CoinMarketCap Academy looks at Base — Coinbase's newly-launched layer-2 solution built on the Optimism tech stack.
Coinbase, the biggest crypto centralized exchange (CEX) in North America, is going on-chain. The exchange recently announced the launch of "Base," an Optimism-based new Ethereum layer-two (L2) chain. Coinbase's 100 million verified users will be able to access the crypto ecosystem via Base’s intuitive interface. The launch adds a significant development in Coinbase's business model — from a centralized crypto exchange to a web3 gateway.
This article explains:
- What Base is and its connection to Coinbase
- How Base works
- Potential future opportunities and challenges for Base
What Is Base?
Base is a layer-two chain developed by Coinbase. It is built on Optimism, a layer-two scaling solution for Ethereum — and the second largest L2 ecosystem, behind Arbitrum. Optimism aims to solve the blockchain trilemma by providing interoperability and composability for participating rollups, one of which will be Base.
Source: L2beat
Optimism's long-term goal is to develop into a "superchain" of L2 chains, with the aim of facilitating the scaling of Ethereum. This superchain introduces a shared security model and tooling for developers to create and interact with Optimism-compatible layer 2s, enabling all chains to work with a normal wallet.
Read: How To Add Optimism To Metamask
Coinbase has been working with Optimism for over a year and contributed to developing EIP-4844, also known as proto-danksharding, which aims to increase block space and lower gas fees. This upcoming Ethereum upgrade can decrease L2 transaction fees by 10-100x. Launching multiple L2 rollups may replace multiple L1 chains, which could lead to a bullish dynamic for Optimism and projects associated with it.
Also read: What Are Cryptocurrency Layer 2 Scaling Solutions?
How Does Base Work?
Base is being built on Optimism and is an optimistic rollup chain. It is built on open-sourced technology and will initially be highly centralized in terms of block production.
It targets the Ethereum developer community and Coinbase's existing user base and will presumably function as a way for Coinbase to experiment with DeFi. Coinbase will be the sole operator of Base, allowing the company to collect fees and act as a potential revenue stream for Coinbase. Base already announced a range of decentralized applications it will work with, which includes major apps like Aave, Sushiswap, and NFT marketplaces like Magic Eden.
Developers could be enticed to work with Base since it will unlock access to Coinbase's massive existing user base of non-DeFi natives.
The tech behind base would leverage the "superchain" idea, where Optimism provides the tech stack for other, potentially permissioned blockchains to build and be secured by Optimism. At the same time, Base would benefit from synergies from EIP-4844, a future Ethereum upgrade that promises to drastically lower transaction fees between L2 chains. This would reduce the friction of interacting with Base and could onboard Coinbase's significant user base, especially first-time crypto users that use Coinbase, to DeFi.
Read also: Next Steps For Ethereum After The Merge
The Future of Base
There are several potential future opportunities and challenges for Base.
First, the launch means Coinbase is betting on web3 and L2 adoption and wants a piece of the future revenue cake. Coinbase is an OP stack core contributor running a joint roadmap with Optimism and could onboard millions of new users to DeFi through Base.
However, Base's launch will likely have a significant impact on Coinbase's finances. Operating Base in its infancy would incur certain costs for Coinbase. Rollups are typically profitable because users pay fees to operators. Base has indicated revenue sharing with the Optimism Collective, which could reduce the revenue that Coinbase can collect but suggests the exchange is optimistic (pun intended) about Base's transaction volumes. Overall, this would still be a scalable additional revenue stream for Coinbase, even if it is a small one in the beginning.
However, regulatory concerns remain, and it is unlikely that Base can launch a token amid an uncertain regulatory climate. As much was stated in its official announcement on Twitter:
Still, liquidity is not expected to be a problem. Similar to how Arbitrum leveraged a potential token airdrop, Coinbase may find a way around launching a token to attract users to Base. Moreover, regulatory unclarity means that Coinbase will steer clear of anything that could later be labeled a security.
Base could be a permissioned rollup, requiring users to be KYC-ed on Coinbase before onboarding to Base, to avoid sanctioned entities using it. Overall, significant hurdles remain before Base can impact the DeFi space.
Conclusion
Coinbase does not plan to rival other exchanges like Binance directly with this move. But it is betting on decentralized technology and further adoption of Ethereum through its scaling solutions. Base could add significant utility to the DeFi space and, most excitingly, prompt DeFi protocols to build applications appealing to Coinbase’s more conservative and beginner user base — and contribute to driving mass adoption.
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