Coinbase Launches The Next Superchain
Coinbase has taken yet another step in being the most trusted US digital assets exchange that is also pushing the ball forward on responsible, compliance FinTech and Web3 innovation with its release of Base, an Ethereum Layer 2 solution and the next Superchain.
Coinbase launches Base, an Ethereum Layer 2 solution and the next Superchain
In addition to proving itself to be the leader as a trusted and U.S. regulated digital assets exchange, Coinbase is also subject to appropriate audit and transparency that comes with being a public company. In addition, they provide their own methods of Proof of Reserves to go above and beyond the call of duty for transparency of its asset management and custodial practices. They also have a significant presence on global public policy, namely US Congress and Federal Government agencies, in shaping the future of informed regulation that embraces innovation and protects retail and institutional investors.
Additionally, Coinbase has proven to be the CeFi leader in bringing innovative, secure, and most importantly compliant solutions to US citizens and global retail and institutional customers. Some of these products and services include:
Its original founding as an on-ramp to digital assets as a crypto exchange, and the first to go public, bringing significant credibility to the space as well as transparency for Coinbase as an institution
Enhancing Coinbase Wallet to enable Coinbase as a CeFi to provide a gateway to Web3 and DeFi (the “key to the world of crypto”!) and provide a non-custodial alternative to exchange based wallets,
Coinbase One for dedicated support and account protection, in a space that is generally non-custodial, self-service, self security, and self recovery
Institutional products to include custody, trading, commerce, and prime brokerage; and
Staking services for yield bearing protocols and supporting the Proof of Reserves model for Ethereum and others
An expansion into the asset management business with its recent acquisition of One River
… clearly Coinbase is creating the ecosystem of the future that is Web3 and DeFi-native, with the connective tissue for both native product integration, cross-chain, and off-chain interoperability.
Now, they are building on top of Layer 1 blockchains…. Enter Base.
What is Base and its value proposition to Web3?
Base is a secure, low-cost, developer-friendly Ethereum (L2) built to bring the next billion users to web3. Base offers a secure, low-cost, developer-friendly way for anyone, anywhere, to build decentralized apps or dApps on-chain. Base will serve as both a home for Coinbase’s on-chain products and an open ecosystem where anyone can build for both retail and institutional purposes.
Most interestingly, and different from many other Web3 projects, Base has no plans to issue a new network token.
Coinbase also cites some interesting differentiating characteristics about Base:
Secured by Ethereum: Base inherits the underlying security of Ethereum, along with Coinbase’s best practices, with these inherited controls significantly reducing the friction to creating products on-chain
Empowered by Coinbase: the ecosystem play here is probably the most powerful; with seamless product integration, existing on ramps for getting customers and partners engaged, and developer enablement, this could have a similar effect as Coinbase Wallet in creating another gateway to DeFi and Web3 specifically for on-chain development
Big features, small fees: by creating a developer focused platform that allows for gasless transactions, developer API tool kits, account abstraction, and bridging for multi-chain applications, this could offer a low fee, feature-rich experience for developers
Open source: by enabling a decentralized, permissionless and open ecosystem via Optimism Superchain. Base is built on the OP Stack.
Other cool functionality: natively integrates with Coinbase Wallet and any other EVM compatible wallet (e.g. Metamask); out of the box node providers via QuickNode, Blockdaemon, and Infura; embedded tool chains for smart contract development like Foundry, Hardhat, Truffle; and more
… all with the ambition of providing a means for cheaper, easier, and safer way to interact with dApps to shepard the next billion users to Web3.
Ok, great, but what is the value proposition in doing so?
This is one of the key components of Coinbase enabling Phase 4 of its “secret master plan” to create an open financial system that increases economic freedom globally by moving deliberately through four phases.
Phase 1: Develop the protocol (1M people)
Phase 2: Build a digital currency exchange (10M people)
Phase 3: Build a mass market interface for digital currency apps (100M people)
Phase 4: Build the apps of an open financial system (1B people)
Coinbase has placed its bets here as the mechanism for unlocking the mass adoption wave of DeFi participation.
Why Optimism?
Coinbase was already heavily involved with Optimism (OP Labs), the first core dev of the OP Stack, on Ethereum Improvement Proposal (EIP) 4844 (EIP-4844 is a post-Merge Ethereum upgrade to introduce data availability for rollups, leading to reduced fees and more transaction throughput… a critical enhancement for Ethereum and L2’s). Through this collaboration, Coinbase and Optimism developed a shared vision for the concept of the Superchain, and how to scale Ethereum for the benefit of web3 developers, users, and the broader cryptoeconomy.
According to the Base blog post, Coinbase joining as the second core development team to accelerate the development and decentralization of the Superchain and the OP Stack.
Accelerate activity in the Superchain: Base is the second L2 after Optimism Mainnet deployed on the OP Stack and intends to be part of the Superchain. Base will bring Coinbase’s onchain products and user base into the Superchain ecosystem, increasing activity in the Superchain while enabling Coinbase users to seamlessly interact with dapps and move assets across the ecosystem. The collaboration intends to: accelerate value in the superchain; add value to the Superchain; advance the developer ecosystem; build towards an interoperable cryptoeconomy; and do all of these things with a primary thrust of decentralization.
How can this be used to bring the next billion users to Web3?
When you consider the ecosystem described above that Coinbase has already created, and this recent announcement of its own blockchain that is fully integrated, all of the pieces to the puzzle are now in place for the bridge to DeFi (exchange, custody, wallet, experience, blockchain dev platform and scaling).
This should provide a direct mechanism to bring fiat current both on and off-chain, given that Coinbase is the primary US-based exchange for the same and provides a digital wallet to interact with dApps… and not just between Ethereum dApps, but other Layer 1 blockchains as well.
There are already gateways in place, such as Base joining Chainlink SCALE as part of the effort to integrate Web2 with Web3, and the testnet is now live. Chainlink SCALE allows blockchains and layer-2 networks to fast-track smart contract innovation in their native ecosystems by covering operating costs (e.g. transaction gas fees) of Chainlink oracle networks for a period of time. In doing so, their developers get access to a variety of important oracle services, which can include configurations specific to their ecosystem needs, such as Data Feeds with higher update frequencies to enable more advanced and low-latency smart contract applications.
This also is a huge endorsement for Ethereum as the centerpiece of the DeFi movement for Coinbase to place its bets here. Ethereum has the most developer activity and demand for block space (with ~4k monthly active developers), and many leading L2’s designed for scaling and decoupling of solutions from Ethereum as an L1 have been built here, including Polygon and now Base:
What critical barriers to adoption will present themselves for Base?
Barrier #1: Regulatory policy. Regulation will most likely be the biggest hurdle given recent events with FTX as a CeFi, and the White House focus on centralized constructs for FinTech innovation and digital assets. Since this is a foray into DeFi, there will be much more scrutiny as opposed to other centralized products and operating models within the Coinbase ecosystem. However, Coinbase is also at the forefront of regulatory compliance, but also, regulatory perspective on driving tech innovation but also steering the conversation towards informed, common sense policy enactment.
Barrier #2: Service maturity and adoption. Details are still unclear and it is early days. There is a lot of promise in the announcements and test net, but not yet extremely clear on exactly how certain functionality will be instantiated (e.g. bridging tech for cross / multi-chain ambitions, although it appears something is in development).
Additionally, this is a very crowded space with a significant degree of great development and ongoing projects. There are a number of Layer 2 solutions out there attempting to solve the Ethereum scaling problem and create a developer ecosystem for dApps, namely for DeFi protocols, including: Polygon. StarkNet. Arbitrum. Loopring. Optimism (which Base is built upon). However, none yet in the US have launched their own L2 with the same nesting within an existing ecosystem, user base, and resources that Coinbase have.
Barrier #3: TradFi building its own DeFi. TradFi is still attempting to build its own DeFi. As we discussed in a previous post on the case for tokenization, many TradFi’s are trying their hand at leveraging blockchain technology, tokenization methods, and smart contracts functionality to build their own DeFi for existing use cases and financial instruments, such as bond issuance. It remains to be seen where adoption at scale primarily comes from for any pure play DeFi project, to include L2’s like Base. This is very similar to the 2010’s era of cloud where many TradFi’s opted to build rather than buy with on-premise, private cloud stacks…. Only to eventually embrace public cloud infrastructure down the road.
Barrier #4 - The DeFi-native competitive landscape. This really boils down to the only other competitor who is also a major exchange with significant user base and native ecosystem: Binance BNB Chain (an evolution of Smart Chain). However, One of the key advantages here for Coinbase is its history of constant compliance with US regulators while also maintaining its own perspective and vision for the future of regulatory policy for the crypto space. Additionally, recent history on Binance.US and its approach to US regulatory compliance have been very concerning.
Where does Coinbase and the industry go from here?
This year will be very telling as Coinbase, the US leader in “compliant crypto”, places its bets by doing its part in helping to scale and improve access to scaling of the leading Layer 1 blockchain for the future of finance… and doing so all during crypto winter and with the headwinds detailed above. However, it has the user base, product and developer ecosystem, and public policy to be able to make this happen and unlock adoption at mainstream scale.
