First there was COIN, then there was BASE

(Excerpt taken from my newsletter at https://www.rocketfuelcrypto.com/, where this will be published later)

Even among a regulatory blizzard from the SEC, Coinbase has announced a new Layer 2 chain called Base. Details are still coming to light, and I’m very interested to see which partnerships or entities come to join the ecosystem. Let’s go through some of the details:

Base is built off of Optimism Stack, a platform designed to spin up Layer 2 chains that are all interoperable with each other. Optimism pumped 20% when the news came out.

Base is not going to have a coin, it will use ETH as its native gas, making it a true Layer 2. That is a smart move given the uncertainty over recent SEC actions. Like Optimism, it’ll be pretty fast and have low fees to use.

The chain will be decentralized, meaning others can build anything on top of it, because it is OP, your existing Metamask wallets will work with it. I’m guessing they will likely make bridges require KYC or to go through Coinbase itself, otherwise not every wallet will be verified. Even if you send your ETH to another wallet on this chain, it still has to ramp or bridge to get there in the first place. This makes bridging with LayerZero or Wormhole a bit more interesting, we’ll see how they handle that integration.

Why is this a big deal? It’s a public company launching a public permisionless chain, so have to be very thorough on how this could actually exist with the current state of regulations. If it does works out, I could see other companies launch their own Layer 2 chains as well, they would be purpose driven chains to serve their ecosystem, all while rolling back into Ethereum. Hot take? Most likely bigger exchanges like Kucoin or Huobi (redoing their HEC chain) could step in with their own rollups. That makes KCS and HT tokens pretty interesting here.

Finally, let’s cover some use cases that Coinbase could do with this. The obvious one is payments. For example, Coinbase could allow companies to accept USDC, and then automatically manage the funds for their customers. Coinbase already custodies a ton of money for enterprise customers, so the transition would be relatively easy for their back end. On the front end though, they would have to partner with existing players like Square (who is all in on Bitcoin), Visa/MasterCard, Paypal or others.

On the Decentralized Finance (DeFi) side, they could be the go-to enterprise custody DeFi network. For example, if people wanted to lend their funds from Coinbase Custody, it could go to Base chain, then drop into Aave Arc. Then another customer could borrow funds from Aave. In this example, it's 2 large companies on an official blockchain platform with DeFi completing the transaction. Technically Coinbase could be controlling the servers, but everything is open, transparent, and could eventually roll back into ETH if necessary. Base could also allow larger companies to open access up to DeFi products as well, as long as Coinbase has strict guidelines with their partners, it could work. From the retail customer perspective, they could be the “trusted” chain, and make bridging from the Coinbase app a breeze. I’m guessing there will be some interface where the customer has no idea they are even using a decentralized wallet to interact with it.?

One could argue though, that encouraging users to go to DeFi could harm the Coinbase core business. If people are not paying fees on Coinbase because they are swapping on Base, that is something that their platform would need to compensate for. The theory is that the transactional volume and maybe value creation of the chain would be greater than existing revenue from trades. Custody services probably could get a boost if they use Base to stake too. That being said, Binance Smart Chain has a market cap of $48B, which is more than 3x the market cap of Coinbase stock, so there’s plenty of upside potential there too.?

Since Coinbase already tried NFTs, I don’t think Base would be a good fit as an NFT platform, it looks like MATIC is already winning the battle there with the enterprise space. In fact, the biggest risk about this project is it could end up like their NFT product, so Coinbase’s priority should be to lock in as many big customer use cases and partnerships as soon as possible. That being said, with over 100 million users on Coinbase, it would only need to convert 1% or so and it would be one of the top chains in the space. The bar is pretty low to do better than their NFT efforts…

Are there any action items here? Probably only if there are brand new DeFi projects that launch and you could get in on the ground floor, but if nobody uses the chain, these will likely trend towards 0. Will there be a BASE coin in the future? It’s going to be some time, once the SEC is more clear on the rules of issuing digital currencies, that’s when Coinbase will decide. For now, the idea of BASE is only an ace tucked way up their sleeve (remember that’s how Bitfinex saved itself with LEO). A side bet would be Coinbase stock (COIN), but the company is bleeding cash right now. Moving forward, we’ll follow which new apps that get deployed over and pick out the ones that look the most promising.