All About Base: Bitwise Highlights Coinbase’s L2 Network and Base’s Potential
Coinbase’s recent financial report has shown remarkable performance, with Q1 2024 net revenue reaching $1.6 billion, a 72% increase compared to the previous quarter and a 116% increase compared to the same period last year. The company’s profitability is also strong, with earnings of $1.2 billion and cash reserves of $7.1 billion, surpassing Wall Street’s expectations.
While Coinbase’s overall performance is impressive, there is a lesser-known native crypto business line called Base that could be a game-changer for the company in the long run. Base accounted for less than 1% of the company’s revenue in Q1 2024, but its potential should not be overlooked.
So, what exactly is Base? It was officially launched by Coinbase in August last year as a new Layer 2 (L2) network built on top of Ethereum. L2 networks, like Ethereum, aim to increase the throughput and reduce the operating costs of L1 blockchain networks.
To better understand how L2 networks work, think of it as a bar tab. When you go out for drinks with friends, the bar charges your credit card each time you order a drink, which can be expensive and slow. To address this, they create a consolidated tab, where they keep track of individual orders and settle them in one transaction.
Similarly, executing transactions directly on L1 blockchain networks like Ethereum can be expensive and slow. The transaction costs on Ethereum have ranged from less than $1 to over $200, with settlement times measured in minutes, which is relatively slow.
L2 networks work by tracking individual transactions and recording them in a batch, which is then periodically “published” to Ethereum. Coinbase’s goal with Base is to facilitate transactions that settle in less than a second and cost less than $0.01.
The usage of L2 networks is skyrocketing, leading to explosive growth in transaction activities on the Ethereum blockchain. Base, being the fastest-growing L2 network, saw a 74% increase in transaction volume in Q1 2024. And this is just the beginning.
In April alone, Base processed 40% more transactions than in the entire first quarter. This explosive growth can be attributed to the London Hard Fork upgrade on the Ethereum blockchain in March, which made L2 networks like Base more efficient. The London Hard Fork has significantly reduced transaction costs on L2 networks by up to 90%, helping Coinbase achieve its goal of low-cost transactions and increasing the usage of L2 networks.
With the increasing number of developers building products on Base, Coinbase CEO Brian Armstrong reported an eight-fold increase in the number of developers building on Base in Q1 2024. As more developers bring new applications, the user base is likely to continue growing rapidly.
The significance of Base lies in its potential to become a significant revenue source for Coinbase, thanks to its high gross margins. When users utilize Base, they submit their transactions to the network they want to interact with. Coinbase acts as the “sorter,” verifying these transactions, batching them, and publishing them to the Ethereum L1 mainnet. It’s worth noting that Coinbase is currently the only sorter on the Base network.
Coinbase charges fees for this service. For example, in Q1 2024, users paid $27.4 million in transaction fees to Base, of which Coinbase received $15.5 million. In April alone, Coinbase earned an additional $11 million from these fees. All these funds flow into Coinbase’s pocket.
If Base continues to grow, it could potentially bring Coinbase a relatively stable profit of $10 million, $20 million, or more per month. In the long run, if Base becomes the primary network for developers to build applications, Coinbase could ultimately become the core infrastructure provider of the crypto ecosystem.
Some crypto industry observers have pointed out that this could position Coinbase similarly to Amazon. Amazon started as an online bookstore and expanded to offer various retail products. However, over half of Amazon’s profits now come from Amazon Web Services, making it the world’s largest cloud computing service provider.
While Coinbase is primarily seen as a cryptocurrency exchange and one of the largest in the world, its early returns from Base suggest that it could play a more powerful role as the core infrastructure provider of the crypto ecosystem.
This is indeed a significant development with far-reaching implications.