An analysis of Base, the Coinbase L2
Mar 10, 2023
Base - A Coinbase L2
Today we want to talk about the Base L2 that Coinbase recently announced. We'll cover why it's important, why they might have done this and what are the implications and why is it interesting.
Coinbase announced an L2 that will roll up to the Ethereum blockchain. They're calling this L2 Base. The way we can think about it conceptually is that it is similar to something like Polygon or Optimism. The Base L2 is built on top of the optimism technology which is a really interesting design choice.
A question might be in a lot of people's minds, why would Coinbase launch an L2?
There are tons of L2s already. Many of them have quite a lot of usage, like Polygon, for example. We think the key reason is that strategically Coinbase is at the very beginning point of the general population's Web3 journey. They mentioned they have a couple hundred million users on the Coinbase platform that have bought crypto.
All these users are using Coinbase's centralized exchange and custodial wallet to store those funds. What they're basically doing by launching their own L2 is saying all of those hundreds of millions of customers, which is probably the largest customer base in all of Web3 crypto, can now start accessing applications built on Coinbase L2 with basically a click of a button.
In the Coinbase app, they can showcase DeFi protocols, lending protocols, and borrowing protocols, all kinds built into the Coinbase ecosystem. This creates a direct revenue channel for them as people port their money from Coinbase to centralized exchange into DeFi protocols. This also lets them control that user journey in a really, really clear way by controlling the on-ramping, controlling the off ramping, and controlling what kind of applications people see inside of the Coinbase app.
Coinbase already has a lot of these DeFi protocols that are shown in their app base. Basically gives them really strong control over the whole ecosystem and the whole end-to-end user journey. The second thing it does is allows them to have really strong technical control over what the L2 tradeoffs are so they can trade off between decentralization, cost, security, and performance in a way that makes sense for them. So I think those are the key strategic reasons why Coinbase wants to do an L2.
Why is there no network token?
One of the interesting points in the announcement from Coinbase is that they're not planning on releasing a new token for this new network. There are a couple of reasons why that could be. They don't want to kind of create hype and mystery around the new token at this point. Right now, it's a down market. They're not going to be able to extract as much value from it. They may change that outlook, obviously in six months, nine months, or a year's time.
The other reason might be they want to actually keep Coinbase's core business, which is the exchange and the tokens people have already purchased. They want to continue that. So they want folks to continue to purchase and hold Ethereum, for example, and they might do like a wrap Ethereum on the L2. That might be another reason why.
How secure is the Base L2?
Regarding the security of Base, we think the key thing Coinbase is relying on is the open-source nature of the software they want to build in the open. They want to contribute back to the optimism stack, and they want to make sure that everything that they're building is verified by the community and looked at by as many people as possible. This is kind of the security through community aspect of it.
We think if Coinbase pushes their existing user base, 110,000,000 people, 80 billion in assets, they might be able to get to a pretty high TVL very quickly compared to kind of the other Lt's that have had to someone like Polygon has had to convince people to bridge their assets over from Ethereum into Polygon. Now, that's quite a big step, especially for people that aren't crypto native and don't have the experience of wrapping and bridging. We think this is going to be really interesting.
If you would like to listen to the complete podcast on this topic from our CEO Sid, here is the complete video.