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Coinbase Releases Its Own Blockchain Dubbed “Base”

Coinbase has released a new project to diversify their revenue. Only, it’s something we didn’t anticipate at all.

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CoinSnacks
March 02, 2023 • Estimated Reading Time: 5 minutes

Last week, we covered Coinbase’s Q4 earnings, and in a word, they were disappointing:

“Putting it all together, Q4 wasn’t the best showing for the ‘premier’ crypto exchange. The financials weren’t great, the earnings call was boring, and regulation continues to be a major factor.”

We also offered up a few possibilities for how they can turn things around by focusing on new business opportunities. This included acquiring a digital identities company, doubling down on SaaS revenue through Coinbase One, and more focus on its prime brokerage business.

And sure enough, less than one week after the earnings release, Coinbase released a new project to diversify their revenue. Only, it’s something we didn’t anticipate at all.

That something is Base, Coinbase’s own Layer-2 (L2) blockchain.

What Are L2s?

Layer-1 (L1) blockchains are the ones that we all know and love. Think Ethereum, Solana, and Avalanche.

The problem with L1s is that they all fall short in either decentralization, security, or scalability, known as the blockchain trilemma. Using our previous examples, Solana and Avalanche lack decentralization, while Ethereum is famously unscalable.

This unscalability makes Ethereum basically unusable for everyone but whales during busy times, as gas fees (the cost of doing business) rise with congestion.

So, to solve this problem, people have developed L2 blockchains, which are built on top of Ethereum to improve scalability. What L2s do is take transactions, roll them up into a batch, and then send them to Ethereum. The result is much cheaper transactions on L2s.

Many people (including ourselves) believe L2s to be the future. We even wrote about it in our crypto trends to watch for in 2023 report.

“L2s, meanwhile, are some of the hottest projects on the market. Optimistic rollups Arbitrum and Optimism are home to some of the most innovative projects in DeFi, while zero-knowledge rollups (which many believe are the future) like Scroll and zkSync should be unveiled in 2023.

We would not be surprised to see Ethereum + its L2s reach greater than 75% crypto Total Value Locked (TVL) dominance in 2023.”

CoinBASE

Base is Coinbase’s attempt at an L2. Reading the official announcement, it looks like a pretty standard one, but there are some key things to point out:

  • There will be no BASE token. This makes sense as tokens are usually used by protocols that need to incentivize usage. Coinbase, with its 110 million users and $80 billion in assets, doesn’t have a usage problem. So, in its place, ETH will be the official token of Base, a bullish development for ETH holders.

  • Base is built using the Optimism OP Stack. What this means is that, for all intents and purposes, Base is a copy and paste of a fellow L2 – Optimism. More specifically, Base is the first participant in the Superchain, which is Optimism’s vision to scale Ethereum through a bunch of connected OP Stack chains. Coinbase throwing its considerable weight behind this plan is hugely bullish for Optimism. Learn more about OP in our writeup here.

  • Coinbase sees Base as a bridge, not an island. Their stated goal isn’t to lock Coinbase’s users on Base, but for Base to be a friendly entry point into DeFi. This means it’ll be easy for users to transition from Base to Optimism, Ethereum, and even other L1s like Solana. This is extremely bullish for DeFi, which has been in the dumps for over a year now. Even if just 5% of Coinbase’s 80 million users use Base, that’s still 4 million fresh DeFi participants.

  • At the start, Coinbase will be Base’s sole sequencer. A sole sequencer is the entity that actually sends the transactions to Ethereum. This would make Coinbase responsible for processing every transaction on Base. Considering that Coinbase complies with federal regulations, it is possible that Base is DeFi’s first KYC-only blockchain. If Base does take off the way Coinbase wants it to, it could be the first domino to fall in DeFi’s eventual shift from permissionless to heavily regulated.

Looking Ahead

Coinbase needed to make a splash, and they did so with Base. By creating a potential flagship blockchain, they also have created a place to build on-chain products. Who knows, maybe we’ll see a Coinbase decentralized exchange, lending platform, or an on-chain game in the future.

Anything is possible now, and this is great for Coinbase’s future.

Moreover, analysts are already suggesting that through Base and Coinbase wallet native swaps, the company could potentially be adding roughly ~$0.7 billion (bear market) – $7 billion (bull market) annually to its bottom line in profit.

Overall, Base is a stroke of genius by Coinbase and the stock is up more than 11% since last week’s close.