Audio of the Week: Why Crypto’s Capital Allocation is Broken
On a recent episode of Empire, Jason Yanowitz spoke with Jordi Alexander, Founder & CEO of Selini Capital. The conversation centered around crypto markets, token issuance, investor unlocks, Etherem’s identity problem, and ETH as an asset.
I think it’s clear to everyone paying attention to crypto that ETH has underperformed compared to other leading assets. Many people have questioned some of its strategic choices, such as the move to proof-of-stake as its rollup-centric approach. Jordi wrote an extended piece in 2022 questioning the hype surrounding The Merge.
In the conversation, they pointed to several issues Ethereum is facing.
Bear vs. Bull Market Dynamics
Ethereum TVL and activity held up quite well during the bear market. From its ATH of around $100 billion in TVL in Q4 of 2022, Ethereum lost about 80% of its TVL, settling around $20 billion for most of 2023.
By contrast, Solana lost over 95% of its TVL in the same period, from roughly $10 billion at its peak to $300 million during the bear.
This is only one metric, but it reflects ETH’s position as a safe asset with strong fundamentals and robust liquidity markets.
However, the situation in the bull market has been nuanced. The proliferation of L2s and the promise of high yields have led liquidity to flee to greener pastures. This accentuates liquidity fragmentation as people realize ETH isn’t the only game in town.
We see similar trends with CEXs, where most liquidity flows to Binance during bear markets.
Ethereum’s Three Problems
- Fragmentation: Crypto newcomers used to buy ETH and BTC. I certainly recommended that to many people in the last few years. However, those inflows are spread across different L2s, causing less demand for ETH.
- Branding: Bitcoin is seen as a scarce form of digital gold, and Solana is optimized for UX and cheap transactions. Ethereum is trying to be both, creating confusion for new users.
- Cannibalism: Another interesting point mentioned in the podcast is that Base generated $2.5 million in revenue in August while spending $11,000 in fees on Ethereum. That’s a lot of value Ethereum is not capturing. I’ve felt for a long time that the rollup-centric roadmap was cannibalizing Ethereum’s business model.
Despite the FUD, Jordi argues that Ethereum’s bull care paradoxically rests on its move to proof of stake. While Bitcoin still suffers from an ESG alignment problem due to its use of Proof of Work, Ethereum might be considered the safer and cleaner form of digital money. Indeed, I think that was one of the unstated goals of the recent Ethereum Story documentary.