Will ETH remain money in the Ethereum ecosystem?

Transcript

GM good morning welcome to the milroad show The Daily crypto show that's dishing out crypto tidbits tastier than your grandma's forbidden cookie jar I'm your host Jay Hamilton and today we're joined by Kyle rehead head of research and coowner at milk road now in this episode we are going to address something very important for all l1s and that is a followup from our conversation a few days ago on Wednesday which is in order for l1's assets to be successful such as eth or Soul they need to be used as money within their ecosystem now this is something that most people have trouble understanding because most people think about money they think

about buying coffee that's not what we're going to talk about I'm going to explain this episode what we are talking about but there is an important question that came up in follow-up to our episode and was also put into challenge the other day when coinbase announced the launch of their wrapped Bitcoin CB BTC on B in ethereum which means could that be money long term what could be money long term with the ethereum ecosystem and will eth be challenged as money within its ecosystem the same as salana would be long term these are important things to understand as I know that everybody listen to this is holding big bags in ethereum in salana and likely some other l1s as well before we jump into today's episode we need to take a

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Lera splice and others gain is already live and you can go check it out for yourself today just head over to milo.com slel gain and get started Kyle what's going on Welcome Back to the show exciting follow-up today on the episode we released on Wednesday talking all about how you need to understand valuing l1's particularly ethereum and salana based upon a few key Concepts one of those Concepts was that these tokens are needed as money within their ecosystem this brought up a natural question which is is eth going to have

any competitors to being money within its ecosystem now and in the long term yeah I mean I think so for sure I think there's many different forms of money right you mentioned at the beginning of the show there's money in form of payment and I think theum already has a competitor there and probably is a is a loser in that realm which is the US dollar right maybe in some world 10 20 30 40 I don't know whatever your SP now Fiat goes away and and Ethan Bitcoin or whatever something becomes like some sort of decentralized asset becomes money but like that's not happening in this world not for a very long time and so I think eth already loses there but there's many other forms of money that other assets might be better suited for or maybe it's not better suited but just there's lots of competition and so you

mentioned Bitcoin is definitely competition to eth as money in the ethereum Eos system it kind of has been because it already has been wrapped Bitcoin and now even further with um with coinbase and then there's like stable coins which is obviously I mean that's just US Dollars on chain so there's some sort of money there that can compete with eth and I think this is um this is the big question and the reason I say this is a big question is if you look at um Cosmos the cosmos ecosystem it's kind of built what ethereum has been trying to built with this L2 rollup they have app chains you know injective AOS all these different things are different chains built on Cosmos Cosmos has a token no one talks about it no one cares about it it's called adom you wouldn't know that though because why would you because

when you use any of those other chains you never use atom Adam doesn't have a way to sort of ACR value or really act as money in the cosmos ecosystem so oddly it's like Cosmos has done what a theum is doing and I think salana will go the L2 route eventually as well or network extensions and Cosmos has already kind of shown like hey their token didn't become money and so why would e why would soul and I think that's the the big question we'll try to we'll try to answer today and and I don't know the clear answer here but um we'll definitely speculate and see what what comes up okay let's start by explaining what is money within the ethereum ecosystem when do you need to use a form of money within the ethereum ecosystem yeah that's the key is in the ethereum ecosystem I think

like I don't know the definition of money exactly I'm sure the things I'm going to say don't fit the like traditional definition of it but I don't really care like we're talking about this digital you know ecosystem this onchain ecosystem it's very different than like the the physical world where money is is basically just Fiat I think in a in a digital ecosystem that's on chain you have money as like the store of value so just what asset do you want to hold that is like the least risk asset to just kind of hold right where do you sort of like put your most of your Capital into okay what do you use for payments of course that's something onchain just like in the real world but then you have things like collateral right a lot of what onchain is is is using Defi and using finance and you

need to use an asset in the real world oftentimes collateral can be either dollars it can also be your house right real estate we don't really have any of that on chain right now and so collateral is definitely a form of money if you think of the way that Dex is work so like Unis swap Etc even coinbase and and binance they all have trading pairs right you want to swap into usdc generally there's like an eth usdc or Soul usdc depending on where you are or usdc usdt and you need that as a trading pair to swap in and out of different tokens so that is kind of a form of money as well there is gas money of course in these ecosystems and you don't have this in the in the traditional world but if you want to do anything on ethereum or on salana you need to pay in

in Soul or you need to pay in eth right in in the traditional world we have that if you want to use AWS you don't pay an AWS coin you just pay an USD or there's just there's no cost to transact or do things on AWS whereas in the these ecosystems there is and so gas becomes a form of money as well so there's a bunch of different ways that you would use money and I think assets like eth and soul will be used as money for some of these and they probably won't be or they'll be competed a lot for money in some of these gas is the one thing that's like for sure nothing can beat it if the ethereum ecosystem proliferates and wins whether that's on ethereum or on l2s it doesn't really matter either way people on eth or l2s they need to

pay ethereum in eth and there's just no way around that and so like it has zero competition on that side of thing so like it automatically wins one point for money the rest is kind of let's see where things play out in terms of store value in terms of collateral etc etc right so let's ask this hypothetical question which is right now it is being used as money for those various things items that you mentioned but will it continue to be used for those items long term well let's let's look now so like right now in this world basically everything on ethereum and on its l2s is using eth's money right now when you go to openc and you want to buy nft it's

all valued in eth and so eth is money in the nft ecosystem on ethereum currently right when you want to pay for something on ethereum or l2s basically every L2 uses eth as gas now at some point that might change we don't know at some point it might so far there's basically no l2s that do that but there's always talk of like I don't know why doesn't optimism just use the op token as gas and then it no longer becomes money there that could happen doesn't exist yet and either way even if they did do that just because the users have to pay pay an OP optimism itself would still have to pay in in eth so it still remains there collateral if you look at the defi ecosystem both in ethereum and on the l2s eth is the number one asset used across everything

whether it's staking whether it's taking out loans whether it's borrowing lending it doesn't really matter eth is the money of Defi and the collateral of defi buy a long shot there's no other asset even remotely close if we talk of store value I guess in the ethereum ecosystem this would be this would be eth a lot of people that use eth or ethereum they just they just hold eth so call it what it is trading pairs has been mainly eth for for a long time but it's starting to get eaten up by stable coins so we'll see where that goes I would imagine it goes to stable coins so I think eth probably loses there but let's see the reason why it it won up to this point was just because like again it's the most used asset most people have it it's the most trustless asset meaning there's

there's no risk in terms of like smart contract risk and so like it just makes sense to use that but I mean usdc usdt are becoming pretty big in in this ecosystem and so like kind of makes sense to just use them just easier for people to understand and wrap their heads around so we'll see what happens I don't really know and then again payments there was always I mean the whole idea of Bitcoin started from payments right that Bitcoin is going to be used as payments never worked out it kind of just moved to store value it's probably not going to be payments lightning Network pretty well sucks uh and then ethereum same idea everyone thought maybe we'll use it here but you can see all the payments apps that are coming out and Technology on that is using different stable coins and so I

think eth's not winning that either today the future is a whole different world so before we talk about the future just a obvious question here what happens if eth is not used as money for these things that you mentioned yeah well I think it goes the way way of adom right basically if no one uses it there's no demand to buy it and it sort of just it kind of gets commoditized probably which is a lot of people do think this is what happens maybe with l1s because let's say maybe it has some fee Revenue that keeps it deflationary or or neutral but then there's just no demand to keep buying it and keep using it then like I think it reaches a point you know kind of like if you look at Commodities today like I don't know

copper and every other commodity they sort of all range in this like depending on where we're at in the business cycle they sort of range but they're all around the same market cap uh and they stay around that they go up and they go down sometimes there's like a demand thing that spikes it but they sort of all range around the same amount and like it's just done that for like decades and so like maybe that's just what happens with l1s if they don't actually become money and they just sort of sit there there's always some demand again because gas it can't lose that the question is what is gas valued at and that we obviously don't really know there's also the idea of like security and staking and and so like there's some value there and some demand there but at some point that probably runs out too

and so maybe it's just like I think a lot of us think that L1 native tokens just will go up and up and up forever and maybe that's not the case maybe it's like eth is just worth I don't know a trillion or two trillion or what is it now 300 billion maybe that's just what it's worth as gas and that's just what it'll always be worth and it's just that's what it's going to be so I think that's what happens that's the like bare case I guess for these assets because the bease can't really be zero like if ethereum ecosystem works or Sal ecosystem works like these tokens can't really be zero because you do need it there is demand no matter what for gas right and for security so like it can't be zero but how high can it go like it it doesn't

necessarily need to be unlimited like I think a lot of us think it is unless unless it becomes money or I'm wrong about fees and MV and these things just print so much revenue and become so deflationary that it's like they just go to a trillion dollars or or the store of value becomes so long term that that creates enough demand yep like gold at 17 exactly like which is also there's there's many ways okay that's the only hope for Bitcoin for the most part thankfully it's doing pretty well there so far just look at the ETF so far this year uh okay in order to understand if ethereum will continue to be money

within the ethereum ecosystem and I want to be clear to any anybody listening or viewing this you could say the same thing about Sal within their ecosystem or the same thing about any L1 token within their ecosystem um we're just using ethereum as today's example what does the world look like 10 years from now on chain let's paint a picture of that and then let's have the conversation of will eum continue to be money for all these items yeah wow what a beautiful world it's going to be 10 years from now on chain I can't wait but it's okay let's let's let's assume that the ethereum road map works okay we scale l2s become the big thing we're already kind of seeing it we start to get everything on chain right we have billions of users The Whole World's on there most payments are on there right

most of the apps we use whether that's Twitter and PayPal Etc they're all integrated into ether and L2 or they have their own L2 whatever it is doesn't really matter but either way most of the money in the world is Flowing on top of ethereum okay in terms of payments you also have most of the on or most of the equities I think Apple Nvidia all these stocks don't exist on the New York Stock Exchange anymore they are actually tokenized and exist on Unis swap so I can swap in out of my eth or my usdc or my apple or my Google stock or my whatever stock and not only that because they're tokenized those are also programmable I can start to use those as collateral in defi right instead on Athena instead of me using eth right now or instead of in maker instead of me

putting eth to get my stable coins I can put Apple stock or I can put Nvidia stock right that'd be pretty cool I want to make a payment I don't know maybe I can start to pay with apple and Nvidia right instead of just dollars maybe stocks start to compete with dollars on the payment side I don't know so I think there's there's possibilities of all those things and think further probably real estate moves on chain as well now your house doesn't go on chain but I mean the the the paper the thing that I value goes on chain and so like now there's some worth there and I can start to use it again as collateral or as something right so I think there's that the other part of this world is that when there are and let's assume again the L2 ecosystem plays out there's

also like ethereum is now kind of hidden most people unless e proliferates his money don't really know what ethereum is because we know what optimism is and bases and we know what arbitrum is and sonum or whatever Sony's new L2 is and all these things that's the things that we interact with or maybe we don't even interact with those but we interact with the apps that build on top of those which could just be the paypals and the robin hoods and the coin bases Etc and they're just using crypto underneath I'm not sure exactly how it's going to play out probably a combination of both and so I think in this world you have billions trillions of transactions that are happening all the time on probably Millions of l2s maybe some of those will be specific l2s for like one app like

PayPal or Robin Hood's L2 and that's just where they do all their things or maybe they all just integrate into some of the l2s where they're integrating into like a and maker and whatever apps exist then but you're doing them in a much better ux like in your PayPal app regardless though we're still doing all the things we typically do in the world like doing things with our finances but way way way more including like buying homes and selling stocks and buying stocks and all this is just programmable because it's all tokens it's all frictionless and instead of like my stocks existing only on the New York Stock Exchange I can start to bring that into other apps right and so I think that's a whole different world that I can't wait to get to but what does that mean when I think about that it means

there's a like right now everyone's like well there's l2s and they have tokens and so like that takes away liquidity from eth so that's bearish eth and in this world that I'm suggesting in 10 years from now there's millions of tokens quote quote and these again are equities homes crypto tokens like whatever protocols and so there's a lot of options of where am I going to put my liquidity and what am I going to use for collateral and so this is could be a bull case could also be a be case it's like why would anyone touch eth Orso in this world when I can hold Apple so I don't know it's it's a it's a wild world but um I think it's GNA be quite interesting let's go back to our list of items of how eth is money currently with

the in the ethereum ecosystem and let's look at each one of those in this new world this fantastic Wonderful onchain World 10 years from now what are the other Poss we don't know whether ethereum will be money or be something else but what are the other possibilities so yeah so let's go through so gas fees eth eth wins there so there is some value attributed to ethereum no matter what and if we have billions and billions of transactions across all these l2s like probably it's that value of those that gas fees is probably worth a lot more than it is today I would assume um but again I don't really know the next would be collateral actually let's go valuing things like nfts probably not going to be eth I think it's probably what's just the main form of payment and that's probably going to be USD because it's

just the easiest and especially if we're going to have stable coins proliferate which I think we will I think stable coins will be how we buy and sell nfts why would we why would we use something different it makes no sense if we value our coffee and our jeans and our everything else in USD like why would we just make this one thing of nft which again nfts will represent tickets and all these other things it's just going to be US dollars so I think eth out the window there most likely doesn't mean we won't pay for it in eth just means we won't see the eth symbol when we see the price of an nft right you might pay for your nft or your ticket to a concert whatever in your Apple stock or your ethereum token or your Bitcoin or whatever doesn't really matter I think

payments will be seamless and it won't matter because I can pay in whatever token I want it'll autocon convert it into whatever token is that the merchant wants but it's what do we actually perceive it and value it as and I think it'll probably just be some sort of US dollar and then you have trading pairs I think again that probably goes to stable coins and so the question really is collateral in store value right what are people going to want to store lots of money in to take out leverage or to loan or to borrow what asset are they going to want to use could be our homes right A lot of people that's what we already use today doesn't exist on chain but it definitely could be homes the problem with something like that and and again it could be stocks but the problem with

these is those exists in the real world and so they're not perfectly they're not perfectly onchain there's like an aspect of it onchain that represents the value but like something in the real world could happen and that could cause a problem for what it is on chain right whereas something like eth or Bitcoin and the reason why like Bitcoin store value is so much better than gold for example is like you don't have to deal with anything in the real world you don't have to move gold from like one place to the next right it's just it's on chain and that's just it so there's no custodial concerns there's no third party risks it's just onchain if you hold it yourself and you self cust right and so that's why Bitcoin is pristine collateral and I think e the same thing in the ethereum system right

there is no real world issue that can happen that could screw up my eth right whereas someone could go burn my house and then I have this house as collateral on chain but like what happens in that scenario right or like apple shuts down it probably won't but like then what happens you know so it's just it's a bit weird when you're taking these real world assets and moving them on chain now companies in the future could just launch natively on chain and they don't actually have a stock on the New York Stock Exchange and so like a little bit less for there but it's still a company in the real world that has like a board of directors probably and people and that just always means there's a little bit of concern and risk there whereas eth is what I've what I called in the

last episode is trustless money on ethereum what that means is there is no board of directors there is no group that minted it and wrote the code to like launch the smart contract to have eth there is no multisig that like holds the treasury of eth like every other asset on the ethereum ecosystem currently and so when I think of collateral when I think of like store value I think that probably holds some value there I really do I think we'll probably use our homes and we'll probably use apple and stuff but I think there's something about this like trustless of eth in its ecosystem where there's just no risk no additional risk plus it's yield bearing right it's generating yield from stake I think there's something about that that makes

it have sort of a premium to everything else which is the same reason why we see Bitcoin as a premium so anyway that's sort of my thoughts there but then also we have Bitcoin that's moved over to ethereum I mean we've had this for a while we've had R Bitcoin for a long time I think last cycle WRA Bitcoin went to about 10 billion in tvl on ethereum which is pretty big it sort of died down and hasn't done that well since I think because of the concern around who's custody it the smart contract risk this bridge risk all that kind of stuff and so again it's hard for it to like go as big as something like eth because it has additional risk but now you have coinbase which has launched their own version of rap Bitcoin and if I think about coinbase coinbase owns and

currently custodies not owns sorry custodies 10% of all the Bitcoin that exists okay 10% and you think of that that's because their customers hold a bunch of Bitcoin their institutional customers hold a bunch of Bitcoin the ETFs are all custody by coinbase and there's a bunch of exchanges in crypto that don't even custody it themselves they use coinbase so like there's a lot of companies that even micros strategy uses coinbase to custody its assets so like coinbase is holding and custody a lot of Bitcoin so it's trusted and so will CB BTC this new form be enough where like hey this risk doesn't really matter because it's coinbase they already hold all the Bitcoin anyway so if coinbase goes under well it all goes under it's all just anyway like potentially and so in this world I don't really know I think there is that

benefit though that eth has in its ecosystem that just no other asset has so give us the the bare case and the bull case here of eth as money within ethereum or any L1 token as money within its ecosystem in the long term I think the bare case is that this trustless asset thing doesn't really matter and look people are listening right now that are like probably like why do why does trustless matter and if you're putting $1,000 doll into collateral like it probably doesn't matter but if you're putting a billion dollars in as collateral to take out some stable coins like you're probably not going to do that with like a token that's I don't know worth $2 billion

you're not going to use your maker token to do that or whatever token to do that or even wrapped Bitcoin to do that because who custody that it's bitgo but they're giving it over to Justin Sun like it's like a weird you're not really GNA want to just leave a billion dollars in that you'll hold a billion dollars of Bitcoin but if you custody it right or coinbase custody it maybe but it's like it gets weirder as you go down the risk curve and so I think this trust this thing matters a lot for bigger amounts of money right and like when we think of big amounts of money now it's probably tens of millions hundred of millions that's not where like when we have 10 years from now and everything's on chain like we're talking hundreds of billions maybe even trillions that people are

holding and using and so it's like I think that it really matters there so anyway the bare case is that for whatever reason that doesn't matter maybe we can make bridges and this like risk of other you know let's call it real world assets or other assets moving into ethereum ecosystem and and make that just like not risky at all somehow the technology gets good enough that it's just it's not really a big concern anymore and so those proliferate and then people are just like I just don't really care about Ethan it's hidden don't really see it people grow up not even knowing what eth is right everyone's onchain but they just never even heard of ethereum they never heard of eth just like most people don't know the name of the protocol that runs the internet today everyone back in the 90s knows the name of the protocol because

like if they were in the space because that was like all the rage that was all that existed once all the apps came and the browsers and the software it's like you kind of forgot about that protocol and maybe that's what happens with these l1s and then the bare case I think to those is just they're whatever the value is of gas and I don't really know what that is but as I said the last episode they're always going to keep trying to make gas go cheaper and cheaper and cheaper to remain competitive and so like there's definitely not a unlimited you know seiling to that like it's just at some point there is a seiling and I don't know how high that is so I would say that's probably the bare case uh is that just like we start to use everything else is collateral and then I

think the bull case is that this sort of pristine collateral the lowest risk asset in this ecosystem does matter to something or someone whether that's an institution whether that's to AI remember AI is going to be the biggest user of onchain not humans and so like what do they care about does AI really want to use something that exists in the real world that they don't have that like humans have a say over like probably not and so like they'll probably want to use a trustless asset again maybe it's not eth I don't know so I I think there's a world where people do care and they continue to use eth as collateral store value Etc and the reason why I think that outside of just this like trust this thing is there's a long time between now in this world that you and I just dreamt of and that means

there's a long chance for ethereum or sorry eth the asset to gain Network effects as a legit asset right ethereum has been around for however however many years now close to 10 years and so it's got Network effects as ethereum the ecosystem the blockchain right and I'm pretty sure it's going to win out or be one of the winners because of network effects there's so many developers there so much Capital people already know about it the tools are better it's easier to build on ethereum and the l2s etc etc etc and so like it's kind of got that Network effect and network effects is a big thing in technology and in finance right and so like as a technology I think ethereum has that eth as an asset already does have Network effects more than any other asset and so Apple obviously has Network effects too

but when is Apple legitimately going to come onchain and be part of the onchain ecosystem I don't know five years from now right before it's really integrated in maybe 10 years from now like it's not going to be that soon and so it means that eth has another I don't know two three four five maybe 10 years before all these other real world assets and like the rest of the world gets integrated on chain and I think that that is a big window for E to really establish itself as the dominant pristine collateral within defi right and if it can do that while generating a yield and it can start to secure not just ethereum but other blockchains and other protocols through reaking like it's not just gas fees that it becomes the like it thing for it's also the

security right to secure ethereum but also to secure every other protocol via reaking so and then also be the the collateral and I think it's just got such a a lead on every other asset at least in the onchain world I just I find it hard to believe that any asset competes with that yes there's a bunch of assets on chain today optimism or maker or a etc but like what are the size of these things they're like two billion FTV and they still have a bunch of unlocks over the next few years so like no one's going to use those assets seriously in the next few years and like they might G gain in price and go to 20 billion or 40 billion or 60 billion still nowhere close to ethereum still not millions and millions and millions of people holding this and I still don't

think people are going to go and use those as their main source of collateral when there's a bunch of unlocks and there's a team that is still pretty small that sort of runs it so like I just think the next few are going to be the real determinant of can these L1 assets find product Market fit at in somewhere of this this money Spectrum um and I just think they have such a Runway to do that that probably they're going to figure it out maybe not I could be wrong maybe Bitcoin just ends up run show and just like say goodbye to them like starting today as coinbase launches we'll see but like bitcoin's been on ethereum for almost five years now and it hasn't run away with it so I just don't understand why it would change today C fascinating conversation today thank you so much for breaking this all

down for us and dreaming up this future world but then reminding us it takes some time to get there and in the meantime there's a lot of runway for eth and other L1 assets to take market share and have those Network effects everybody listening in this is a longer episode more around 30 minutes I want to know if you guys prefer 30 minute episodes or if you prefer 20 minute episodes we always want to make sure we're making the right episodes for you so let us know and as always if something you want us to talk more about or dive deeper into let us know in the comments or on Twitter thanks so much for joining us today have a wicked awesome day everybody as always if you liked today's episode please hit subscribe and make sure you follow us so

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