Coinbase no longer wants to be in the business of just selling coins: it wants to onboard a billion people to a crypto-native economy. The role Coinbase sees for itself is that of a portal for users: an environment where they can safely make their first baby steps. Coinbase built a chain tailored for that purpose: Base. What is Base?
Main net launch of Base is expected in the second quarter of 2023. Coinbase doesn’t launch a token and instead opts for a Layer 2 on Ethereum. This means that all transactions on Base eventually settle on Ethereum. A layer 2 can process more transactions than Ethereum itself and at a much lower cost. Examples of existing layer 2’s (L2) are Polygon, Arbitrum and Optimism itself. In the case of Base, it is a rollup built on the technology of Optimism.
What is the Difference Between Base and Other L2s?
In the Bankless interview, Coinbase’s lead developer Jesse Pollak ducks this question a bit and talks about how the chain will bring developers and users into contact with each other.
In other interviews, he has alluded to lower transaction fees. Pollak has told TechCrunch that in the beginning, Base will have comparable fees to Arbitrum or Optimism, in the 10- to 50-cent range, with plans for it to drop to around 1 cent over the next year.
Why is Coinbase Disrupting Its Own Business?
It’s not the first time Coinbase makes a commitment to ‘make on-chain online and onboard 1B+ users into the cryptoeconomy.’ Already in 2017, Coinbase showed it doesn’t want to limit itself to being a centralized exchange. It was the year of the launch of Coinbase Wallet, a wallet where the customers hold their own keys and don’t have to provide Know-Your-Customer data. It is equally unlikely that Base will integrate KYC requirements: it will be permissionless. It is yet unclear what the US regulators will think of this.
The launch of their own chain is for sure an act of Coinbase doubling down on their belief in crypto as a decentralized system. If successful, Coinbase would disrupt its own business model, a feat that not many companies in history have been able to achieve. Most companies are disrupted by competitors who launch a different business model and outcompete the old one.
On-Ramp From Fiat to Crypto
Coinbase views itself as the on-ramp from the fiat world to the crypto world. But currently, most Coinbase customers are not transacting with blockchains from their own wallets. They generally trust Coinbase to manage their coins. Coinbase’s hope is that the integration of their wallet and Base will introduce more people to ‘pure crypto’, where they can venture out in the crypto ecosystem built on Base and beyond.
Coinbase views Base as a gateway, a portal: “We encourage them to start on Base, but go everywhere: we see Base as a “bridge” for users into the crypto economy. It’s an easy-to-use default on-chain experience with access to products on other chains.”
The chain will be integrated across Coinbase’s exchange, wallet, NFT marketplace and developer products.
But What’s in it for Coinbase?
But won’t Base cannibalize Coinbase’s business? After all, they make their money from transaction fees and custodying people’s coins. If those people are onboarded to Uniswap through Base, won’t that hurt Coinbase’s bottom-line? Jesse Pollak on Bankless:
“Coinbase is really the gateway to web3, a gateway to the crypto economy. We weren’t going to be an exchange for the rest of our lives. An exchange is just a step. Later steps are about building an entirely new economy on-chain, the crypto economy. Coinbase’s role in that is going to be the gateway to that crypto economy and we think ultimately that that’s going to be a massive business that we’re super excited to grow. And not only is it going be a good business, but a rising tide that lifts all boats.”
This argument of a rising tide lifting all boats has some merit to it. After all, attracting more users to your DeFi gateway might also make them stick around to use some of your centralized services.
Also, it is yet unclear if Coinbase can benefit from the activities on Base itself through some fee structure. Could it become a DeFi version of Apple’s app store, where Coinbase would take a cut on every transaction? Is it a case of All your Base are belong to us, as Coinbase itself joked? Well, to be successful in a highly competitive landscape, the cut surely would have to be much smaller than the 30% cut that for example Apple takes!
Collaboration Between Base and Optimism
Base is built on the open-source and MIT-licensed OP Stack, in collaboration with Optimism. According to Coinbase, its developer team is the second team working (after OP Labs) on the OP Stack and its mandate is to ensure it remains open source.
As Optimism has freed up its OP Stack, it has given Coinbase the opportunity to piggyback on the lead Optimism has built over the years and launch faster. In return, Coinbase promises to share a portion of future revenue with Optimism and contribute to the continued development of the building blocks it uses.
The Superchain
Coinbase’s vision is to create a robust developer ecosystem of interoperable L2s. They expect that there will be many rollups with significant activity, serving as “hubs” for different ecosystems. This is supposed to gradually increase their interoperability until they form a “mesh” or “Superchain” that jointly scales Ethereum. This Superchain will be, in Coinbase’s view, a network of interoperable L2s, which will pave the way for greater participation, security, and new use cases.
Coinbase and Optimism clearly have a mutual interest in the further development of Ethereum. That’s why the Coinbase team has also joined OP Labs in working on Ethereum Improvement Proposal (EIP) 4844. That’s the upgrade on Ethereum that will reduce the cost of layer 2 rollups by a factor ten to hundred. All in all, a fascinating collab between a ‘traditional’ company and a ‘pure’ crypto company.
What Can Be Built on Base?
Coinbase has a good deal of clout in the industry. Quite a few crypto businesses have committed to building on Base, including Chainlink, Etherscan, Quicknode, Aave, Animoca Brands, Dune, Nansen, Magic Eden, Ribbon Finance, The Graph, and Wormhole, to name a few.
As the chain is intended to be a ‘gateway to crypto’, if you will, everything you can imagine can be tied to it. For example, decentralized finance, gaming, metaverse, the whole shebang.
Bullish for Ethereum Ecosystem
The good news for Ethereum is that a giant like Coinbase recognized its network effects as too large to be ignored. Apparently, Coinbase reasoned it would be wiser to engage and benefit from the Ethereum ecosystem than to silo itself off with a separate Layer 1.
This looks bullish for Ethereum, as it sets a precedent. Coinbase is a publicly listed company. If more companies will build chains and/ or apps on Ethereum, it reaffirms the narrative that Ethereum will stay the dominant Layer 1 for smart contracts.
Of course, this whole story is also bullish for Optimism.
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
