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Will An Ethereum ETF Get Approved? | Mert Mumtaz

By Lightspeed

Published on 2024-05-21

Dive into the latest crypto trends with Lightspeed Podcast - Ethereum ETF approval odds, the low float token dilemma, and the ongoing debate between L1 and L2 scaling solutions.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

Ethereum ETF Approval Odds Increase to 75%

The cryptocurrency world is abuzz with the latest news regarding the potential approval of an Ethereum Exchange-Traded Fund (ETF). According to the recent Lightspeed podcast episode, featuring Mert Mumtaz and Dan, the Bloomberg Fellows - often referred to as the "ETF gods" - have significantly increased their prediction odds for an Ethereum ETF approval in the coming weeks from 25% to 75%.

This sudden shift in prediction has sent ripples through the crypto market, with Ethereum (ETH) experiencing a notable price surge of around 10% on the day of the announcement. The impact wasn't limited to Ethereum alone, as other cryptocurrencies, including Solana (SOL), also saw positive price action, with SOL up approximately 8%.

The Significance of an Ethereum ETF

While the hosts of the Lightspeed podcast admit that ETFs aren't their primary area of expertise, they acknowledge the potential positive impact an Ethereum ETF could have on the broader crypto ecosystem. The approval of such an ETF would likely bring increased attention to Ethereum and, by extension, to the cryptocurrency space as a whole.

Mert speculates that the introduction of an Ethereum ETF could lead to a cascade of benefits:

"More attention to Ethereum is good for crypto as a whole, right? So if bloomers are like, 'Oh, wow, Ethereum, what is this?' And then maybe they do some research and maybe their partners do some research and maybe the network effects start coming in a little bit. And there's better SEO, there's better knowledge."

This increased visibility and legitimacy in traditional financial markets could potentially dispel some of the misconceptions surrounding cryptocurrencies, transforming them from a "mirage thing that is only sometimes on TV as a scam" to a legitimate tradable asset.

The Broader Implications for Crypto

While the hosts express optimism about the potential ETF approval, they also caution against overestimating its immediate impact on the industry. Cryptocurrency, they argue, is likely still too small to make a meaningful impact on Washington's regulatory stance. However, the increased attention from influential figures like Tom Emmerich, who has been vocal about crypto recently, suggests that the tide may be turning.

The podcast hosts emphasize that regardless of the ETF approval, the crypto industry should continue to focus on building valuable products and services that solve real-world problems. This approach, they argue, is more likely to drive long-term success and adoption than any single regulatory decision.

The Low Float, High FDV Token Dilemma

Moving beyond the ETF discussion, the podcast delves into a pressing issue that has been plaguing the crypto market in recent months - the proliferation of low float, high Fully Diluted Valuation (FDV) tokens. This trend has reached a boiling point, with token after token launching at absurd valuations that seem unsustainable in the long run.

Understanding the Problem

The hosts reference a recent post by crypto influencer Cobie, who used StarkNet as an example to illustrate this issue. The problem stems from what Cobie calls the "shadow realm" or private markets, where venture capitalists (VCs) essentially outbid each other, driving project valuations to multi-billion dollar levels before retail investors even have a chance to participate.

By the time these tokens become accessible to the public, they're already at insanely high valuations that they struggle to sustain. This results in a pattern of "down only" price action for these low float, high FDV tokens, leaving retail investors feeling scammed and creating a negative feedback loop for the entire ecosystem.

The Root Causes

The podcast identifies several factors contributing to this problematic trend:

  1. VCs willing to fund projects at increasingly higher valuations
  2. Founders faced with the difficult decision of taking higher valuations they may not be able to fulfill
  3. Products that aren't fully developed or tested before token launches
  4. A mismatch between token valuations and actual value creation

As Mert points out, "These are businesses and the businesses need to do business things and generate value for some market, right? A business is essentially giving people in some segments of a market what they want in exchange for money, okay? That's what a business is. Nobody is really, well, I don't wanna say nobody, but a fair chunk of these themes are not doing that."

Potential Solutions and Their Challenges

The hosts discuss several potential solutions to the low float, high FDV problem, but each comes with its own set of challenges:

  1. Unlocking team and investor shares earlier or eliminating cliffs altogether
  2. Not airdropping tokens, which would prevent initial circulation
  3. Airdropping a larger percentage of tokens (25-50% instead of 5-10%)

However, each of these solutions has drawbacks. For instance, unlocking shares earlier could exacerbate selling pressure, while not airdropping tokens might limit community engagement. Airdropping a larger percentage of tokens might not always align with the business goals of projects, especially those that don't necessarily need to be maximally decentralized.

The hosts argue that finding the right balance is crucial, and that there's likely to be a spectrum of approaches depending on the nature of the project and its goals.

L1 vs L2 Scaling: The Ongoing Debate

A significant portion of the podcast is dedicated to the ongoing debate between Layer 1 (L1) and Layer 2 (L2) scaling solutions. This discussion was sparked by recent developments in both camps and highlights the different approaches to solving blockchain scalability issues.

The Ethereum Approach: L2 Scaling

Ethereum has been pursuing a strategy of Layer 2 scaling, relying on rollups and other L2 solutions to handle increased transaction volume. This approach aims to maintain the security and decentralization of the base layer while pushing transactions to more efficient second layers.

The hosts discuss a recent tweet by George Eos, CTO of Paradigm, about their project Rath, which is rebuilding the Go Ethereum client in Rust for significant performance improvements. This development could potentially benefit L2s by allowing them to run more efficient sequencers.

The Solana Approach: L1 Scaling

In contrast to Ethereum's L2-focused strategy, Solana has been working on scaling its base layer to handle high transaction volumes. The hosts highlight several key technologies that enable Solana's approach:

  1. Proof of History: Allows nodes to maintain their own internal clock, reducing communication overhead
  2. Turbine: An efficient data propagation system
  3. Gulf Stream: Solana's mempool-less transaction forwarding protocol

Mert argues that while L1 scaling does introduce more replication costs compared to L2 solutions, it also provides benefits in terms of censorship resistance and atomic composability.

The Market Will Decide

The hosts emphasize that both L1 and L2 scaling approaches have their merits, and ultimately, the market will determine which solution(s) gain the most traction. As Mert puts it:

"I think it actually entirely depends on which use cases actually are the most important in the future. If it's things like global finance requiring atomic composability and low latency, you have your answer, okay? But if it's like games or things that are like Clark Aster, for example, which don't actually need the chain or global state at the very least as much as we would think, then by all means, and L2 makes more sense for that, okay?"

This nuanced view suggests that different scaling solutions may find success in different niches, rather than a one-size-fits-all approach dominating the entire ecosystem.

The Role of Validators in Blockchain Networks

The podcast also touches on the important topic of validators and their role in maintaining and securing blockchain networks. This discussion was prompted by the announcement that DRIP, a project in the Solana ecosystem, would be running a validator.

The Importance of Engaged Validators

Mert emphasizes the critical role that engaged, active node operators play in the health and development of a blockchain network:

"You don't want a lot of values on a network, okay? You don't want a lot of values for the sake of just being validators. You want a lot of engaged, active node operators who really care about the network, understand how to troubleshoot it and communicate things, fix it, improve it. And that's how the network improves."

This perspective highlights the qualitative aspects of network decentralization, beyond just the raw number of validators.

The Challenges of Running a Validator

The hosts discuss the technical expertise required to run a validator effectively. While it's possible for most engineers to set up a validator, the real challenge lies in managing it properly, including setting up fallbacks, managing keys, and being comfortable with Linux and DevOps practices.

For many projects, especially those focused on consumer-facing applications, dedicating resources to running a validator may not align with their core competencies or priorities. This leads to the question of whether it's better to delegate validator operations to specialized service providers.

The Risks of Centralization

While delegating validator operations to specialized providers might seem like an efficient solution, the hosts warn about the potential risks of centralization. Mert cites the example of Conduit, a rollup-as-a-service provider that controls admin keys for over 12 rollups, highlighting how this concentration of control can lead to single points of failure.

The hosts argue that while innovations like Liquid Staking Tokens (LSTs) and validator-as-a-service offerings might appear to increase decentralization metrics, they could potentially be creating a false sense of security. As Mert cautions:

"I am very wary of inflating network metrics because there's nothing worse than a false sense of security in security, right? It's all good until one day it's an annual fuck, right? Like we should've seen this coming."

Solana's Unique Validator Ecosystem

The discussion also touches on Solana's unique approach to validators. Unlike some other networks where home-based validators are common, Solana validators are typically run from data centers. This approach brings its own set of considerations regarding geographic and infrastructure diversity.

Interestingly, the hosts note that Solana is present in more data centers than most networks have nodes, with over 450 data centers hosting Solana validators. This wide distribution adds a layer of resilience to the network, making coordinated attacks more difficult.

The Future of Blockchain Scaling and Decentralization

As the podcast wraps up, the hosts reflect on the broader implications of these discussions for the future of blockchain technology. They emphasize that there's no one-size-fits-all solution to scaling or decentralization, and that different approaches may be better suited to different use cases and market demands.

The Importance of Real-World Utility

Throughout the discussion, the hosts repeatedly stress the importance of building products and services that provide real value to users. As Mert puts it:

"I think if you just build something that people want and use, then the token price, it'll be much easier to manage than if it's purely a story. Because a story, if it's not grounded in reality, has a lot of places where it can start leaking and start getting chaotic."

This focus on utility and real-world application is presented as a counterpoint to the speculative frenzy often seen in the crypto markets, particularly around token launches and valuations.

The Evolution of Blockchain Business Models

The podcast touches on an interesting trend in the Solana ecosystem, where businesses are beginning to run validators as part of their operations. This approach, championed by Solana co-founder Anatoly Yakovenko, suggests that running a validator could become a standard business practice for companies building on blockchain networks, even if it operates at a loss, due to the benefits it provides to their operations.

This trend highlights the evolving relationship between businesses and the blockchain networks they build on, potentially leading to new models of corporate participation in network maintenance and governance.

The Need for Nuanced Metrics

Finally, the hosts emphasize the importance of looking beyond simple metrics when evaluating the health and decentralization of blockchain networks. Factors such as geographic distribution of nodes, diversity of hosting providers, and the level of engagement of validator operators all play crucial roles in the overall resilience and decentralization of a network.

As the blockchain industry continues to mature, developing more sophisticated and nuanced ways of measuring and promoting genuine decentralization will be crucial to ensuring the long-term success and resilience of these networks.

In conclusion, this episode of the Lightspeed podcast provides a comprehensive overview of some of the most pressing issues facing the cryptocurrency and blockchain industry today. From the potential approval of an Ethereum ETF to the challenges of token economics and the ongoing debate between different scaling solutions, the discussion highlights the complexity and rapid evolution of this exciting field. As the industry continues to develop, it's clear that success will depend not just on technological innovation, but also on creating real value for users and navigating the complex interplay between decentralization, scalability, and security.

Facts + Figures

  • Bloomberg Fellows increased their prediction odds for Ethereum ETF approval from 25% to 75%.
  • Ethereum (ETH) price surged by about 10% following the ETF approval odds increase.
  • Solana (SOL) price increased by approximately 8% in the same period.
  • The Grayscale CEO recently stepped down, adding intrigue to the ETF approval process.
  • Recent token launches like W and Pith have occurred at multi-billion dollar valuations.
  • Cobie's post highlighted StarkNet as an example of the low float, high FDV token problem.
  • Conduit, a rollup-as-a-service provider, controls admin keys for over 12 rollups.
  • De-gen chain experienced a 49-hour reorg due to issues with Conduit.
  • Solana is present in over 450 data centers, more than most networks have nodes.
  • Helium Mobile offers a crypto-native phone plan with unlimited talk, text, and data for $20/month.
  • Blockworks is hosting Permissionless 3 in Salt Lake City starting October 9th.
  • DRIP announced they would be running a Solana validator, though it's operated by another entity.
  • Rath, developed by Paradigm, is rebuilding the Go Ethereum client in Rust for improved performance.
  • Justin Drake, who works for the Ethereum Foundation, received an advisor allocation in eigenlayer.
  • Solana has recently eclipsed Ethereum in total economic value captured (fees paid by users) on some days.

Questions Answered

What are the current odds of an Ethereum ETF being approved?

According to the Bloomberg Fellows, often referred to as the "ETF gods," the odds of an Ethereum ETF being approved in the coming weeks have increased from 25% to 75%. This significant increase in prediction odds has caused a stir in the crypto market, with Ethereum and other cryptocurrencies seeing positive price action as a result.

What is the low float, high FDV token problem?

The low float, high FDV (Fully Diluted Valuation) token problem refers to a trend where tokens are launching at extremely high valuations with a small circulating supply. This occurs when VCs outbid each other in private markets, driving valuations to multi-billion dollar levels before retail investors can participate. When these tokens become publicly accessible, they often struggle to maintain their high valuations, leading to "down only" price action and leaving retail investors feeling scammed.

How does Solana's approach to scaling differ from Ethereum's?

Solana focuses on Layer 1 (L1) scaling, aiming to improve the performance and capacity of its base layer. This approach utilizes technologies like Proof of History, Turbine, and Gulf Stream to enable high transaction throughput without relying on Layer 2 solutions. In contrast, Ethereum is pursuing a Layer 2 (L2) scaling strategy, using rollups and other L2 solutions to handle increased transaction volume while maintaining the security and decentralization of its base layer.

What are the potential benefits of businesses running their own validators?

Businesses running their own validators on a blockchain network can potentially gain several benefits. These may include better transaction prioritization during congestion, earning rewards that can offset operational costs, and having a more direct stake in the network's governance. Additionally, it aligns with the idea that businesses built on a blockchain should contribute to its maintenance and security, even if running a validator operates at a loss, as it can be seen as a necessary operational cost that provides overall benefits to their business on the network.

How does Solana ensure geographic diversity in its validator network?

Solana ensures geographic diversity in its validator network by incentivizing validators to operate in diverse locations. The network is present in over 450 data centers, which is more than the total number of nodes in many other networks. This wide distribution adds resilience to the network, making coordinated attacks more difficult. Additionally, there are reputation scoring systems that reward validators for being located in less represented areas, further encouraging geographic diversity.

What is the significance of the Rath project for Ethereum and L2 scaling?

Rath, developed by Paradigm, is a project rebuilding the Go Ethereum client in Rust. This development is significant because it promises substantial performance improvements for Ethereum and Ethereum-based chains. For L2 solutions, this could mean more efficient sequencers, potentially leading to better scalability and performance. However, the podcast hosts also discuss how this relates to the broader debate between L1 and L2 scaling approaches, noting that the effectiveness of each approach may depend on specific use cases and market demands.

How does the concept of "engaged validators" contribute to network health?

Engaged validators are crucial for the health and development of a blockchain network. Rather than simply having a large number of validators, networks benefit more from having active node operators who care about the network, understand how to troubleshoot issues, communicate effectively, and contribute to improvements. These engaged validators play a key role in maintaining network security, proposing and implementing upgrades, and ensuring the overall resilience of the blockchain ecosystem.

What are the potential risks of delegating validator operations to specialized service providers?

Delegating validator operations to specialized service providers can introduce risks of centralization. If too many validators are operated by a single entity or a small group of entities, it can create points of failure and potentially compromise the network's decentralization. The podcast cites the example of Conduit, a rollup-as-a-service provider controlling admin keys for over 12 rollups, to illustrate how this concentration of control can lead to vulnerabilities. Additionally, delegation can create a false sense of decentralization if metrics like validator count increase without a corresponding increase in the diversity of actual operators.

How might the approval of an Ethereum ETF impact the broader crypto ecosystem?

The approval of an Ethereum ETF could have several positive impacts on the broader crypto ecosystem. It would likely bring increased attention to Ethereum and cryptocurrencies in general, potentially leading to greater understanding and adoption among traditional investors. The increased legitimacy in traditional financial markets could help dispel some misconceptions about cryptocurrencies. However, the podcast hosts also caution against overestimating its immediate impact, noting that cryptocurrency is still relatively small in the context of global finance and regulatory considerations.

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