Pro Crypto Insider Talks - February 2023

In this month’s Pro Crypto Insider Talks, Delphi’s own Kevin Kelly and Ceteris join Raoul Pal, CEO of Real Vision, for an in-depth discussion on the latest trends impacting crypto (hosted by Ash Bennington). In this episode, they cover a wide range of topics, including:

• Impact of L2s on ETH fees and potential implications of ETH’s deflationary economics
• Updates and developments on Cosmos
• Macro cycles and latest market outlooks from Raoul & Kevin
• Secular tailwinds for crypto/web3
• Potential impact of recent regulations
• Early ideas on the AI x crypto intersection
• NFT marketplaces and ways to benefit from the growth of NFTs

The full transcript of their conversation can be found below.

00:08

ASH BENNINGTON: Welcome to Real Vision Crypto Insider Talks. I’m Ash Bennington, joined by our guests, Raoul Pal, CEO and co-founder of Real Vision, Kevin Kelley, co-founder of Delphi Digital, and Ceteris, research associate at Delphi Digital. A quick housekeeping note before we dive in, we’re switching up the format of Crypto Insider Talks. Going forward, Raoul and Kevin will be the guests for each episode. And if we get a question from the hive that requires a deeper knowledge of a particular sector, we’ll bring in a Delphi analyst who can speak to it in a highly detailed way.

 

00:40

We’re always tailoring our crypto approach to meet your needs. So make sure to let us know what you think about this format in the comments and in discord of course. The guests on this show received a list of potential questions prior to filming today so that they can have time to do research and prepare thoughtful responses. I know Ceteris has limited time with us today, so let’s direct a few questions to him before we lose him.

 

01:01

The first couple of questions here are about layer-ones and the layer-one landscapes. Let’s dive right in. Our first question is from Zajanna, who wrote, ETH has become deflationary. But given the potential for material price rises and subsequent marked increases in gas fees, does this not push work onto layer-twos, capping potential ETH returns over the longer term? Great question, Ceteris.

 

01:25

CETERIS_PAR1BUS: I think that’s a good question. And it’s something that people are obviously thinking about a lot, because the whole point of layer-twos is reduce gas fees on layer-one. But I think it’s important to understand that with Ethereum, it’s not really a question of, if they can just keep these high fees and not have rollups and building on top of it over the long run, because other blockchains will come around and compete with users for ETH.

 

02:01

So we’re in this weird dynamic right now where blockchains have all failed to scale. And so there haven’t been these vibrant ecosystems outside of Ethereum to really compete for Ethereum block space. So building rollups on top of Ethereum is basically how Ethereum decided to scale. When you think about other ecosystems, like Solana, they all try to scale on one layer. And you’re trying to keep fees cheap on the layer-one and you’re trying to scale with hardware. And when you think about Cosmos, it’s doing app chains. So you’re trying to split the applications outside of the base layer.

 

02:49

But Ethereum, essentially, they want to keep the node requirements and the requirements to run a validator light on the L1, and so by necessity, there’s only so much you can handle on that layer. So if Ethereum didn’t have rollups, what you would see happening is while they’re able to charge a premium for their block space now, as you get these other ecosystems just coming online and grabbing more users, grabbing more market share, those fees would start to go down because people would start to get more competitive offerings from other blockchains.

 

03:29

And so, the question surrounds around, is it a bad thing that rollups will be cheap? And then this question mentioned it but with EIP-4844 coming up, this is actually a new change to Ethereum’s base layer, where they’re actually going to charge rollups less to post their data. So again, this will actually reduce the amount of income that Ethereum gets from rollups. And so you can look at that and think that this is Ethereum of cannibalizing itself in a sense. But it is more so just a necessity for theorem to be able to scale. Because the flip side is that–

 

04:18

What you want is you want to create– blockchains today still don’t have a ton of users on them and the grand scheme of things so you what you want, is you want to amortize these costs across numerous layers and push the state and execution onto these different layers and so the sum of all of this in the long run creates this massive defensive moat around the area, and you’re still going to have people settling– you still– the rollups are always going to have this inherent risk over the L1, because they’re all based on smart contracts. They have these either fraud proofs or validity proofs which have their own risks involved with the circuits.

 

05:02

ASH BENNINGTON: Well, Ceteris, one of the interesting things about this and you alluded to it in your answer there is this series of different models out there for how these layer-ones are going to be build an integrated guide. Raoul, please jump in.

 

05:14

RAOUL PAL: Yeah. So what I’m thinking about this is don’t think of a fixed ETH economy. So what they’re allowing is more participants to use the ETH economy, some of them on layer-twos, some on layer-ones. Now, layer-twos accrue to layer-ones, but just much less. So if the whole space can grow 10x, it’s still good for the overall ETH layer. And you can still keep people within ETH. So if it was just the same size economy, and you’re robbing it to layer-twos, yeah, ETH is less valuable. But as a whole ecosystem grows, that’s the bet.

 

05:54

Therefore, it all accrues to the layer-one as well as the layer-twos. So the whole overall economy is much cheaper. I’ve been thinking about this. And something I’m actually going to try to speak to Kevin about later today, is I’m actually thinking about this as if you think of ETH as the overall economy itself, like a nation state, these layer-twos are like Google and Apple and businesses that are built using the infrastructure of the US economy. And so it’s all accretive in the end, just not all of the profits flow through to the GDP or whatever it is. But the larger it grows, I think it all comes out awash in the end.

 

06:30

ASH BENNINGTON: It’s such an important point, Raoul, to point out that this is really ultimately the value here is in growing the pie and expanding the ecosystem more generally. Kevin, anything to add?

 

06:41

KEVIN KELLY: Yeah, I think it’s a good point. I think one of the probably key differences is one, it’s something I’ve been looking at, too, in terms of is this very much a volume play? Because to your point, if you’re able to grow the size of let’s say, Ethereum’s economy multiple, multiple times over and yes, you’re charging less fees, but you’re making it more efficient, more competitive, then it becomes more of a volume play where you’re trying to again, reach scale and reach users that way.

 

07:05

The comparison to the US economy I think is interesting. The rollup fees potentially being equivalent to taxes for some of these businesses that are operating within the US or operating on Ethereum, exactly right. I think one of the key differences and Ceteris can certainly speak more to this is ETH as that underlying probably pristine collateral of this ecosystem more so than the native transactional currency. Because some of these layer-twos will have their own native currencies, they can use for different things. But that is an interesting comparison to of nation state