Gokhan Er, Managing Director, IOSG Ventures
Momir Amidzic, Senior Director, IOSG Ventures
Momir: Hello. Hello. Today we have a lot of freestyle, I guess traffic in Bangkok is making us improvise. So me and Gohan will now chat a little bit more about investment philosophy and the current Ethereum landscape. I guess Gohan has been on stage several times, so no need for him to introduce himself. I’ll be quick. So my name is Momir. I’ve been with IOSG Ventures actually since early 2020. In the beginning, I was mostly focused on defi research and investment. But since 2021 started looking more into infrastructure and today I’m pretty much a generalist, recently spending time in the Bitcoin ecosystem, deep in crypto and AI. So that’s the brief intro. Maybe we can start with one of the fundamental questions. What is Ethereum? There is a lot of debate about whether Ethereum is a productive asset, whether Ethereum is a currency, and whether it is sort of value.
Momir: And I’m sure there are a few more competing narratives. But Gokhan, what is Ethereum?
Gokhan: Perfect. Yeah, so it’s a tough question to answer and I think maybe the way that people discuss this and it might be relevant to like our audience as well, what makes Ethereum a bit more valuable? Let me start from there. Historically, Ethereum’s main revenue has been coming from transaction fees. Ethereum was making billions of dollars just in 2021. And the reason it was making those was there was a lot of congestion in the network and transaction fees were super high and those fees were used to burn the Ethereum itself, the asset that will bring value back to it. Now that Ethereum is scaling, what’s happening is that the transaction fees are going to almost zero. Right? Probably in the long enough horizon, they should approach zero. And the transaction fee revenue for Ethereum should not be something significant.
And then I think Kyle was putting it there. Any L1 token should be valued based on how much MEV value accrues. MEV is basically when you’re making transactions on a chain, how do you order these transactions by ordering them in different ways that you could make money out of these transactions? And then his argument is that this should be the main value, how all the L1s should make money. But then I think recently he started adjusting his position because Ethereum cutting edge research is showing us that MEV value, while some of them will go back to validators, actually the majority of them are going to be consumed or extracted or paid back to users or the Dapps themselves. You can see that in the uni chain that is just recently launching.
Yes, there will be MEV, but it’s going to go back to users and dapps, right? And Ethereum L1Uniswap V4 hooks, also enable a similar thing with the projects like Sorella Labs. So I think that also reduces the value that any L1 token actually can get from MEV itself. Maybe 10% of MEV still goes back to the validators themselves. And then the final value for any sort of L1 token, including Ethereum itself, is actually being used in the ecosystem as value, as a store of value as you mentioned? Maybe the state. Maybe it is used as collateral in Fefi applications, maybe it is used as money on OpenSea and NFT trading platforms or meme platforms, et cetera.
I think this is where it creates a lot of for that asset and it starts becoming more like money in the minds of the people. And how do you reach out to that? Maybe that’s another thing. But this is what I think. I think the only way any L1 token captures value is basically just focus on the third aspect of it. And it’s not a straightforward path. It might be some social engineering, it might be creating a meme around it so that it’s used on every layer of the stack. But I think that’s the way moving forward for the Ethereum itself.
Momir: I think one of the mistakes of the Ethereum community is that let’s look into Bitcoin. Bitcoin is trying to look up. They’re looking to go as an asset that is much larger asset and they are saying like we are much better than this asset. You have Solana. They are looking at Ethereum that is 3x market cap and they are competing and comparing themselves against the Ethereum and saying like okay, we are better than Ethereum. We should have like a 3x upside at least to kind of manifest. We have Sui, they are like looking above like they are looking to Solana and comparing themselves and Ethereum. Who is Ethereum comparing themselves against? It’s too defensive. Ethereum community is always talking about oh no, we are better than
They are accepted to being like a defensible position and they are not talking about like bigger vision and who are they going to challenge but more like taking step back. And while like Solana is being aggressive, I’m not sure what would be the kind of best positioning for Ethereum. I have like a strong opinion that Ethereum shouldn’t be positioned as a productive asset. I think that has been one of the mistakes that we can see for DeFi protocols because once everybody started considering these DeFi tokens as productive tokens that have sort of like fundamentals, revenue accrual, and so on, their upside has been limited to actual fundamentals that they are generating.
And if you look into Ethereum as a productive asset, it is not a super interesting pitch because it is trading maybe 100x of its multiple to the revenue fees that are being generated on Ethereum. So even from somebody who is now looking to buy ETF of Ethereum, if thinking about it as a productive asset, they are not going to see like a big opportunity. So I think that Ethereum should probably try to focus on being like either currency or this global settlement layer and then compare themselves as an alternative to something bigger. If their currency then start talking about like why we are better than the US dollar, if they are like a global settlement layer, then talk about some other bigger vision but stop being defensive essentially compared to Solana.
Gokhan: I think that’s a great point. If you look at Bitcoin for example, right? These guys have been talking about Bitcoin becoming the most strong assets, let’s say like inflationary sort of prevention or like a hedge asset. They’ve been talking about this at least for 10 years now, right? They knew that the next step for them was to go to institutions and sell their token to them. And then they’ve been creating this narrative and positioning them in different positions just to take advantage of that. That’s been the case. But for Ethereum, just like you said, I think we even us didn’t even know what story to tell. And maybe that is also because Ethereum has gone through multiple important significant upgrades to its network. Like a couple of years ago we could say, hey, it is the same as Bitcoin, but more programmable.
All of a sudden now you have L2s up there building and they will have their own tokens and then that goes back. Okay, then what does it eat the asset to in this sort of a world? So that’s sort of a mindset shift. I think even the Ethereum core community is just now realizing and trying to sort of polish their narrative how to position ETH in this sort of a world. And it’s not an easy one. Maybe we can talk about like ETH in relation to L2s versus like also another thing like L2s parasitic to ETH as an asset all its value capture. I think this is like one of the main arguments that people are making recently. And I agree. There was one article from the Ethereum Foundation, Mike, I think, wrote this and he was arguing that since ETH, the asset is the native token of the L1 itself it will be the only layer where you’re going to have this permissionless censorship-resistant properties of your asset and it will be the glue between all these different L2s that are building on Ethereum. So this is the reason basically why you should have some Ethereum value or the moneyness as the most strongest asset in this ecosystem. I think this is the best narrative that we can come up with so far. But it’s not an easy narrative that you can go and talk to a lot of people as well. So there are problems with that too. What do you think about it?
Momir: I think if there is like a power load distribution for rollups and like strong network effects such that Base, Arbitrum or some other rollups start like in attracting a lot of the ecosystem participants on their chain and that we start seeing something like native assets of base that are not actually listed on L1 at all that start existing from day one on Base. I’m not sure how does that impact this sort of vision because like one of the principles you mentioned, the presentation that Vitalik talks about is that Ethereum would be the asset where each L2 can always. Users of L2 can always exit. Right. But if something doesn’t even exist on Ethereum, what happens then? So I think there is like also that sort of potential risk.
But I think this might be a little bit too technical of an issue to discuss today. Maybe we can also talk about like Solana versus Ethereum more generally, like how to kind of assess the opportunities between these two ecosystems. Are Solana ecosystem projects investable? How does a fund that was exposed to Ethereum mostly for a fast five years observes the opportunities in the Solana ecosystem. Do you want to start?
I think that for Solana the best thing that happened to them was that FTX failed two years ago. On the one hand it drove them down to below $15 and created the opportunity for new entrance to build their position and have like a 10x upside opportunity. On the other hand, it kind of created a much more organic ecosystem without one central actor dictating the dynamics, without SBF coins, and without these sorts of tendencies. And then when you look into these early entrants into the Solana ecosystem once they made 10x on their position they were starting to look for like more up on the risk ladder like new opportunities there to allocate some of these profits and they started to play with this meme coin narrative and they created like all these meme coin hype.
So if no FTX bankruptcy impacted them then very badly whole Solana ecosystem, we wouldn’t have today’s meme coin craze on Solana and a huge amount of volume. But I think fundamentally speaking, beyond these meme coin trends, I think there are also some good signals that Solana is much more mature than it used to be before and it’s a much more legitimate contender. I think it’s the first time ever we seen that one new vertical is being innovated and shaped outside of the Ethereum ecosystem. I think we see that with DePIN. Until now every innovation started in Ethereum and then other ecosystems copied it from Defi, nft, social primitive gaming everything started on Ethereum and then we had like Ethereum Defi copy on NEAR, on Avalanche, on Solana.
But this time around we have like this whole new vertical, this very interesting that is finding its own hub on Solana DePIN. Right. So there are like many new interesting angles. And I think when it comes to these opportunities, VCs shouldn’t be dogmatic but mostly observe each project based on its use cases. I think that both ecosystems have like are in the mature stage. Obviously Ethereum for many reasons I think it’s still the leader, it’s still the most trusted blockchain, it still has the most sustainable scalability roadmap. But Solana has a very active developer community that is unique in the sense that they have different ideas and they innovate around different concepts. So I think that VCs in general shouldn’t be dogmatic but focus on new use cases innovation and today we can see them both in Ethereum and Solana ecosystem.
Gokhan: Yeah, I think like a couple of things from my side as well is I think it was the beginning of this year right where we started, projects coming to us and then most of the good ones or like some of the good ones started building on Solana and that was our realization. Okay, now the good developers are building on the Solana ecosystem and VCs and many of the other users and liquidity, everything follows the developers rather than anything else. So maybe that was a strong signal for us to take a look at Solana ecosystem and were very much impressed by like the DePIN ecosystem that is emerging there. My thesis is that I think anything that is happening on Solana in another scenario could happen on Ethereum L2s.
It’s just many of these L2s have given it a try. But then they still had these like transaction fees going out to $20, $30, or let’s say having some other problems as well. I think the core piece of any blockchain is you should enable people to have these low transaction fees and then a high volume of transactions overall. This just didn’t happen on Ethereum L2s. In a world where maybe we had these scaling solutions a year ago, a year earlier, I think we could be looking at a different trajectory path for the L2s now. But now they have it. We’ll see if they can actually execute and hustle and get the developer mindshare back. But this is something we will all see this year.
Momir: I think another thing besides these fundamental technical questions is that in crypto it all starts with speculation and these alternatives L2s on Ethereum they also have to make the community rich first and then start to have a little bit more lively ecosystem. We saw what happened when Solana went from $10 to $200. We saw what happened before with Ethereum when it grew 200 billion-plus market cap. So far we haven’t had this effect with L2s. Often we have this problem for instance Base is not going to launch the token at all, right? But it still has very good ecosystem. There is still like missing this speculative component. Some other L2s started with low flow tokens and are now in the problem of being down only since launch. So the community is generally not happy with everything.
Gokhan: You that it’s a bit more than the tradition and then series A earlier access than the meme coins that like they much earlier than the rest of the community. But. But I think the value coming out of meme coins is basically how you distribute your token to the community at an early stage without extending this whole process. And what makes memes I think a bit more interesting is basically within the context of AI agents as well. Like recently the Goat, everybody knows about it obviously an agent owning a token and issuing a token and distributing it to community through meme coins. I don’t see that happening through VC fundraising or private fundraising. Maybe in that case specifically it makes a bit more sense that they go with the meme token route.
But then I think memes and even some VC coins obviously have a lot of problems with the low flow in token supply and how they distribute the community. But maybe you can tell more about that too.
Momir: I think when we look into this narrative like in the community positioning VC tokens against meme coins, it appears like as if community is unfair towards VC coins, doesn’t want to play them and so on. But actually, I don’t think that’s the case. I think that crypto VC still enjoys some of this crypto premium and their projects are traded at a much higher valuation than maybe fundamentals deserve. And I think there was never the case where we had a product that has product market fit, good traction, good user base, good volume and that didn’t get recognition or liquidity from the market. So I think whenever we have like product with product market feed, nobody cares whether it’s a VC token or not. Right? Like today if Pump.fun issues token it’s like the OpenSea of this cycle.
They control this like meme coin narrative and so on. Nobody would be asking like oh what’s the percentage ownership of Alliance Dao in this project? Because this project has actual value and users there is something happening that could kind of defend this value in the market. So I think that the big problem for VCs is that there has been a lot of things that has been funded that doesn’t have product market fit, but still wants to kind of issue the token. And then everybody starts complaining about why this token doesn’t have much liquidity or demand from retail. Well, usually it’s the case that there is no product market fit. Right. So I don’t think that the market is unfair to VCs.
And the reason that there is less innovation is probably also the reason why the market is in a situation where bitcoin is breaking all-time highs looking for higher risk bets to make and then if there are no innovations as we had in last Cycle DeFi and NFTs then the market will always go back to meme coins. But I think that in general, this meme coin trend is something that’s a very bad dynamic mostly for centralized exchanges because they’re missing out more than VCs are missing out in a sense that centralized exchanges are not able to list many of these meme coins early enough to make their user happy and they cannot even if they lease them, they are going to be blamed if the meme coin fails if the user gets the money.
And once they don’t lease them, they are losing users who are leaving to trade directly on Solana. So they’re like in a situation them if you do it, then if you don’t. So it’s a very challenging environment for exchanges as well. And it is something that needs to be kind of addressed with more innovation. But I think that the low float dynamics is something where exchanges and VCs are stabbing themselves in the back and to some extent also contributes to this issue and to some extent contributes to the issue of we still didn’t have a proper wealth effect with L2s because they all start with very low float. So I think this is something that needs to be redesigned from the ground up.
I think that this is hurting the industry in many ways and the industry’s main participants, from investors to exchanges and it doesn’t allow projects themselves to succeed because they cannot build wealth effect for the community. So how to resolve this problem, I think that’s a more complicated question. But there are essentially two ways you can resolve low float, right? You either make insiders liquid much earlier or you make airdrops much larger so that you have like community distribution happening much sooner, a bigger chunk. I think both approaches have their issue. Like when it comes to the second one making airdrops harder, I think it’s super risky for projects to go in the market and airdrop like 50% of the tokens because that essentially means overspending on marketing and overspending on scaling before you find a product market fit.
If you fuck up like you essentially don’t get the second shot. If you distribute too many tokens, there is no way to pivot, right? So unless the product is a little bit more mature and the prime market fit is already clear, I think it doesn’t make sense to be that aggressive. Then on the insider’s part, there is also an issue, right? If we unlock the team then how they remain committed? And I feel like that most rational ways to unlock investors much earlier. I think we have examples like a project that we invested in four years ago that are only now in a stage where they are a little bit more mature to launch tokens.
So I don’t understand why there is a requirement that we have to be locked for four more years to kind of like once you already walk the journey of four years to come to the point that the project is ready,
Gokhan: how do you think unlocking the investors is going to help in this case? Because you’re still going to keep the investors responsible by just reputational terms, right?
Momir: I think you have to increase the supply of tokens and like somebody needs to sell in the market, right? If nobody is willing to, if there is no sell-side then you end up with a huge FDV and down only charge for the next three years, right? And if you have the selling side you come a little bit closer to the real market price, right? And then even for VCs, it doesn’t necessarily mean that VCs would sell. Like you have examples of, let’s say Pendle, they launched at maybe like 50 million FDV, they dropped to 15. I think most of VCs exited maybe in 50 to 100 million. And then Pendle went to 1.5 billion. Right. It’s not necessarily in the best interest of VCs. But then you should let.
If people are not confident about the project, there must be some internal reason for this to reflect also on the price. Or if they are not diamond hands or don’t have trust, they should also not be forced to enjoy the upside. If you don’t want to hold it and take this additional risk, you should also not enjoy the upside of the project. So I think that there is like when you do ipo, right, in traditional market, like it’s an event where investors are liquid, right? You can choose because there is like actual product that is mature and has some fundamental value. That market would find a reason to trade it beyond just narrative and mind share.
Gokhan: Yeah, I think it’s true. Probably the main problem is that with the crypto, as always, the retail is so much involved from day one that there are some rules that you put out there to protect the retail. That also distorts maybe the institutional side of things. If you look at IPO, for example, IPOs, it’s only a couple of companies, right? They managed to reach to that state versus in the crypto case, it’s just from day one you can have it and retail start buying and selling it. So if you want to protect them, then you have to introduce some rules that might not make sense in the institutional sense. This is I think our whole struggle when it comes to token design.
But the main problem is probably like it’s been how many years that since 2017 and even earlier we’ve been issuing tokens in the market. And if, if we start thinking about what are the best practices, I think we go and ask like 10 projects in the space that have launch tokens. I think we would hear 10 different answers in terms of how to manage this whole process from the token allocation to how to distribute your community, how you incentivize them, et cetera. It’s just, it’s been impossible to come up with best practices. And I think this is what we are, you know, like why we are suffering so much.
Momir: But I think that the consequence of this, like good intention to protect retail was actually also to hurt retail. Like exchanges force these like locking schedule and then like you have all the L2s launch at 20 billion FDV and bid down only since launch, right? So, everybody, you make it such that who comes early, who shows early trust in the project, or just wants to speculate from the early days is punished the hardest, right? Like if they come early and hold, they would essentially come at a super large FDV. So you have good intentions, but the unintended consequences that you hurt the retail, you hurt the project because it cannot have like a wealth generation sort of like effect for the community. And at the end of the day, nobody benefits. Exchange is also hurt because their users are pissed off.
The volume is not as great as if there is like actually the vice-versa effect. So nobody benefits. So I think that low float one way or another shouldn’t be the practice, Like if the project is already a little bit more mature and it should be listed on Exchange, right? But then if it’s already mature enough to be listed on Exchange, there is no reason to lock everybody. That means that there have been years of effort, and there is a strong product and a solid community. You launch on Exchange by then like enforcing these additional requirements, right? If the project is not mature, then don’t list it on Exchange. And there is no need to discuss whether this should be like low float or whatever sort of distribution dynamics.
