advice and should not be regarded as an offer of Multicoin's investment advisory services.

History of Ethereum

Now let's talk about the history of Ethereum. Ethereum is already 9 years old, and it was officially released in July 2015. I think this is very critical and will be emphasized again and again today. Ethereum has been around for 9 years, and it has enough time to solve the problems it faces and determine its own development direction. I will discuss these in detail later.

So, what happened in these 9 years? I think there are three very important things. First, the rise of decentralized finance (DeFi), becoming the most important application of blockchain. Although there had been some developments in DeFi before 2020, the real explosion was in the DeFi "summer" of 2020. This was 5 years after the launch of Ethereum.

The second major event was Ethereum's decision to adopt a roll-up-centric expansion roadmap in October 2020, a decision made a few months after the EIP-1559 update. However, an obvious problem with the roll-up roadmap is that it is not DeFi-friendly, leading to problems such as cross-chain bridges and network fragmentation. They announced this roadmap just two months after the DeFi "summer" ended, and the impact is obvious.

The third key turning point is Ethereum's switch from proof of work (PoW) to proof of stake (PoS) in 2022. It is worth noting that the Ethereum community had this plan as early as before the launch of the mainnet in 2015, but it took 7 years to achieve it. This shows that Ethereum has been very slow to move and has always lacked a clear direction.

Next, I would like to briefly talk about Ethereum's expansion roadmap. To be honest, this roadmap has changed several times, and the earliest proposals included concepts such as Plasma and state channels. If you remember, there were also crazy ideas like Hyperledger at that time. Obviously, none of these came to fruition. In the end, it took them 5 years to officially decide on a roll-up-centric roadmap in October 2020.

However, this roadmap is now also questioned, or at least partially questioned. Recently, there have been more and more public discussions about whether to expand L1 and whether to introduce multiple block proposals. These ideas are closer to the strategies of projects such as Solana and are now re-entering the discussion of Ethereum.

We don’t know what decision Ethereum will eventually make. It may take 3 months, 6 months, or even 9 months to see the result. But I want to emphasize that the roadmap formulated four years ago is now at least partially questioned, and may even be completely overturned. Ethereum has been around for 9 years, but it is now back to the starting point. What is going on?

Before discussing Solana, I would like to mention one more point: Ethereum is no longer the center of value capture. The roll-up-centric roadmap explicitly shifts transaction fees and MEV (maximum extractable value) fees from L1 to L2, L3, and even L4. Although this roadmap successfully pushed transactions to the L2 layer, it also moved most of the value creation away from Ethereum as an asset.

ETH STILL HAS NO CLEAR DIRECTION

These people will tell you that you can still use Ethereum for data availability (DA), which is true. But as I will show in the next few slides, the value of DA is almost zero. There is more than enough DA available on Ethereum and elsewhere. People will eventually say that the value of Ethereum comes from "ETH is money", but this is complete nonsense. This statement is essentially a circular argument that cannot be disproven, and they are just imposing their beliefs on you without any logic to deduce.

The litmus test for whether something is money is simple: go to a coffee shop and ask them how they price their coffee. If they price it in ETH, then ETH is money. If it is in USD, then USD is money, and this is the standard for judging money, and nothing else is the standard.

Transaction data of L2

We can see the proportion of transactions transferred from L1 to L2 in the past three or four years. This is very obvious. Almost all transactions are now on L2, more than 90% of transactions occur on L2. This is according to plan, and they did achieve their goals, but what is the result? They keep talking about the so-called DA value rule. In fact, L2 is the party that makes money.

Let's take a look at the revenue and expenditure of Base, which is currently the largest L2 on the main indicators. It can be clearly seen that Base's weekly revenue is about $1 million, while its expenditure is almost zero. The reason for zero expenditure is that they only need to pay L1 fees for DA. By March, Base's revenue dropped to zero and may remain at this level in the future.

One ​​point I want to emphasize is that while people have been saying that L2 relies on L1, in fact, this chart clearly shows that they are actually opposites. The purpose of Base is simple, which is to generate profits for Coinbase shareholders. They want to maximize revenue and minimize expenses. In fact, the incentive mechanism of Base is exactly the opposite of the incentive mechanism of Ethereum L1, because Base wants to minimize the fees it pays. If we look at other major L2s, such as Optimism, the chart shows almost the same situation, and Arbitrum is the same pattern. This trend is consistent among all L2s.

Ethereum’s positioning is ambiguous

I want to be clear that Ethereum has never really defined what it wants to be.

It was launched 9 years ago as the “world computer”, but this concept has never been really defined, and even now it is not clearly defined.Admittedly, I don’t think they have to define what a “computer” is, it’s just a marketing term. But 9 years later, they still haven’t told us what the platform actually does. While concepts like DeFi, Web3, and decentralized identity storage have emerged, Ethereum is currently a mix of these concepts, and to be honest, it has become unclear and has no prominent direction. Even a few weeks ago, Vitalik and other members of the Ethereum Foundation publicly stated that DeFi is just a circular argument and suggested that everyone use Ethereum to do something else.

This is great, and I also hope that Ethereum can do more. But the problem is that after 9 years, they still have not provided clear guidance and have not given any clear opinions. The lack of urgency and clear direction has filled the entire system with negative energy. DeFi is the most important thing on blockchain, whether it’s Ethereum, Solana, or other chains. When I hear people say “DeFi is not important”, I just say, if you are not going to optimize DeFi, then tell us what you are going to optimize for. But they don’t, because they don’t know.

Let’s recap: Ethereum has been around for 9 years, and it took 5 years to determine the scaling plan, and another 7 years to complete the transition from Proof of Work (PoW) to Proof of Stake (PoS). Ethereum has never been clear about what it wants to be. The scaling plan keeps changing, and there is no clear direction. They don’t know what they are optimizing for. Because of this roll-up roadmap, they have actually transferred most of the value-added from ETH to L2, such as Base and other projects.

Meanwhile, Ethereum’s market cap remains around $300 billion, which is one of the top 40 assets in the world by market cap. However, the project still has no idea what it wants to be, and this structural problem is very obvious. Next, we will turn to Solana's history for discussion. Compared with Ethereum, which has never found a clear direction, Solana has always had a clear goal.

The Origin of Solana

Solana's founder Anatoly Yakovenko began to conceive of Solana in 2017, when he was using a US service provider, Interactive Brokers (similar to a more advanced version of Robinhood) to write a trading robot. He found that he could not get real-time market data from the New York Stock Exchange and Nasdaq, while companies like Virtu and Jump Trading could easily get it. He felt that this was very unfair and believed that everyone should have fair and open access to market data.

This unequal experience prompted him to develop Solana, with the goal of allowing anyone to access market data in real time 24 hours a day, 7 days a week. The Solana system is designed to optimize the dissemination of information, and anyone with a computer and a network can receive this data in real time. This vision has become Solana's "North Star", guiding them to build a global, real-time decentralized exchange from day one.

Although the process was much more difficult than expected, Solana began development in 2018 and eventually launched version 1.0 in 2020. Despite many failures, network downtime, congestion and other problems, they always adhered to this vision. It was not until the 1.18 version upgrade in May 2023 that Solana truly realized this vision. This upgrade enabled the chain limit order, order cancellation and other functions to start working properly, and transactions were carried out smoothly with almost zero fees.

Solana's success lies in that they insisted on this difficult and ambitious vision, and although they experienced failures, the final user experience was excellent, without the bridge and fragmentation problems on Ethereum. In addition, Solana's asset value has also increased significantly, and now generates $500 million to $1 billion in revenue each year, mainly from MEV (maximum extractable value). Solana's success proves the power of focus. It took them 6 years to turn their vision into reality.

This is why we believe that Solana's market value will surpass Ethereum. Next, we will explore some key on-chain indicators that show that Solana's performance has approached or surpassed Ethereum.

Surpassing Ethereum

First, the blockchain system is essentially a financial system. We can see that Solana's on-chain transaction volume has basically caught up with Ethereum in the past year, and sometimes even exceeded Ethereum. This is the most important indicator we think, after all, the core function of the blockchain is to conduct transactions.

Next, let's look at the second indicator: validator rewards. Solana has also caught up with Ethereum in this regard. In some weeks, Solana's validator rewards even exceeded Ethereum.

The last indicator is the transfer volume of stablecoins. Although Solana still lags behind Ethereum in this regard, its growth rate is amazing. About a year ago, Solana's on-chain stablecoin transfer volume was 1/10 to 1/20 of Ethereum, and today it is close to half, which shows that funds are flowing more and more on the Solana chain.

If you believe that these indicators will continue to maintain the same growth trend, then it is reasonable to speculate that Solana’s market value will also grow in the same direction.

Solana's Structural Advantages

Next, I would like to talk about the future of Solana and its three unique advantages, which are almost impossible to be replicated by other communities and are why we are more optimistic about its future.

The first advantage is the token extension function

The token extension function was launched earlier this year, which provides many features for payment companies or major global asset issuers, such as built-in yield function, confidential transfer function (hiding sender and receiver), asset issuance and withdrawal function, etc. These functions were developed based on the direct needs of payment companies and Wall Street and are now online on the mainnet.

The reason I emphasize this is that we not only have DeFi and other decentralized financial tools, but also need to meet regulated financial needs. Without these integrated features, regulated financial companies will not be able to go on-chain at scale. These features are already fully integrated in Solana's L1 layer and are ready to use. We think this is a huge advantage of Solana and is almost impossible to replicate in the Ethereum ecosystem.

Ethereum's EVM (Ethereum Virtual Machine) is fragmented, with many different versions, such as Optimism, ZK-rollups, Polygon, etc. Although they are about 98% of the same code, they are not completely consistent. If you want to establish common standards between these different EVM versions, such as stablecoins for confidential transmission, it is very difficult to get these systems to communicate and cooperate with each other. This is not a technical problem, but a problem of interpersonal coordination. You need to get these different teams to sit down and reach an agreement, which is very challenging.

The first project to use token expansion is Paypal's stablecoin PYUSD, which was launched on the mainnet a few months ago. We expect that token expansion will become one of Solana's signature features in the next 3 to 4 years, and it will make Solana stand out from the crowd of blockchain projects.

Fire Dancer

Next, I want to talk about Fire Dancer. Fire Dancer is a brand new Solana client that is going to be released in the next few days or weeks. They may announce the exact date at the Breakpoint conference tomorrow. If you are not familiar yet, Fire Dancer is a new supply client developed by Jump Trading. Jump Trading is one of the largest high-frequency trading firms in the world, and Jump is known for being the fastest of all high-frequency trading firms. We think this is very important because the Jump team has applied all of their knowledge and experience in building high-performance trading systems to this client. From the beginning, Solana’s vision has been to create a decentralized Nasdaq, and now we are bringing the wisdom of one of the world’s leading trading firms to build the world’s fastest commission-free exchange. This system will be extremely scalable and fast, and will make the things we like about Solana - composability, no bridging problems, etc. - even better with Fire Dancer.

Hardware Expansion

The last thing I want to talk about is hardware expansion related to Fire Dancer. One of Solana's design principles is natural expansion through parallel hardware. Solana has been talking about this since day one of the project. I've been talking about it for several years. The core idea is simple: If you double or triple the number of cores in the system, you would expect the performance of the system to double or triple as well. It's a very intuitive idea.

This idea applies not only to Solana, but also because of Moore’s Law, over the last 50 years, and especially over the last 10-15 years, as the number of cores increased, systems that can exploit parallelism have achieved significant gains in real performance. Today, this idea is particularly relevant because there is a renaissance in AI happening, with a lot of capital flowing into the entire semiconductor value chain, from design to manufacturing, and the growth rate in this field is the fastest in the past 30 years.

This is all thanks to the explosion of AI chips, which are being developed by a large number of startups, companies like Nvidia and AMD. Most of these chips are highly parallel, and not all of them will be suitable for Solana, but it doesn’t matter, we just need a few of them to adapt, which will greatly improve Solana’s performance. The amazing thing is that this AI renaissance has nothing to do with crypto. No one in crypto needs to know or care about what is happening in AI, but the $30, $40, or even $50 billion of R&D investment in AI will indirectly drive performance improvements for the Solana network.

This is a key idea at the core of the system design: To win what we think will be one of the largest markets in the world, a decentralized Nasdaq. The EVM (Ethereum Virtual Machine) is a single-threaded processor, and although they have been talking about parallelization for 9 years, there has been no real progress so far. We think this full embrace of parallel processing will become more obvious in the coming years, especially as the assets on the chain expand.

Finally, we are excited about the future of Solana. Everyone is working in the same direction. Everyone is committed to building this decentralized Nasdaq. We have a strong development team, asset issuers, token expansion capabilities, and efficient clients, all of which work together to build a network that can scale and create an asset that appreciates as the network scales. We look forward to seeing further development of Solana in the coming years.

Thank you everyone!