Coinbase, the second-largest crypto exchange by trading volume, is diving into the blockchain world in a move that some market players are excited about.
On Thursday, the exchange launched Base, an Ethereum-focused layer-2 (L2) blockchain, in an effort to enter the decentralized ecosystem through its own chain and expand further into the developer space, Jesse Pollak, lead for Base and head of protocols at Coinbase, previously told TechCrunch.
Base’s L2 is a “secure, low-cost, developer-friendly” chain that aims to help builders create dApps on-chain, the company stated. A number of crypto businesses, platforms, marketplaces and infrastructure firms have committed to building on Base, a Coinbase spokesperson told TechCrunch.
Those that plan to be involved include Blockdaemon, Chainlink, Etherscan, QuickNode, Aave, Animoca Brands, Dune, Nansen, Magic Eden, Pyth, Rainbow Wallet, Ribbon Finance, The Graph, Wormhole and Gelato, to name a handful.
“The launch of Base reinforces the importance of L2s in growing the blockchain ecosystem,” said Dmitry Shklovsky, co-founder of QuickNode, which is a partner and node provider for Base. “More onramps and more equitable, developer-friendly L2s are key health indicators that we are moving in the right direction.”
L2 blockchains build on top of layer-1 (L1) blockchains like Ethereum, Solana and Avalanche in an effort to reduce bottlenecks, constraints and other network-clogging effects. Instead of putting every transaction on an L1 chain, L2s bundle transactions so tasks can be delivered in a more efficient manner.
L1s like Ethereum are secure but impractical for high-throughput volumes due to prohibitively expensive gas, or transaction, fees, spokespeople from The Graph Foundation and Edge & Node said in an email to TechCrunch. “L2s make the blockchain space more accessible by a broader range of both devs and users, allowing cheaper, faster transactions that still take advantage of the security of L1s like Ethereum.”
L2s are essential for accessibility and scalability in the space, Shklovsky said. “L1s typically prioritize security and decentralization over scalability. L2s reduce the workload on the main chain, making the network faster and more user-friendly, allowing chains to scale quickly without compromising decentralization or security.”
Growing the L2 space
Base is built on the MIT-licensed OP Stack in collaboration with the layer-2 blockchain Optimism, which is also focused on the Ethereum blockchain. “Optimism is not a competitor [to Base], but rather a collaborator,” Shklovsky said.
The Optimism stack is open source and relied upon by many in the web3 space, The Graph and Edge & Node spokespeople said. “This demonstrates the positive-sum and collaborative spirit of web3, in contrast to the competitive landscape that has become the norm in web2. When developers build in the open, everyone benefits without having to reinvent the wheel from scratch every time a new technology is created.”
Coinbase’s new chain will not impact the crypto ecosystem more or less than any other L2, Shklovsky thinks. “Since there is no plan to issue a network token, Base’s only impact on the broader crypto ecosystem is creating another onramp for new users — which is good for everyone.”
Coinbase is home to over 110 million verified users and is a well-known entry point for new people looking to enter the web3 space. So, this launch could be a connecting point to the Wild West of crypto.
The new chain will help “onboard new users into the crypto ecosystem that will engage in decentralized applications — at a deeper level than surface-level engagement on exchanges,” The Graph and Edge & Node spokespeople said.
“By launching an L2, Coinbase creates a bridge between exchange users and the decentralized web,” the spokespeople said. “It’s encouraging to see centralized organizations building on top of decentralized infrastructure, introducing their users to more web3-native experiences.”
Reinforcing beliefs
In general, Offchain Labs (the team behind L2 scaling solution Arbitrum) and QuickNode also see Coinbase’s involvement as exciting. “It reinforces what we’ve always believed — blockchain is about so much more than just cryptocurrency,” Shklovsky said, referring to the tokens often associated with particular chains.
Coinbase’s involvement also validates the vision for L2s, Steven Goldfeder, CEO of Offchain Labs, said. “Scaling Ethereum is a team sport and we welcome them to this important space.”
There are dozens of L2 blockchains that exist today, with over $6.34 billion in total value locked (TVL) across the networks, up about 3% in the past seven days, according to L2BEAT data.
Arbitrum, which is the biggest L2 scaling system, has over $3.35 billion in TVL and surpassed Ethereum in daily transactions on Tuesday with over 1.1 million transactions, according to block explorer Arbiscan. This growth points to the demand for scaling solutions as the Ethereum ecosystem continues to grow.
“We’ve been long-time believers in the importance of L2 technologies as the future of our Ethereum, and indeed we’ve been seeing this vision play out with Arbitrum seeing explosive organic growth, outpacing the number of transactions on Ethereum for the first time this week,” Goldfeder said.
While Base is incubated inside of Coinbase, its plan is to decentralize it “in the years ahead,” Pollak said. The team has done “a lot of work over the last six months” to address some of the biggest concerns from others, including how a big centralized company can engage in a decentralized way.
This effort to become fully decentralized “shows their commitment to the ethos of the blockchain space,” Shklovsky said.
Market players have to look at the L1 and L2 spaces with an abundance mindset, Shklovsky said. “With billions of potential users worldwide, there is a place and use case for every L2 as long as they are secure, user-friendly and scalable.”
Regulation sitting on the sidelines
As all this plays out, regulation looms in the background for the whole industry.
The U.S. Securities and Exchange Commission has been circulating around the crypto space as it homes in on staking businesses like Kraken’s — which got hit with a $30 million charge from the agency earlier this month.
In separate news, at the beginning of 2023, New York financial regulators found that Coinbase violated anti-money laundering laws by failing to conduct adequate background checks. Coinbase agreed to pay a $50 million fine to the New York State Department of Financial Services and is also required to spend $50 million on improving its compliance program.
A number of U.S.-based crackdowns are transpiring across the crypto space, and the question of how major crypto firms and exchanges like Coinbase will navigate these new waters is unclear. Adding a new decentralized blockchain to a centralized entity could cause some headaches for the exchange if they go off-course in the eyes of regulators.
But whether regulation will carry a deeper weight on the space is yet to be determined.