What Does Coinbase’s New Layer 2 Mean for the Industry?
On February 22, Coinbase announced Base, their Ethereum Layer 2. This was quite an unexpected announcement and has wide-ranging implications surrounding future industry trends and the direction of cryptocurrency exchanges. Let’s analyze what we currently know about Base and some of its potential consequences for the Web3 industry.
Ethereum has dealt with scalability and congestion problems for the past several years. Due to Ethereum’s massive surge in popularity and inability to keep up with blockchain demand, transactions on Ethereum cost anywhere from $5 to $100, depending on their complexity, which is prohibitively expensive for most users. Layer 2s provide a scalability solution by acting like a zip file for transactions: they “roll up” a bunch of transactions into one piece of data, execute and compute the transactions off-chain, then post the results on-chain. This provides nearly the same security guarantees as mainnet Ethereum at a fraction of the price. The two biggest Layer 2s available today are Optimism and Arbitrum.
Coinbase, one of the largest and most prominent centralized cryptocurrency exchanges, is the first to announce a Layer 2. In their announcement post, they mention that they do not have plans to release a token alongside Base and instead will use ETH to pay transaction fees. Additionally, Base will be heavily integrated into Coinbase’s current product stack, meaning users will have access to simple and cheap onramps and offramps into the Ethereum ecosystem. With over one hundred million verified users and $80 billion worth of assets on the platform, Base will immediately have a large pool of users, liquidity, and partners to draw from, which will help catalyze the Layer 2 to relevancy quickly.
Base is powered by the OP Stack, an open-source toolkit created by Optimism. Given the Optimism rollup’s current position in the market as second to Arbitrum, this support from a massive chain should help Optimism improve its market reputation and positioning. Technically, Base will be a Superchain, meaning it is part of a permissionless system of chains built under the OP Stack that share security and communication. This mechanism should provide Base even more compatibility and flexibility with other layer 2s.
This announcement is one of the most interesting to come out of the Web3 industry this year, as it indicates a few trends that we may see over the coming months. Unlike Binance or OKx, two exchange competitors that have their blockchains, Coinbase chose to build on the Ethereum technology stack. This allows them to leverage the decentralization and security of Ethereum while also having the added benefit of less regulatory risk. Binance has had to cut some ties with the BNB Chain, formerly known as the Binance Smart Chain, for fear of regulators calling the BNB token a security. The BNB Chain is also criticized for its centralization, with only 40 validators controlling the network compared to Ethereum’s 500,000. Additionally, an on-chain presence allows Coinbase to build its own decentralized applications, and it could directly compete with Uniswap, Aave, and others if they so choose. They could also build new innovative DeFi primitives and jumpstart their growth with the massive amount of liquidity at their disposal. Given Coinbase’s large investment arm, Coinbase Ventures, it is likely that they will incentivize new and existing projects to make Base their home, which will further increase the Layer 2’s value and usefulness.
Other exchanges that have yet to release a blockchain will likely follow suit and release a Layer 2. It makes more sense than going through the hassle of creating a completely new blockchain and worrying about decentralization and regulation. The other possibility is that exchanges create appchains through interoperability protocols like Cosmos’ SDK, which would serve a similar purpose to Base.
Coinbase’s focus on Base and the Ethereum ecosystem is a net positive for the cryptocurrency space. Not only does it emphasize decentralization but also sensible regulatory practices, and this trend will probably continue. Base is set to launch on Ethereum mainnet in the coming months, which will be a monumental moment for Coinbase, Optimism, Ethereum, and blockchain enthusiasts alike.
By Lincoln Murr
