This episode unpacks the contentious Solana governance vote on SIMD 228, exploring the proposal's failure, the underlying dynamics of Solana's validator ecosystem, and the broader implications for blockchain scalability and value capture.
SIMD 228 Vote Failure and Analysis
- The podcast begins with a discussion of the recently concluded vote on SIMD 228, a proposal to modify Solana's inflation schedule. The proposal failed, receiving 61% of the vote, short of the required 66% supermajority. Mert, co-host and CEO of Helius, states he wasn't surprised by the outcome, and had even requested the vote be delayed. He explains that a deeply divisive proposal passing wouldn't have been a true "win," referencing the startup principle: "if it's not a hell yes, it's a no."
- Mert emphasizes the long-term nature of the proposed changes, aiming to incentivize active participation over passive issuance.
- He highlights the potential economic shock of drastically reducing issuance (hypothetically 90% lower), forcing validators to seek revenue through increased block space utilization and MEV (Maximal Extractable Value) optimization.
- "If you talk to the multi-coin guys, if you talk to Anatoly or anybody from Anza, everybody roughly understands that's the endgame," Mert says, referring to the need for increased on-chain activity to compensate for reduced inflation.
Critique of the Governance Process
- Mert expresses disappointment with the governance process surrounding SIMD 228. While the proposal was introduced three months prior, serious discussion only ignited in the final week, leading to a perception of rushed decision-making.
- He criticizes certain arguments against the proposal, particularly those advocating for "systems thinking" by combining multiple proposals simultaneously.
- Mert argues this approach increases complexity and risk, citing Taleb's work on system fragility. He advocates for incremental changes and observation.
- He also criticizes the overreliance on historical data and the attacks on proponents' motives, rather than focusing on the proposal's merits.
- "I'm totally fine with the outcome, the process though I was not a fan," Mert states, highlighting the wasted time and lack of productive discussion.
Validator Dynamics and Political Challenges
- The conversation shifts to the political challenges of passing a proposal that directly impacts validator revenue. Jack, the host, points out that larger validators were more supportive of SIMD 228, while smaller validators, facing potential unprofitability, largely opposed it.
- Mert acknowledges this dynamic but offers a nuanced interpretation of the voting data.
- He explains that many "small" validators are actually controlled by larger entities, creating a misleading perception of decentralization.
- He also notes that many "no" votes came in at the last second, strategically timed to avoid political conflict unless absolutely necessary to defeat the proposal.
- Mert mentions that Ledger's "no" vote was likely decisive, but understandable given their business model relies on staking rewards.
The Solana Foundation Delegation Program
- The discussion turns to the Solana Foundation Delegation Program (SFDP), which subsidizes smaller validators by delegating stake and covering voting costs. This program has been criticized for potentially creating a false sense of decentralization.
- Mert explains the SFDP's purpose: to bootstrap new validators and increase node count, similar to Uber's growth strategy.
- He acknowledges the program has been winding down, with the number of self-sustaining validators increasing.
- Mert argues the SFDP should be limited to app teams and core contributors, and the existing program gradually phased out.
- He emphasizes that simply having subsidized validators doesn't guarantee decentralization and can mask underlying risks.
- "It gives a false sense of security and numbers," Mert says, suggesting that even without the SFDP, Solana would still have a respectable validator count.
Future of Solana's Issuance and Mert's Perspective
- The hosts discuss potential next steps for Solana's issuance. Austin Federa's "Left Curve 228" proposal, suggesting an accelerated decline to 1.5% issuance, is mentioned.
- Mert expresses reservations about arbitrary changes, preferring market-based mechanisms that provide feedback and allow for evolution.
- He reiterates his focus on increasing block space, improving MEV, and fixing transaction sending issues, rather than dwelling on the issuance debate.
- "I honestly do not give a [ __ ]," Mert states, emphasizing his desire to move on and focus on core network improvements.
Standard Chartered Report and the "Ethereum Midlife Crisis"
- The podcast shifts to a discussion of a recent Standard Chartered report titled "Ethereum Midlife Crisis," which significantly lowered its price target for Ether and criticized Ethereum's L2-centric roadmap.
- The report claims that Base, an Ethereum L2, has removed $50 billion in market cap from Ethereum, highlighting the parasitic nature of L2s.
- Mert agrees with the report's directional assessment, stating that L2s clearly eat into the value capture of the L1.
- He contrasts this with Solana's approach, where execution on the L1 aligns incentives between app teams, infrastructure providers, and token holders.
- "Physics will catch up at some point and you need to scale the L1," Mert asserts, arguing that Ethereum's focus on L2s is unsustainable.
Ethereum's Potential Solutions and Challenges
- The hosts discuss potential solutions for Ethereum, including taxing L2s or scaling the L1. Mert is skeptical of the former and believes the latter is the only viable long-term solution.
- He points out the political power of L2s within the Ethereum ecosystem and questions whether the L1 can regain market share.
- Mert highlights the "brand account" phenomenon, where Ethereum-aligned entities engage in coordinated social media campaigns to promote a unified narrative.
- He argues that Ethereum still has significant advantages, including the most assets and security, but risks losing its lead if it doesn't prioritize L1 scaling.
Solana's Five-Year Vision
- The episode concludes with a discussion of Solana's five-year anniversary and Mert's vision for the network's future.
- Mert emphasizes the goal of achieving "blockchain at NASDAQ speed," creating a system with the performance of a single computer.
- He believes this will eliminate inefficiencies in finance and commerce, citing his own experience with slow and expensive international money transfers.
- Mert views crypto as a technology that can improve and evolve capitalism, making it more efficient, fair, and scalable.
- "I think crypto is a tech that improves or evolves capitalism," Mert says, highlighting the potential for transparent markets and capital allocation.
- Concretely, this means focusing on increasing block space, reducing latency, democratizing MEV, and ensuring decentralization and security.
Reflective and Strategic Conclusion:
This episode provides a critical analysis of Solana's recent governance challenges and the broader debate surrounding blockchain scalability and value capture. For Crypto AI investors and researchers, the key takeaway is the importance of aligning incentives and prioritizing L1 scalability, as demonstrated by the contrasting approaches of Solana and Ethereum. Investors should closely monitor developments in both ecosystems, paying particular attention to how networks address the challenges of validator economics, decentralization, and the evolving relationship between L1s and L2s.
