In 2021, Jesse Pollak was ready for a new challenge. After working at Coinbase for five years, he had risen through the ranks and led a team of 3 people to a team of 250, responsible for Coinbase’s consumer products. He then developed a desire for entrepreneurship.
In order to retain this star engineer, CEO Brian Armstrong told Pollak, “Figure out how to bring Coinbase on-chain.” “On-chain” is a cryptocurrency term that refers to activities happening on the blockchain.
Facing this challenge, Pollak first envisioned building a decentralized autonomous organization (DAO), an obvious crypto collective that relies on a loosely connected group of mostly anonymous individuals to make decisions.
In front of the executive team of this Fortune 500 company, Pollak presented his request: could they allocate $1 billion and 60 employees to transform Coinbase into a DAO?
“They said, ‘We love your energy, but you’re thinking about it in the wrong way,'” Pollak recalls with a smile.
He then started considering the advertising market, followed by app stores, and then identity applications. After a year and a half of exploration and trying out various possible solutions, Pollak realized one fact: “First, we need a true software platform.”
Coinbase’s own Layer 2 blockchain, Base, was born. Base is built on top of Ethereum and can aggregate batch transactions and write them to the main chain. Base was launched in August of last year and is widely regarded as a successful L2 project. In the first quarter of 2024, Base’s transaction volume reached twice that of Ethereum, generating over $56 million in revenue. Mainstream applications on the chain include Uniswap, Chainlink, and OpenSea.
“We are redesigning the software stack because we need to rebuild most of Coinbase’s functionality on this new platform,” Pollak explains during a video interview with Fortune Magazine in his Washington, D.C. childhood bedroom. Behind him is a mural tree painted by his father, with branches flourishing around him. But his ambition goes far beyond that: “We are building the next generation of the internet.”
“I feel like I was born to do this.”
Pollak is a talkative person who enjoys discussing lofty ideals rather than mundane technical details, breaking the stereotype of most engineers. After studying at a Quaker school for 15 years, he believes that some Quaker values – simplicity, community, equality, and stewardship – are what motivated him to create Base.
Pollak’s entry into the cryptocurrency field was purely accidental. He had previously been involved in a startup that developed encryption for tech companies, but the company failed, and he joined Coinbase as an engineer. He wasn’t particularly enthusiastic about cryptocurrencies, but the company provided him with a path to work hard and create meaningful things.
“I don’t think my view of cryptocurrencies has ever been from a libertarian perspective. It’s more like, ‘All the systems we have right now are really bad. What if we use this technology to improve them?'”
By 2023, Pollak had gained the respect of the blockchain community and gained recognition among engineers, entrepreneurs, and influencers. But with the launch of Base, his position now leans more towards being a leader in the crypto industry. “I feel like I was born to do this,” he says.
The success of Base is largely due to Coinbase. The launch of L2 received recognition from the consumer-facing public company giant. Coinbase users automatically use Base, and wallet users then transition to other applications from there.
Tom Schmidt, a partner at crypto venture capital firm Dragonfly, told Fortune Magazine, “The tight integration with Coinbase makes the whole thing sweeter.” “There are very few people in Coinbase who really understand cryptocurrencies, and Jesse is one of them.”
Pollak believes that the Base community’s importance is no less than brand recognition. He compares the sentiment of Base developers to the early Silicon Valley atmosphere. On Farcaster, a decentralized social media platform, the channel with 240,000 people (the largest channel on the platform to date) allows developers to exchange ideas with each other.
For Coinbase, having its own blockchain network provides a source of income that is not heavily dependent on the ups and downs of cryptocurrencies. This need for diversified income has also led Coinbase’s competitors, Kraken and Binance, to build their own blockchains. These projects, unlike Base and other L2 projects built on Ethereum, are one of the reasons why L2 has gained so much attention.
The trend of L2 monthly transaction volume
Ryan Wyatt, head of the blockchain-building community Optimism Collective, told Fortune Magazine that one reason is that Base wants to be an exciting community. Wyatt says, “Besides finance, various different consumer experiences are starting to emerge.”
Traffic on Base is concentrated in social and gaming applications. According to a recent report by asset management company Franklin Templeton, almost half of the SocialFi transactions occur on Base.
According to the Base website, there are 353 applications in its ecosystem. Currently, the most popular ones are those related to DeFi, with Uniswap and Jumper leading the way. But consumer-centric applications are also making progress. One of them is Friend.Tech, which has caught people’s attention as users can buy “shares” of influential individuals to gain access to their private chat rooms. “Your network is your net worth.” Another popular application is the restaurant loyalty app Blackbird, which allows regular customers to accumulate native tokens and earn perks like welcome drinks.
Schmidt from Dragonfly acknowledges his impression of Base’s “non-corporate” vibe, attributing this atmosphere to Pollak.
“You need to show people something.”
Coinbase’s CEO has been committed to diversifying the company’s revenue since 2022. Armstrong told CNBC that year, “We want to move away from reliance on transaction fees and shift towards subscriptions and services.”
This pursuit is starting to pay off, as in the first quarter of 2024, about one-third of Coinbase’s net revenue comes from “subscriptions and services.” This includes interest income from its stablecoin USDC and staking revenue, where customers lock up Ethereum in exchange for rewards. Meanwhile, Coinbase also earns revenue as the custodian for eight spot Bitcoin ETFs and through Coinbase One, a subscription plan that provides enhanced trading features for over 400,000 sophisticated investors. During the last bear market, subscriptions and services were a lifeline, bringing in about half of the company’s revenue in early 2023.
But Base stands out as Coinbase’s true crypto-native app. The $56 million in revenue generated in the first quarter comes from payment-related income and “sequencer fees.” The sequencer can be seen as the infrastructure that verifies, orders, and packs transactions on Base and then releases them to L1. In return, sequencers receive a share of the fees paid by users, and Coinbase calls these fees the “primary driver” of growth.
Coinbase CFO Alesia Haas told investors on the latest earnings call, “I want to highlight that Base has really strong unit economics.” She said that with the growth in transaction volume (a key growth metric Coinbase is focused on), Base can become a “long-term significant contributor to our revenue and profit.”
But Pollak admits that it is still a huge challenge to bring non-crypto people into the crypto space, and convincing them to enter the space should not be driven by political or ideological considerations but by providing them with high-quality products they want to continue using. Later this summer, Base will launch the “Onchain Summer” promotion in partnership with major brands like Coca-Cola, giving away $2 million in prizes, grants, and points to encourage potential users.
“To really break through, you need to show people something,” he says. “We’ve overcome the hurdles.”
Original article:
Author: Niamh Rowe, Fortune Magazine
Compiled by: Luffy, Foresight News
