Coinbase (COIN) announced its Layer 2 blockchain, Base with the intention to onboard the “next billion users to web3”.
What is ‘Base’?
Coinbase’s layer 2 network, Base was launched with the aim to onboard more users into cryptocurrency. With Base, COIN wants to allow developers to integrate their products and provide fiat onramps. Its existing pool of users could introduce about $80M worth of assets into DeFi and other cryptocurrency protocols.
The Base testnet was announced on 23 Feb 2023, with the mainnet launch being in the works.
What makes Coinbase’s move noteworthy is that it is the publicly listed company to launch its own blockchain.
But so what?
“It allows users to have self-custody over their assets, while still being inside the Coinbase ecosystem. Coinbase has over 110M users and more than $80B AUM, which could eventually be onboarded to DeFi.
The Base launch is a first in the exchange world. If proven to be successful, others might likely replicate the model, leading to a more Eth-centric world with less alternative L1s.”
— Chris Long, Crypto Investing Mentor and Yield farming expert
1) This could be a new way for COIN to grow users
The bear market meant that there’s less transactions and even lesser new users for crypto exchanges. This is bad for COIN’s growth.
In the short term, developers who build on Base would be able to instantly target Coinbase users. While COIN has over 110M users, a large majority could be beginners who don’t want to figure out the rather complex process of moving their coins around. Such users can be onboarded into crypto via Base.
That said, user growth works both ways.
In the long run, Base could attract existing crypto investors onto the Coinbase ecosystem. If executed well, Base might just become a new stream of growth for COIN.
2) Base is a Layer 2 protocol
Layer 2 protocols are not new – they are basically scaling solutions that allow for more efficient transactions to take place on top of a Layer 1 blockchain. There have been many L2 protocols, Optimism is an example that is built on top of Ethereum.
This means transactions done on Coinbase’s L2 protocol will be supported by the Ethereum network, and fees would likely benefit OP’s treasury.
“Base is an Optimism fork and they have to pay to OP treasury for using the network.
It could become a free-to-use incubation office for protocols to move in to build their services and let users try it out. If there is a protocol that garners enough use and attention, they might just become one of the top protocols for the next wave of investors.”
— Aik Keong, Crypto Investing Mentor and Investor
While this is beneficial for Optimism, it also suggests that Coinbase isn’t playing the same game as Binance’s Binance Smart Chain (BSC).
Given the FTX scandal and a (hopefully) wiser cryptocurrency investing scene, if COIN were to launch their own internal blockchain supported by their own validators, it could open up questions on decentralization and whether the exchange could manipulate transactions.
Hence, the move to fork Optimism and rely on the Ethereum blockchain to approve and secure transactions is a smart one.
On top of that, Coinbase now has the potential to attract users, brands and developers and eventually become a major player in the Layer 2 space.
As a publicly listed company, COIN could help make blockchain technology more accessible to mainstream audiences, while potentially develop a significant side business.
Downsides to Base
While Base is definitely a bullish move, there’ll be trade offs. Chris opined:
“All Base users will have to be AML/KYC’d: there may be some limitations to onboarding in some smaller nations, as well as general. While Base could grow the crypto scene, it might also be step back for privacy.”
— Chris Long
As a public listed crypto exchange, Coinbase will need to adhere to regulations. This means all their users would have to be verified.
KYC is a process that exchanges use to verify their customers’ personal information. And it has long been viewed as an anti-thesis to cryptocurrency.
Should COIN’s Base become a major L2 solution, privacy could be thrown into the backburner for its users.
What happened after the announcement?
Optimism’s OP token was up 16%,
an unrelated token Base Protocol (BASE) jumped by 250%!,
but…COIN’s stock remained lackluster 😒 Although it spiked 5% when opening on 24th, the stock eventually closed at -1%, despite the company beating revenue estimate in its latest report.
At the point of writing, Coinbase has no intention of launching a network token for their new Base L2 layer.
The price movements suggest that although this news took the crypto scene by storm, non-crypto investors were unmoved. A lot of work still has to be done for before COIN can onboard the “next billion users to web3”.
