Solana Thesis: The Fastest Horse Rises From the Ashes | Ryan Watkins, Wilson Withiam

The Bitcoin ETF Approval: A Watershed Moment for Crypto

The recent approval of Bitcoin spot ETFs marks a pivotal moment in the cryptocurrency industry's history. After nearly a decade of anticipation, this development represents a significant step towards mainstream adoption and institutional acceptance of digital assets. Ryan Watkins, founder of Syncracy Capital, emphasizes the transformative nature of this event:

"I think it's like one of the most exciting events in the history industry. So we've been waiting for nearly a decade for the Bitcoin ETF to be approved. And while the ETF itself is in furthering anything about technology or like the adoption of technology, for some Bitcoin where the purpose of it is to just hold it, this actually is extremely beneficial to Bitcoin being adopted."

The approval addresses key challenges that have hindered institutional participation in the crypto space. Traditional financial institutions have been hesitant to engage with new counterparties and manage private keys directly. The ETF structure allows them to invest in Bitcoin through familiar channels and established custodians like BlackRock, effectively lowering the barriers to entry.

Wilson Withiam adds that this development lends significant legitimacy to Bitcoin as an investable asset:

"It's not really this monumental change in the technology itself, but it's more so the implication of how these institutions begin viewing this asset, and that you have the stamp of approval by someone like BlackRock."

The Domino Effect: From Bitcoin to Ethereum and Beyond

The approval of Bitcoin ETFs is likely to trigger a cascade of similar products for other cryptocurrencies. Ethereum is widely anticipated to be next in line, with speculation already mounting about potential Ethereum ETFs. This progression follows a natural pattern as institutions typically move down the market cap rankings when exploring new asset classes.

Ryan Watkins explains:

"And then naturally, what happens next is all these institutions, they just go down the rankings list, and they go to Ethereum that I'm sure down the road, they'll get to Solanic. And this is very exciting, because this is actually how you get institutions to start. At the very least holding these assets."

This gradual expansion of institutional involvement is expected to bring more capital and attention to the broader cryptocurrency ecosystem. As major financial players like BlackRock seek to capitalize on fees from a range of crypto-based ETFs, the industry is likely to see accelerated growth and diversification of investment products.

Ethereum's Evolving Narrative and the Rise of Liquid Staking

As the crypto landscape evolves, Ethereum's narrative continues to shift. From its initial positioning as a "world computer" to the current focus on "ultrasound money," Ethereum is now garnering attention for its staking and yield-generation potential. This is particularly relevant in the context of the emerging "restaking" narrative, which is attracting institutional interest due to its yield-producing capabilities.

The Lido protocol, a prominent player in Ethereum's liquid staking ecosystem, stands to benefit significantly from these developments. Ryan Watkins outlines the confluence of catalysts for Ethereum:

"So for us, it's like, I think there's like a confluence of catalyst for Ethereum right now. You mentioned like ETF, we also have EIP 4.4, we also have for staking. And these are all just happening more or less on the same timeline, like ETF for Ethereum, like thank you to, yet before 4.4 within Q2 as well. Sooner, restaking, I mean, that's kind of like an ongoing process."

Liquid staking protocols like Lido are positioned as "great businesses" within the smart contract platforms they operate on. They capture fees and value from the underlying blockchain activity, benefiting from increased network usage and rising asset prices.

The Misconception of Cryptocurrency

One of the key insights shared during the discussion was the misconception surrounding the term "cryptocurrency" itself. Ryan Watkins explains:

"The name cryptocurrency, so this is actually along with something I would share with some friends that were skeptical about the asset class, is that the more a cryptocurrency is actually a misnomer or the industry, because not everything here is attempting to be a currency."

This insight is crucial for understanding the broader potential of blockchain technology and digital assets. While Bitcoin may be viewed primarily as a store of value or "digital gold," platforms like Ethereum offer a much wider range of applications and use cases. This diversity allows for different types of investors to participate in the crypto ecosystem based on their specific interests and risk appetites.

MakerDAO: A Case Study in DeFi Evolution

The discussion touched on MakerDAO as an example of how decentralized finance (DeFi) protocols are evolving and attracting investor interest. MakerDAO stands out due to its revenue-generating capabilities, particularly in the current high-yield environment. Ryan Watkins explains their investment thesis:

"So definitely the yields that you're getting on on only the treasuries right now are excited. And that was something that was exciting in the bear market, where it's like, it was very hard to discern what was valuable in the bear market. But here you did have this one project that was bringing in, you know, nine figures of revenue and actually accelerating that in the bear market."

The growth potential for MakerDAO is multifaceted, including:

1. Increased demand for DAI (MakerDAO's stablecoin) as collateral in various DeFi applications.
2. Growth in lending activity during bull markets as users seek to leverage their assets.
3. The implementation of the "Endgame" plan, which introduces new governance structures and sub-DAOs.

The discussion also touched on the potential impact of MakerDAO's token redenomination, which could make the MKR token more psychologically appealing to retail investors.

Ethereum's Role in the Crypto Economy

While Ethereum currently holds a central position in the crypto ecosystem, the landscape is evolving with the rise of Layer 2 solutions and competing smart contract platforms. Ryan Watkins offers a nuanced perspective:

"I don't think that this smart contract platform landscape is winner take all. I think it's winners take all. And there are, I think there's a sufficient amount of trade offs in the design space of smart contract platforms that make it so that a single technical stack can actually serve every single use case effectively."

This view suggests that while Ethereum may maintain its dominance in certain areas, there is room for other platforms to excel in specific use cases or niches. The development of Layer 2 solutions and the potential for more experimentation at the virtual machine (VM) level could further expand the capabilities of the Ethereum ecosystem.

The Solana Thesis: Speed, Cost, and Simplicity

The podcast delves deep into the investment thesis for Solana, highlighting its unique position in the cryptocurrency landscape. Ryan Watkins articulates four key factors that drive user demand in blockchain platforms:

"People want speed. They want things that are cheap. They want things that are safe. And they want things that are simple. Right. Those are the four of these things that people want, and that won't change."

Solana's architecture is specifically designed to address these fundamental user needs, with a particular focus on speed, cost-effectiveness, and simplicity. The integrated stack of Solana offers advantages not only for end-users experiencing applications but also for developers building on the platform.

Wilson Withiam elaborates on Solana's technical innovations:

"Solana, it's having significantly more efficient data propagation and also having parallel execution. And you actually get more transaction throughput for a dollar invested in hardware than you would on like some competing systems."

This efficiency in hardware utilization and transaction processing gives Solana a competitive edge, especially for applications that require high throughput and low latency.

Overcoming Safety Concerns

One of the initial concerns about Solana was its approach to network safety and decentralization. Ryan Watkins shares his personal journey in understanding and ultimately embracing Solana's security model:

"And then what happened for myself is like, you know what? Really started to dive into like the technical architecture in Solana. And what I really started to appreciate was twofold. One is that it's not just jacking up the hardware requirements that enables you to get higher through purpose."

He goes on to explain that Solana's security model is based on the principle that as network activity increases, so does the incentive to run full nodes, thereby enhancing decentralization over time. This perspective challenges the notion that high hardware requirements necessarily lead to centralization.

Solana's Unique Position in the Crypto Ecosystem

The discussion highlights Solana's emerging role as a hub for two critical applications in the industry: payments and decentralized physical infrastructure networks (DePIN). Wilson Withiam explains:

"Where Solana doesn't get maybe enough appreciation is that it's really becoming the home for two of the more critical applications evolving in, in the industry, one being payments and the other one being deep in."

These use cases are particularly significant because they bring real-world assets and activities onto the blockchain, potentially driving broader adoption and increasing the overall value stored on-chain.

Investment Opportunities in the Solana Ecosystem

The podcast explores the investment landscape within the Solana ecosystem, drawing parallels with Ethereum's DeFi renaissance in 2020. Ryan Watkins outlines their approach to identifying investment opportunities:

"We start from a first principles basis. And I think a good example of this is Jupiter. The corollary for Jupiter on Ethereum would be something like a one-inch. One-inch is not as exciting as Jupiter is on Solana."

He explains that due to Solana's integrated system and low transaction costs, certain types of applications, like decentralized exchange (DEX) aggregators, can thrive in ways that weren't possible on Ethereum due to high gas fees and fragmented liquidity.

The Potential for Monetary Premium in Crypto Assets

An intriguing point of discussion is the potential for various crypto assets, beyond just Bitcoin and Ethereum, to achieve a "monetary premium." Ryan Watkins challenges the notion that this quality is exclusive to established cryptocurrencies:

"If you really just kind of strip out the whole like, mimetics of it, the basic properties that enable it to be this monetary store value are shared among and for the other smart contract platform."

He argues that adoption and usage are the key factors in determining whether an asset can achieve and maintain a monetary premium, rather than any inherent qualities of the blockchain itself.

The Evolution of DeFi Protocols on Solana

The podcast highlights how DeFi protocols on Solana are learning from the experiences of their Ethereum counterparts and innovating in unique ways. Wilson Withiam notes:

"It's fascinating to see how a lot of these DeFi protocols on Solana are really learning from, if there was, if there was past because you've seen like one of the logical things when we were looking at Eigen layer as well as like, but it seems natural that they want to have some sort of liquid staking token for all of their restate deats as well because people would want liquidity on that."

This trend towards more integrated and comprehensive DeFi offerings on Solana could lead to a more streamlined and user-friendly experience, potentially driving further adoption.

The Role of Data Availability Layers

The discussion touches on the emerging narrative around data availability (DA) layers, such as Celestia and EigenDA. While these solutions are gaining attention in the short term, particularly for scaling Ethereum and its layer 2 ecosystem, the long-term value proposition is less clear.

Ryan Watkins expresses some skepticism about the long-term business potential of specialized DA layers:

"As far as like longer term, it's where it becomes where challenging is. For one, I think data availability in itself, I'm not fully convinced is like a big business alone. I mean, it's some very cheap service to provide."

However, he acknowledges that in the near term, there will be significant demand for these solutions as Ethereum and other networks seek to scale their transaction throughput.

The Transition from Research to Fund Management

The podcast concludes with insights into the transition from being crypto researchers to managing an investment fund. Ryan Watkins and Wilson Withiam share their experiences, highlighting the differences in approach and focus.

Ryan Watkins explains:

"I think what's different now is that the research is far more targeted and far more like investment focus. So and there's trade-offs. When I'm at MSORI, I had an infinite amount of time to do research on anything and research doesn't need to lead to like an investment decision."

This shift towards more practical, investment-focused research represents a significant change in their day-to-day work and how they approach the crypto industry.

Conclusion: A Maturing Crypto Landscape

The wide-ranging discussion on this episode of Lightspeed provides valuable insights into the evolving cryptocurrency landscape. From the institutional adoption driven by Bitcoin ETFs to the innovative developments in smart contract platforms like Solana, the industry is showing signs of maturation and diversification.

The Solana thesis presented by Ryan Watkins and Wilson Withiam offers a compelling case for the platform's potential to capture significant market share in the coming years. By focusing on fundamental user needs and learning from the experiences of earlier blockchain platforms, Solana is positioning itself as a formidable player in the crypto ecosystem.

As the industry continues to grow and evolve, investors and enthusiasts alike will need to stay informed about the latest developments and emerging trends. The insights shared in this podcast provide a valuable framework for understanding the complex and rapidly changing world of cryptocurrency and blockchain technology.

Facts + Figures

• Bitcoin spot ETFs have been approved after nearly a decade of anticipation, marking a significant milestone for institutional adoption of cryptocurrencies.
• Ethereum is up about 8% and Lido is up 20% on the day of the podcast recording (January 10th), while Bitcoin's price remained relatively stable.
• MakerDAO was bringing in nine figures of revenue and accelerating that growth even during the bear market.
• Solana's price was around $20 in Q2 2023 when Syncracy Capital accumulated a large position, and it has since risen to around $100 at the time of the podcast.
• The Jito airdrop for Solana went to 10,000 wallets with a minimum value of about $15,000 per recipient.
• Jito's fully diluted valuation (FDV) was higher than Lido's at launch, despite Lido having higher adoption and TVL.
• Jupiter, a decentralized exchange aggregator on Solana, has expanded to offer perpetual futures trading.
• Solana is becoming a hub for payments applications, with integrations involving Visa and Shopify being explored.
• Helium, a decentralized wireless network, has migrated to the Solana blockchain.
• Ryan Watkins and Wilson Withiam launched their fund, Syncracy Capital, in May 2022, shortly after the collapse of Terra.
• The crypto industry is structurally overweight in Ethereum, with many investors allocating 50% or more of their portfolio to Ethereum or its ecosystem.

Questions Answered

What impact will the approval of Bitcoin spot ETFs have on the crypto industry?

The approval of Bitcoin spot ETFs is expected to have a significant positive impact on the crypto industry. It allows institutional investors to gain exposure to Bitcoin through familiar investment vehicles, lowering the barriers to entry. This development is likely to increase institutional adoption of cryptocurrencies and pave the way for similar products for other digital assets like Ethereum.

How does Solana compare to Ethereum in terms of scalability and user experience?

Solana offers superior scalability and user experience compared to Ethereum in several ways. It provides faster transaction speeds and lower costs due to its efficient data propagation and parallel execution capabilities. Solana's integrated stack also simplifies development and user interactions, making it particularly suitable for applications that require high throughput, such as payments and decentralized physical infrastructure networks (DePIN).

What are the key investment opportunities in the Solana ecosystem?

The Solana ecosystem presents several key investment opportunities, particularly in decentralized finance (DeFi) applications that leverage the network's unique capabilities. Examples include Jupiter, a decentralized exchange aggregator that benefits from Solana's low transaction costs and integrated system. Other areas of interest include liquid staking protocols, payments applications, and projects in the DePIN space, which are finding a natural home on Solana due to its scalability and cost-effectiveness.

How are DeFi protocols on Solana evolving compared to those on Ethereum?

DeFi protocols on Solana are evolving by learning from the experiences of their Ethereum counterparts and innovating in unique ways. They tend to offer more integrated and comprehensive services, combining multiple functionalities that would typically be separate on Ethereum. This approach leads to a more streamlined user experience and potentially higher efficiency. Additionally, Solana's low transaction costs allow for the development of products that weren't economically viable on Ethereum due to high gas fees.

What is the significance of data availability layers in the crypto ecosystem?

Data availability (DA) layers are gaining importance in the short term as solutions for scaling blockchain networks, particularly for Ethereum and its layer 2 ecosystem. They provide a way to increase transaction throughput without compromising on decentralization. However, their long-term value proposition is less clear, as the service they provide may become commoditized over time. The success of DA layers will likely depend on their ability to evolve and offer additional value beyond basic data availability.