Exploring the Potential and Risks in Coinbase’s Base Layer 2 Initiative

Footprint Analytics

Author: [email protected]

In the ever-evolving cryptocurrency world, Coinbase has established itself as the leading centralized exchange (CEX). However, Coinbase believes that decentralization is the key to creating an open, global cryptoeconomy that is accessible to everyone, and launched its Secret Master Plan back in 2016, planned to publish a Dapp for achieving their goal. In August 2023, Coinbase took a major step toward realizing this vision by officially launching the Base chain.

Base, a Layer-2 blockchain, is intricately designed to elevate the Ethereum mainnet’s capabilities by enhancing transaction speed, reducing costs, and broadening functionality.

Several moves further exemplified Coinbase’s commitment to openness and collaboration. For over a year, Coinbase has been working with Optimism and contributed to developing EIP-4844, also known as proto-danksharding, which aims to increase block space and lower gas fees. To ensure the integrity of this decentralized ecosystem, Coinbase implemented five key principles to create a level playing field where users can participate and thrive without bias or barriers.

With a staggering user base of over 11 million verified individuals, Coinbase’s foray into the competitive realm of Layer2 solutions. Through Base, Coinbase aims to bring over 1 billion users into the global crypto economy.

Base Lightning the Layer 2 Landscape

Currently, Layer 2 networks are seeing a proliferation of applications in diverse fields including gaming, NFTs, and social media. Many prominent enterprises such as BitDAO(Mantle Network), Consensys(Linea), Kraken have also entered the competitive Layer 2 market.

The integration of various dApps has established Layer 2 as an indispensable infrastructure within the Ethereum ecosystem. It not only significantly reduces transaction costs but also enhances user experience.

According to data from Footprint Analytics, Base has secured the third-largest market share in the Layer 2 space, following established chains like Arbitrum and Optimism. Among the emerging public chains, Base has delivered an impressive performance.

In the following sections, we will review Base’s growth trajectory, analyzing the key factors contributing to its rise. If you want to know more details about Layer2, check our previous analyses .

Key Features of Base

• Ethereum L2: Base leverages Ethereum’s security, stability, and scalability, integrating Coinbase’s best practices. This ensures a secure and smooth onboarding experience for developers launching decentralized apps from Coinbase, Ethereum L1, and other interoperable chains.
• Scaled by Coinbase: Base seamlessly integrates with Coinbase products, users, and tools, granting developers access to over 110 million verified users and $80 billion in assets within the Coinbase ecosystem. This integration not only enhances the user experience but also accelerates widespread adoption.
• Big features, small fees: Base provides full Ethereum Virtual Machine (EVM) compatibility at a fraction of the cost, offering early access to Ethereum features like Account Abstraction (ERC4337), developer-friendly APIs for gasless transactions, and smart contract wallets.
• Open source, powered by Optimism: Committed to decentralization and openness, Base welcomes all visionary creators. It is built on Optimism’s open-source OP Stack, ensuring a permissionless and inclusive environment for innovation.

Despite its promising prospects, Base faces several challenges.

• Technical immaturity: The current state of Layer 2 technology is in its early stages, requiring significant development and testing to ensure security and stability. Base is actively addressing this challenge by investing heavily in technical research and development. Initiatives such as working with Paradigm to develop the Breath client and creating open source monitoring tools such as Pessimism demonstrate their commitment.
• Policy and regulatory concerns: Coming from a centralized company, Coinbase poses some challenges as it tries to navigate a regulatory landscape that is often unclear for crypto. Fortunately, Coinbase’s proactive stance on policy efforts puts it at the forefront of addressing regulatory challenges.
• Security issues: As an open blockchain, Base hosts numerous protocols without thorough vetting. Users lack the ability to review technical details, leading to frequent security incidents after Base’s official launch.

The field of Layer2 stack is developing everyday, Polygon also published its Layer2 stack — Polygon CDK in September.

Polygon CDK and Optimism’s OP Stack share similar design philosophies, aiming to lower the development barriers for developers and build an Ethereum-centric L2 interoperable network through modularity and composability. By parallelizing application-specific chains and constructing an L2 multi-chain interactive network centered around Ethereum.

However, there are also some differences between them:

This generic chain architecture design approach is undoubtedly one of the current development directions in the Layer 2 space. Polygon and Optimism are paving the way for this design, and its high scalability and developer-friendliness are poised to gain an advantage in capturing developer mindshare, thereby driving the rapid growth of Layer 2. However, the performance and sustainability of Layer 2 solutions are still subject to market observation in practical operation.

How Base comes to here

Base Chain, a critical component in Coinbase’s vision of constructing a global open financial system, has garnered significant attention since the launch of its testnet in February.

According to the Footprint Analytics dashboard, the total value locked (TVL) connected to Base exceeded $148 million on the launch day and has grown to $459 million as of today.

Receive Attention from $BALD Rug

BALD’s launch on July 30th fueled by a significant influx of capital and the humorous association with Coinbase CEO Brian Armstrong, known for his bald appearance, garnered initial attention and hype. There was even speculation that BALD might be an official Coinbase token.

The hype quickly intensified, pushing BALD’s market cap over $100 million in just two days. Unfortunately, the excitement was short-lived. The developer “BaldBaseBald” orchestrated a malicious exit, withdrawing over 10,500 ETH (nearly $20 million) from the liquidity pool, significantly impacting BALD’s liquidity and causing a rapid decline in Base TVL. Base is “permissionless,” says Coinbase’s Jesse Pollak on August 14 after this storm.

Achieve Phenomenal with Friend.tech

friend.tech is a social media decentralized application (DApp) built on Base, an Ethereum Layer 2 blockchain incubated by Coinbase. This innovative platform seamlessly integrates the concepts of fan economy and on-chain gaming, creating a unique synergy.

The strategic timing of friend.tech’s public launch on August 10, 2023, synchronized with the debut of Base, has indeed proven effective. Beyond strategic timing, friend.tech’s success can be attributed to its novel concept, revenue-sharing model, and the influencer effect. These factors collectively contributed to the rapid evolution of friend.tech into a phenomenon, fostering significant adoption and engagement. The success of friend.tech has played a pivotal role in enhancing the overall usage and popularity of the Base blockchain.

Enhance Excellence with Aerodrom Finance

On August 31st, Velodrome, the largest DEX protocol on Optimism, deployed a new forked DEX called Aerodrome on the Base network. Within less than 2 days of launch, Aerodrome’s TVL reached $200 million at one point, accounting for 50% of Base’s total TVL.

Aerodrome strategically allocated 7% of veAERO emissions to the AERO-USDC LP Pool, driving liquidity providers to buy the limited AERO in the market due to attractive LP rewards. This scarcity boosted AERO’s price, increasing earnings for providers and creating a positive feedback loop. However, people are not sure if this loop is sustainable.

Current Status

With the backing of Coinbase and the support of traffic projects Friend Tech, coupled with active grant development efforts, Base has experienced rapid growth in just a few months, evolving into a robust ecosystem. As of November 15th, the ecosystem boasts over 230 projects, with the most prominent categories being Infra (64), DeFi (51) and Gaming (26). This surge in the number of projects demonstrates Base’s ability to attract diverse initiatives, fostering a thriving and diverse ecosystem.

The diversity of project types shows that Base is not only a hub for decentralized finance (DeFi), but also a versatile platform that accommodates different sectors, from infrastructure to gaming, demonstrating its potential to become a comprehensive blockchain solution for a wide range of applications.

Leading DeFi protocols on Ethereum and other chains are actively expanding to Base, adding to the DeFi ecosystem. As of November 15th, there are 51 DeFi projects on Base. Major lending protocols such as Aave and Compound have deployed on Base, enabling lending and borrowing capabilities. DEX projects such as Uniswap, SushiSwap and Balancer provide decentralized trading on Base. Revenue aggregators such as Beefy Finance enable revenue optimization across multiple protocols.

Base also integrates with NFT infrastructure such as OpenSea, ZORA and Manifold to support digital collectibles and NFT marketplaces. It is collaborating with game studios such as Animoca Brands for blockchain-based games.

With its expanding developer tools, wallet options, data oracles, and node services, Base is building a solid infrastructure foundation to support a wide variety of dApps and services on its network. The blossoming ecosystem demonstrates Base’s strong momentum and potential to become a leading Layer 2 scaling solution.

However, through the ups and downs, the market turned quiet and sustainability became a cause for concern in these months.

In the midst of increased traction, the Base ecosystem has experienced rug-pull incidents. Starting with the $BALD incident, followed by the disappearance of SwirlLend with $460,000 in August, and approximately 10 days later, the Magnate Finance team pulled nearly $6.5 million worth of crypto assets from the platform. Security events were also prevalent, with hackers targeting decentralized exchange (DEX) RocketSwap in August, stealing over 472 ETH (approximately $869,000). LeetSwap DEX suspended trading on Base on August 1 due to a potential exploit.

Summary

In just a few short months, Base has experienced rapid growth, showcasing its potential to attract a diverse range of applications.

Despite facing challenges such as industry-wide technological immaturity and uncertain regulatory environments, Base has garnered significant market attention. The inclusion of traffic projects like Friend Tech has notably propelled the ecosystem’s development.

Looking ahead, as Coinbase plans to bring over 1 billion users into the global crypto economy through Base, it represents a crucial movement deserving market anticipation.

However, investors should exercise caution, acknowledging the potential risks in the ecosystem’s development.

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What is Footprint Analytics?

Footprint Analytics is a blockchain data solutions provider. It leverages cutting-edge AI technology to help analysts, builders, and investors turn blockchain data and combine Web2 data into insights with accessible visualization tools and a powerful multi-chain API across 20+ chains for NFTs, GameFi, and DeFi.

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