Bankless - 195 - The Bull Case for $COIN | Michael Rinko & Jay

Episode Date: November 6, 2023

This is our first time ever covering a TradFi stock! However, Coinbase is a different beast… Coinbase is a behemoth of a company, growing since May of 2012. CEO Brian Armstrong has been on Bankless a number of times. Today, we’re bringing on two analysts–independent researcher Jay (0xJaypeg) and Delphi Digital analyst Michael Rinko. Today’s episode will not be a history lesson on Coinbase, if you’re looking for that, we’ll highly recommend checking out Coinbase’s documentary: COIN: A FOUNDER'S STORY Today’s episode is all about $COIN the asset. Down from its ATH of $342/share in Nov. 2021 to $85 today—and with a current market cap of $17.8B— are you bullish $COIN? Why or why not?  ------ ✨ DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-coin-bull-case  ----- 🏹 Airdrop Hunter is HERE, join your first HUNT today https://bankless.cc/JoinYourFirstHUNT  ------ TIMESTAMPS 0:00 Intro 4:30 The Business of Coinbase 8:40 Diversifying the Business 14:30 Analyzing Equities 17:20 Coinbase USDC 23:30 Yields and Interest Revenue 31:45 The Staking Business 37:00 The Take Rate 43:45 Growth of Staked ETH 48:20 Coinbase International 56:45 Derivatives Revenue and Regulation 1:06:00 Coinbase Bank and Custody 1:17:00 BASE 1:31:00 Ranking Coinbase’s Opportunities 1:35:00 Coinbase Assets 1:38:20 The Company Itself 1:48:00 Predicting $COIN 1:54:50 The Bear Case ----- RESOURCES Michael on Twitter https://x.com/mrink0  Jay on Twitter https://x.com/0xjaypeg  Delphi Digital Report https://members.delphidigital.io/reports/coinbase-from-sleeping-giant-to-industry-leader  ----- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures 

The real opportunity here with coin is that the street, Wall Street is looking at it as this traditional bank. And I think those of us that have spent some time, you know, digging in the weeds and in the crypto space, look at Coinbase as this diversified crypto juggernaut with its kind of tentacles in just about every vertical across crypto. And, you know, they're kind of poised to capitalize on just about every area of growth across the crypto space. Welcome to Bankless, where we explore the frontier of internet money and internet find is how to get started, how to get better, how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become

more bankless. David's going to introduce the episode today. What do we got? The case for coin, that's Coinbase, we're going to do the full analysis of Coinbase's business, not just an exchange anymore. The big question after Coinbase went public in 2021 was, can it diversify away its business from just exchange fees? And was it able to achieve that goal? Our analysts say that answer is yes. So what are Coinbase's new businesses? There's ETH staking to talk about. There's USC yields.

Also a potential offshore derivatives exchange to fill the void of Bitmex and FTX. But also potentially in being a custodian for these Bitcoin ETFs, how much money can Coinbase make from all of these new businesses? Which ones are the big ones? What about base? How much revenue is Coinbase pulling in from its new OP stack layer two? What about base? How much revenue is Coinbase pulling in?

from its new layer two on Ethereum, the base chain. What about the future growth of all of these things? What does the future hold? And of course, what does this mean for the valuation of coin. It's the first time we've talked about an equity on the show, how dare us. But I think the coin-based story is pretty compelling. Like our analyst said, it's been able to pivot away from its dominance, its dependency on exchange fees, and now it's turning into kind of a behemoth in this base. And so listening to this episode, you're going to be able to fully understand and unpack the Coinbase, the business that is Coinbase. Today on the show, we're bringing in Jay, an independent researcher and content producer as a side hustle on Twitter, and also Michael Rinko, a research analyst

at Delphi Digital. Both of them have put out a ton of content unpacking the Coinbase business, filing through the paperwork, the Tradify paperwork, to understand exactly what makes the Coinbase company tick. Before we get into this episode with Jay and Michael, we disclose. Ryan and I both own some coin. We are long-term investors in this space. We're not journalists. We don't do paid content. There is a link to all bankless disclosures in the show notes and also at bankless.com slash disclosures. Let's go ahead and get right into this episode with Jay and Michael. But first, a moment to talk about these fantastic sponsors that make this show possible, including a preferred crypto exchange for 2023. Cracken, if you're not having a account with

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Bankless Nation, I'm excited to introduce you to Jay, a software developer as his day job, but an independent researcher and content producer as his side hustle, producing a ton of content research about Coinbase specifically. Jay, welcome to Bankless. Thank you. Glad to be here. We also have Michael Rinkgo, a research analyst at Delphi Digital, who also put just an astounding report about Coinbase together not too long ago, very timely for this episode. Michael, also, welcome to Bankless. Thanks, David. Super happy to be here.

Guys, I'm really excited to get this episode done. Coinbase, as we all know, is a pretty gargantuan company in the space, especially with some of the downfalls of its competitors, as well as the regulatory pressures, going out offshore. And so I want to do this episode just to really get a lay of the land, a snapshot of Coinbase as a business. To do that, I think we need to go back to the day Coinbase went public in 2021 at almost a $100 billion valuation. I remember at this time, and this was crypto's largest company going public. It was a big just moment for the crypto industry as a whole. And I remember the conversation at the time was really focusing on Coinbase's dependency as trading fees to support its business. It was kind of a one trick pony.

It only had one line item in its business sheet, which is how much fees can it take from just trading fees on the exchange. The worry here was that the moat around Coinbase's trading fees was not very deep and could be easily eaten away by his competitors. And so Michael Jay, I want to just do this. episode to talk about how has this story developed since and how has Coinbase's business developed over time. Michael, I'm wondering if you kind of just take us down memory lane on this one. Coinbase as an early OG in the space. Talk about the development of Coinbase's business model up to the point of Coinbase coin public. Yeah, yeah, absolutely. So I think to take a step back for a second, when Coinbase was founded, people were still trading on Mount Cox. So Coinbase is, as we said in the

report, kind of a certified OG. It's been in the space. for a really, really long time. It was really the first, you know, American kind of Western regulated entrant into the crypto-centralized exchange space. And ever since it entered the space, it's obviously face competition. At the very beginning, it was Mount Docs.

And then, you know, we had Binance, FtX for a hot second, now Cracken, and there's a whole host of kind of Eastern Asian-focused exchanges. But I guess just to set the scene, Coinbase was always first, was always one of the early movement. But it never really felt like, and I think especially to those of us in the space, it never felt like it was actually leading the space. It kind of seemed content to let others push the bounds of whether it was legality or innovation. And I think Coinbase kind of looked at itself as maybe getting a little lucky or because it was there first, it was trying just not to make a mistake, essentially. And I think as we'll talk about that kind of internal psychology at Coinbase has maybe changed over this past cycle. Jay, what would you add to that context back in?

2021 when Coinbase went public or really what do you want to add to that conversation before we get into the present day business model of Coinbase. Yeah, I think at the time during that moment, Coinbase had started working on a number of different products aside from their main trading exchange. But I think those were still very much in the works. They had spent a lot of effort, you know, doing the rounds going public and going through with the IPO. I think now in 20203, a few years later, we're finally seeing the fruits of their labor come to light. So, To go back to the day Coinbase went public, I think it went public at something like an $85 billion valuation, give or take a couple Bs. Today, it's trading at $18.3 billion. So down significantly,

down alongside with the crypto market cap, and also with just overall the rise of interest rates and the decline in tech stocks. So $18.3 billion is kind of what we're dealing with as the crypto's largest public company. But I just want to ask the question that everyone was asking back in 2021 when Coinbase went public. Was it able to diversify its PNL away from trading fees? Has it been successful here? Michael, we'll start with you. Yeah. So I think the short answer is yes. For the first time ever, so how Coinbase breaks down its businesses is into two big buckets. Transaction revenue, which we can think of is essentially just as those trading fees that you were talking about, David. So I sell one BTC to you. Coinbase captures a small percentage point,

a couple of bips on that transaction, that flows to the transaction revenue part of their income statement. Everything else is grouped into something that they call non-transaction revenue. So as we'll get into, that's interest income, that's their subscriptions, that's base chain, that's everything else non-transaction revenue. So as you pointed out, I think the fear at the time when Coinbase IPO was that basically all you could do is buy and sell different crypto tokens on the exchange. And there was this question of, well, once the market inevitably rolls over, which it obviously did right after the IPO, once it rolls over and people are no longer trading as actively, how is Coinbase going to make money? Where is that going to come from? Is it kind of just this one-trick

pony? And what they've actually been able to do is that they have been able to diversify the revenue streams. And actually now Coinbase's business kind of looks more like a traditional bank than like a high-flying tech stock. Yeah. And just to have the numbers side by side, when Coinbase has first IPO, their earnings at the first quarter, I think the transaction revenue was something like 96% of their total revenue. And as Michael mentioned, that's come down to something like just under 50% going into 2023. So Coinbase was successful in diversifying their income away from trading fees. But also, it's not like not to diminish the value of trading fees. I want to talk about, you know, the trading volume of Coinbase over time. Because while the Coinbase is trying to

diversify its revenue away from trading fees, it will also grow in trading fees. And so Jay, take us through this tweet of yours about just the growth of transaction volume of Coinbase over the years. Yeah, I think if you look at the transaction volumes from 2017 to now, it's pretty clear that it kind of follows this cyclical fashion that's in line with the crypto cycles. So as we get into 2017, 2021, you can clearly see there's an anomaly in that transaction volume's peak. And then through 2022, 2022, they've come down a ton. I think in 2022, they did something like 800, 850 billion in transaction spot volumes. And then in 2023 to year, they've done something like 250 billion. So it's certainly come down a lot. I think another thing to note is their take rate

as volumes have come down, has inched higher. And as a result of that, trading volume still, I mean, at the end of the day, Coinbase is still in exchange and trading volumes are still a significant part of their revenue. How significant is it in 2023? Like, what's their overall percentage? Yeah, I think this year, I mean, if you look at Q1, Q2, transaction revenue was around 47% on the year. So just under halfway. And what was it back when Coinbase IPO? Do you remember? I think it was something like 96, 97%. Wow. Okay, that is diversification. Why do we care about diversification? Isn't revenue revenue? Like, why do we care where it comes from? Why is that part of the story here? Yeah. So I think it's a great question, Ryan. And as Jay said,

I think the way to think about it is as different types of revenue or not all revenues created equal. So trading volume revenue, that transaction revenue, that when Coinbase first IPO dominated their business, that's nice in bull markets because there's essentially no ceiling. You know what I mean? There could be a trillion dollars of volume one year. There could be two trillion in the next. You know what I mean? It's kind of exponential in nature, but it's also exponential on the downside. So it's highly sick. that interest income that Coinbase is like increasingly diversified into that tends to be a bit stickier and non-cyclical. So it might not go up as much in these bull markets, but it also doesn't go down as much in the bear. And, you know, part of the story right now is just the fact that interest rates have gone up so much. So Coinbase is making, you know, killing off that.

Even if interest rates come down, a lot of that interest income will prove sticky. And Wall Street likes that because it makes like the earnings and revenue a bit more predictable and easier to just, you know, fit into a financial model. So Michael, it's a more durable source of revenue. It's a lot less volatile. Like I was looking at kind of the high level here on, you know, I've been so long since I've actually like looked at a stock and analyzed a stock, all right? Like, what are these things? Wow, they have cash flows and such. Isn't that different? Anyway, I was just looking at kind of annualized income statements. And to get a sense of that volatility from a profit, and revenue perspective. So 2020, it looks like Coinbase had revenue of $1.27 billion, which is a lot.

And they were profitable. Net income of $322 million. And then you go to 2021. Revenue of $7.84 billion. Look at that jump. $1.2 billion to $7.84 billion. And $3.6 billion of that was profit. All right. It's 2021. Wall Street's looking at this stock and going, oh, my God, it's just printing money. What have we discovered? And then you flip forward to 2022. You have revenue of half that, about $3 billion. And then income, so net income, that's profit, negative $2.6 billion. All right? That's like the whipsaw, I guess Wall Street is seeing when trading fees are dominant, right? It's like it's going to fly high when there's a crypto bull market and it's going to completely evaporate and just leave you with a whole bunch of cost structure during the bear cycle. And of course,

I don't know how much conviction Wall Street necessarily has on when the next crypto bull market's coming, right? You know, they probably aren't foreseeing one the same way that us crypto bulls are. So maybe that gives a sense of that volatility that you were talking about, Michael. Jay, what would you add to this story? Like, why do you think it's important to diversify revenue sources? Yeah, I think it's exactly what you said. And I think as the crypto ecosystem has matured, I think these opportunities have shown up in terms of, you know, rates are higher. the way USDA income and USC revenue works is predicated on interest rates. I think in addition to that,

over the past year we saw the proof of merge patch go through on Ethereum. We saw Shanghai, Chappellella withdrawals enabled on Ethereum staking. And I think those have lent itself to opportunities to create that more stable, less volatile revenue that Wall Street loves to see. And like you both said, Coinbase was successful in achieving this. So I think in this next bit of this conversation as we move forward. We'll talk about the actual positive cash flow parts of Coinbase's business that has developed since Coinbase has gone public. And then once we're done talking about that, we'll talk about some of the future juice that's left to squeeze out of Coinbase's variety of investments that they've made. Of course, base comes to mind. Custodians of a

potential Bitcoin spot ETF. Custodian fees there might also be a big player here. But I want to just talk about the first big victory that Coinbase had since going public. with this motivation to diversify its revenue. Where did that first big victory come from? What is it? And tell us how it works. Michael, you want to take this one? Yeah, absolutely. Coinbase was very aware of the fact that its revenue, I think, is tied to the health of the overall crypto ecosystems when things are good, when Bitcoin's going up and people are happy and feeling confident in trading. Coinbase does well, and they make money. But, you know, Coinbase is an OG. They've been through several bare markets. Now, how do they build a

company that's resilient and can weather those bare markets and make money during those bare markets. And that was a real question mark leading up to their IPO. And I think CoinBist was aware of the fact that public market investors probably weren't going to be kind to them in those bare market environments. So one of the things that we saw them do was pretty aggressively start to push USDC. So they have this agreement or had, we could probably dive into the details later, but an agreement will circle to provide USDC. And essentially, you know, how you can think about it is when you bring your dollar onto Coinbase's platform and then swap it for USDC, Coinbase is minting one USDC giving that to you.

And then it's taking your dollar and saying, thanks for this dollar. I'm going to go invest it in a short-term treasury and earn all of that yield. But you go enjoy your USDC. You know what I mean? So it's a pretty good trade for Coinbase because the short-term treasuries are super liquid, if you ever want that dollar back, they could pretty quickly sell it and then return that dollar to you. But the whole time, they're capturing that yield on short-term treasuries, and obviously we all know what yields have done recently. So the more that yield goes up, the more

and more money Coinbase can make. And this was a partnership with Circle. This is Circle's business model. They made this partnership with Circle to be able to share in this business model. This was the way that this partnership between Coinbase and Circle got started. Can you talk about that, Michael, just shed some light on that because we need to also talk about how that's updated since. Yeah, absolutely. So this is Circle's business model as well, essentially minting U.S.D.C, taking fiat dollars or other Fiat, and then investing it in short-term sovereign debt. So in this case, it's U.S. Treasuries. And so they both entered into, I believe it was called like the Circle Consortium or something like that. And the details of exactly the revenue split is hard to find.

Jay might have the updated numbers. But I believe that they were. both sharing in that yield that is earned from USDA. Recently, they've updated the arrangement. So it sounds like Coinbase might not earn the yield directly, but instead now has a direct share in Circle the entity. So it's slightly different exposure. Right. So instead of having this consortium partnership, Coinbase just now owns a part or Circle. And they got to kind of do away with this complexity. Yeah, just to clarify there, I think originally the agreement between Circle and Coinbase was that they would get the pro-rated share of interest depending on how much UCTC was on each of their respective platforms.

I think recently, I think early September, under the new arrangement, the revenue would be shared more equitably. It sounds like it's 50-50 now. And as an addition, as Michael mentioned, I think the update here is that Coinbase now owns a larger equity stake in Circle itself. So rather than the consortium, which was a joint venture between them, I think, sounds like it's more of a merger and coinbase now owns a more explicit part of circle itself so maybe this progression goes both circle and coinbase understand that if they both share in the minting and

distribution of us dc there's like a greater than the sum of the parts phenomenon here because like u s c just has a standard gets proliferated more but neither of them are wholly owning the upside here if the u sec is minted on coinbase then coinbase gets that yield gets the pocket that yield if it's minted via Circle. Circle gets to pocket that yield. And then USC just proliferates. That's what it used to be. And it's a huge business model just because they get all the yield. Its yield is massive in the year of 2022 and 2023. Now it seems to be that they just simplified everything. Coinbase just now owns perhaps a healthy chunk of Circle. And Circle gets just to focus on USC. Coinbase can focus on Coinbase. But Coinbase just owns a big chunk of circle. And the yield that is backing the revenue of USC is also owned by proxy

by Coinbase. We just did an episode with Nick Carter not too long ago. The revenue of crypto at large, first it's Ethereum, the protocol, and EIP-1559 burn, then it's tether and then it's circle at USC. And so not to underestimate how massive the revenue is from this part of Coinbase's PNL. What numbers can we actually place around this PNL? What numbers do we got to illuminate this part of Coinbase's business? Yeah, I think for 2020 and 3, it's, It looks like Wayne Base had probably made $450 million off interest income with about 80% of that coming from USC specifically. Cool.

So it's a pretty sizable portion. I think it runs, it's something like 30% of their top line revenue. That's a lot of money, right? It's interesting to try to ponder on how durable that is because, you know, it rests on a couple of things when it certainly rests on Fed interest rates, right? They're only able to make that spread because our interest rates are so high. But it also rests on, I guess, user's tolerance for being willing to kind of give that away to circle into Coinbase, right? So if I have USDC effectively, rather than a Treasury or something

or a T-Bill, then effectively I'm giving my 5% plus yield over to Coinbase. And, you know, maybe it's better for me as a user if I have USDC sitting around to actually bring it into the Coinbase interface and like generate yield there. I guess they call it rewards, right, probably for some regulatory reasons there. But I think users can generate like what if they make it eligible, they're USC eligible for rewards on Coinbase, generate like 4.15% to like 5% something in that range, in which case Coinbase doesn't get to pocket that. And then you kind of wonder if there's going to be some like on-chain treasury type of device that users will start to prefer rather than a USDA. I know I certainly would. I'd like to collect that 5% yield rather

than giving way to Coinbase. So is there any question among analysts about, like, how durable this line item actually is of interest income? I mean, it seems pretty impressive and seems pretty large now, but conditions could change pretty quickly, either if competitors enter the ring or if yields drop. Yeah, I think that's a great point. And it's an open question. It's something that I have certainly thought about. And I think you kind of presented it the right way.

Like the two inputs to this line item for Coinbase is one, what's the yield that they're getting on their treasury bills. So if that yield were the drop, you know, that's bad for Coinbase. There was actually one of the key risks in Coinbase's last 10K, their annual report, was they said, you know, we're exposed to yields falling, you know, which is kind of funny because for most of crypto, it's the opposite. You know what I mean? When yields fall, it's a good thing. It's a good thing for all of our bags. But that's also true for Coinbase, though. If yields fall, presumably crypto price goes up and they make more on transaction fees. So I guess maybe they benefit from both sides. True. Yeah, no, it's definitely a double-edged sword. But I guess, yeah, to just circle back to your

initial question, I think Coinbase could potentially be exposed to some sort of on-chain stable that is yield bearing. We've yet to really see one kind of proliferate, that's certainly possible. I think the one thing that Coinbase benefits from is just its distribution. You know, every pair on the exchange, I believe, are most pairs, you know, trades against USDC. You could do a lot with USC within Defi. Coinbase is obviously rolling up base, as we'll get to later. So I think their play is to kind of just make sure that anywhere you go, USDC is also there. And it's just the easiest, best, you know, most liquid stable to use.

So they want to make it up in volume. Like if USC grows from what is it now, like 30 to 40 billion to like a trillion, right? I mean, that's a pretty high ceiling for them. Jay, you were going to say something else. Yeah, I think to add to kind of tie it all together. I think Coinbase internally has probably done some analysis where for every USC that stays on their platform for a prolonged period of time that USC, even though they're paying interest on it, ends up bidding coins or transacting within their platform. So the tradeoff here is they pay

off some interest or they share some interest that comes from the treasuries and the debt that they buy. But in return, they get some expected value of trading fees or transactions on their platform, which ultimately, my guess is that they yield more revenue from that. relationship. This entire part of Coinbase's P&L is called interest income and the part that we've been talking about just the yield from USC is 80% of that line item, which leaves 20% that we haven't discussed yet. Jay, what is that remaining 20% of Coinbase's interest income? Yeah, the 20% really comes from customer deposits. So what Coinbase, like many other banks do, is that they invest customer deposits into very short-term government debt. So think of like what your money market

fund is doing with the cash that you've deposited. Just to be clear, we're not talking about FTX style, you know, illiquid, venture investing of people's Bitcoin and Ether. What part of customer deposits are we really talking about here? Yeah, it's really just the Fiat, the dollars that are sitting in coin basis balances. So not the USDC that I've deposited, not the Ether that I've deposited, but perhaps the dollars that I've wired over or ACH transferred in, those get invested into the short-term bonds. Exactly. Which is the same business model as USC, just one's a USC and one's not a USC, right? Right, exactly.

Jay, I noticed you used the B word when you're talking about Coinbase. You said banks. I'm not calling you out because this is bankless. I'm actually just saying that because is that your mental model for what Coinbase is. I know like there is a regulatory like term for bank, right? We've always called crypto exchanges like Coinbase banks because they operate a similar way. Anything that in crypto that takes custody of your assets, a B, bank, right? But is that your model for thinking about Coinbase? Like, are they a bank? Or are they

something different? Yeah, I think that's a great question. I think in the sense of what we're talking about right now, interest income, that's very much in line with what traditional banks do in terms of taking as much deposits as possible, try to make interest rate spread on the amount that you're paying out versus the amount that you're yielding from whatever you're buying. I mean, I think we'll cover more later, but staking, particularly Ethereum staking, that's something that's fairly new and been patched within the past year. Also sort of follows this model as far as you get, rather than U.S. government debt yield, you get, I guess what I characterize as the native yield of the Internet. And that's something that Coinbase has really doveen into in the past year as well. The native yield of the Internet.

I like that, David, eat the internet bond. Well, that's also the next part of this agenda. It's also, I think perhaps the next largest part of Coinbase's P&L is staking revenue. Jay, I love that dichotomy. The first part of the first new part of Coinbase's P&L is interest income from the Fiat, Tradfai, bond market. And then the next part is interest staking revenue from the Ethereum Protocol. Talk about this business. What is this business?

How does it work? How does Coinbase make money here? and how big is it? Yeah, definitely. So staking blockchains, I guess to just back up a little bit, blockchains really operate proof of work or proof of stake. And proof of work is effectively machines solving these cryptographic puzzles. And proof of stake is slightly different in that users or I guess nodes in this case put up a stake.

So some amount of ether or some amount of whatever the coin is. and they're able to validate the network. And because of that stake, that drives an incentive for them to behave and cooperate in a way that allows the network to run smoothly. And in this case, with Ethereum, as well as other networks, there are hardware requirements to stake. And effectively, what Coinbase offers is a solution around this as far as, hey, I want a stake, but I don't want to put up the hardware requirements, so I don't have the know-how. Instead, Coinbase offers the service where for every Ethereum you hold or for whatever other coins you hold, they will front-load that work for you and give you access to the staking mechanism. And in return, you pay a fee to Coinbase for offering the service.

So right now, Ethereum Proof-Stake is offering around 3.5% APY in Ether terms on people's ether. What's the fee that Coinbase charges for providing access? to that yield. Right. So Coinbase currently charges 25%, and this is fairly high. Like if we compare this to Lido, which is the other super popular staking protocol, I think they charge something like 10%. So Coinbase definitely takes a premium for their staking services. How do they get away with that? That's two and a half X the next market leader, or maybe actually Lido might be first, but how do they get away with having such a higher fee? Yeah, for everyone listening here, I think it's likely that we're more crypto-native. There's definitely listeners here who are running their own notes.

solo staking. But I think we have to remember that there's still a lot of participants, retail and institutions that would rather not go through the hassle or the work of solo staking or setting up their own notes. And I think Coinbase, through their brand, through their reputation, through the fact that they're a public company, I think there's a premium for staking through Coinbase just because you have that security, you can sleep better at night, and you don't have to worry about the technical details or the risk. that come with staking, whether that's through Lido or through operating your own validator or your own node. Yeah, it kind of strikes me. If you look at sort of an alternative, like a non-custodial

alternative like Lido, right, essentially where you're still maintaining your private keys effectively. You're still going bankless. For a lot of institutions and frankly, for a lot of users, that is a bug. That is not a feature. Okay. I apologize to anyone listening from bankless. That's not what I view. I think going bankless is actually the feature and not the bug. But for a lot of people, They're just like, I don't want toxic waste. I don't want to hold on to these private keys. What if I lose them? Right? And like, fair point. If you're a large institution and you don't have good private key management, you basically outsource that to Coinbase in addition to the staking. So Coinbase cussed, all of this ether and these other assets. And that seems to be a core competency that Coinbase has really invested in. It's right. It's just like they haven't been Mount Goxed. Knock on some one. FTCX. And if that were ever to happen, that would be a very dark day for our industry. But, right, they've invested a lot into their custodial security apparatus so that large institutions

feel safe, parking their assets and their private keys at Coinbase. And so that has to be part of the, you know, 25% fee that they can charge is you're also getting custody for some people that's a feature. That's not a bug. What would you add to this, Mike? Yeah, totally. I mean, I think that's a great point. And I think that's kind of what you just described. That's what Coinbase sees itself. It sees itself as the primary way for retail and institutions to onboard into crypto. And once you're onboarded, once you've been in the space, you know, like Bankless Nation has for multiple years now, maybe it'll go somewhere else. But that first onboarding, that first kind of on ramp onto the crypto highway, Coinbase wants to own that. And the way that they own that, I think, is to your point,

to make the entire experience, whether that's trading, staking, et cetera, super seamless, nice and safe, feel comfortable, kind of look from a UI, UX perspective, very similar to Web 2. And I think that they've done that. So just to, like, add a couple of numbers. And not only does Coinbase enjoy an insane take rate on their staking, but it's also the same on, like, the transaction side. So last year, 2022, Coinbase's average take rate on retail volumes. So it's like me and you was 1.35%.

So for every $100 traded, Coinbase made $1.35 cents. That is crazy. Compare that to defy, but also compare that to tradfi. What are these numbers in proportion? Michael, do you have any kind of benchmarks? Yeah. So retail was $1.35 or 1.35%. And then on the institutional side, it was 0.017%.

So that's 1.7 bips. Are they just like scalping retail? Yeah, essentially. Convenience. Just to add, I think having used Coinbase myself, I think Coinbase basically has two screens. They have the advanced trade screen where the maker, taker fee is a lot lower. I think it's something like 10 to 15 bibs. But their default screen, not the advanced trade, charges you a fixed fee up to $200.

So I guess the blended fee, as Michael mentioned, is ridiculously high, like at 1.35%. They're just charging for being naive. It's like, hey, if you're naive and you're willing to not press the advanced button, we're going to charge you an extra percent. Sure. Or it's convenience. Convenience fee. I mean, like, convenience.

Have you guys seen the, like, the prices that a pay, you could buy, you can buy crypto in your Venmo account. Do you want the take rate is there? I don't know. It's stupid high. I don't know. Something egregious. Like two and a half percent, five percent, something like even higher, right?

So they are like kind of cheaper than that. at least, but they're not as cheap as something you might find at defy. Yeah. So one last stat. So even though institutional volumes made up nearly 80% of Coinbase's overall trading volume, they only accounted for 6 to 7% of that line item's revenue. Wow. So it's all retail. It's all retail. Coinbase is a retail story. Yeah. Wow. Wow. Amazing. On the staking revenue, the eth stake, the 25% that they take for staking people's eth, what's the size of this part of the Coinbase P&L. Yeah, and their two earnings, I think they stated

there was something like $7 billion worth of EF state, 2.2 billion of that from institutions. So I think the total staking ends up being something like $300, $325 million at $1,600

ETH currently. That's a lot of retail EF then in Coinbase as well. That's a surprising, one and a half. Yeah, I think LSTs have definitely been a pretty big theme this year. I think a big reason is because you get a token that represents your state ETH, and then you can use that token to go do things in defy and get more capital efficiency on it. I think through this year, there's been some foot as far as people definitely

like to point to the high fees that Kwebis has charged. But even though this chart is outdated, it's been pretty clear from March when this chart was posted that the supply of CBEEth has continue growing. I think it just shows to the premium that people are willing to pay to have the Coinbase branded version of the LST. And I think especially as the cycle moves on and as the new participants that come are less crypto-native, I expect this number to continue going up and to the right relative to the total amount of LSTs out there. So the C-B-Eath, it's an inside of the larger business model that is ETH staking. The only difference is that they just issue a liability on Ethereum that we call CBEath to redeem for Ether on the Coinbase

Platform. I'm looking at the most updated numbers. Current CBE supply is 1.3 million ether with a total market cap of 2.2 billion. So there's $2.2 billion earning 3.5% APY that's state to Ethereum on that 2.2 billion. And then Coinbase is taking 25% of that 3.5%. And how does that compare to like STEath, which is the big LST. Oh, let's go find out. Yeah, how big is SCEath? I'd be curious. I think STEath is something like 30, or Lido's staking in general is something like

32, 31% of the market share of stake Eath. I think for Coinbase including CBEath as well as the staking that's done on their platform, I think they hold something like 20% of total market share. So they're definitely behind

Lido, but they're not too far behind in terms of fees generated. So number one is Lido at 31.8% coming down. Number two is Coinbase at 13.9% and followed by Figment at 3 and Binance at number four coming at 4.3%. And then crack in after that. You're looking at the Hill Dobby chart, right? Yep. So with that chart, I think there's some inaccuracies around Coinbase validators. So not all of Coinbase validators are labeled correctly. And then just kind of reverse engineering their income statements or their earnings from the past quarters. I think it's closer to 20%. Right. So, okay. So, Okay, so we don't know every single Coinbase validator out there. What you've done, Jay, what you're saying is that you've gone and looked at their income statements and identified that there's perhaps six or seven percent more of Coinbase validators out there that we haven't publicly identified that are probably out there is what you're saying. Yeah, exactly.

Coinbase, tag your validators from the ecosystem. Is there any other stone left unturned about the eth staking part of Coinbase's business model before we move on? I think the only thing I would add is if you look at their past couple of income statements, I think in Q4 of 22, they mentioned they had $3 billion worth of EF staked. That's grown to $7 billion at the end of Q2. I think one interesting thing that they've mentioned was that recently in their Q2 statement, that $2.2 billion belonged to institutions.

And it happens to coincide that Q2 is when Chappellella, so withdrawals with Staked Eth, went through successfully. And I would expect to see more stats and more granular metrics. around the amount of institutional participation around Staked Heath moving forward. Do you guys have any opinions about growth with Staked Heath? I know growth around an LST or growth around a share of the staking around the Ethereum protocol is kind of a touchy subject, especially when we talk about the decentralized nature of our chains.

But Coinbase probably would be very interested in growing that line item in their P&L. Do you have any ideas about where the future takes this part of Coinbase's business? Yeah, I think around staked Eath, I think we're something like 23% of all ETH is staked currently. The way the staking rewards works is that as more ETH is staked, that APY trends downwards. So I think at something like 30% of all ETH steak, that becomes something like 2.8%, and then at 40% it becomes in the low twos. I think the way I see is that 40% probably presents a rough ceiling for the amount of East Staked in the long term. And then, like I mentioned before, as the cycle goes on, I expect the proportion of EF stake with Coinbase to steadily rise relative to Lido and some of the other more crypto-native methods that exist currently. And why is that?

Just because Coinbase is the first point of contact for a lot of institutional capital. Is that why? That and I guess if you're a retail participant, that's not as crypto-native. You don't spend all your time in this space. I think it's a lot easier to go in your Coinbase app, click a couple of buttons, versus trying to up. a swap on uniswap and custody the stake ballast tea token yourself it's kind of interesting i don't know if wall street has ever dealt with this but like the higher coin base increases in market share the more coin base will be white blood cell attacked by the decentralization maxis in the ethereum community the lido people are saying i told you so yeah and i honestly i would probably count myself as you know as one of them like it would be probably disconcerting for a lot of people in the ethereum community to

realize that this is not in fact 13% on Coinbase, but it's actually 20%. I mean, that's high. And if you're talking about getting to 30%, right, then you already have like close to one third majority. We already know you can like delay finality and do certain things at one third. And then two thirds is another, like we've done an entire podcast on this whole thing. And so I think probably the ask from the wider Ethereum community would be like, as you ratchet up in market share, Coinbase, please increase your prices. Like take a higher slide. increase your fees. Go from 25% to like 30% to like 35% and 40%. And it'll be interesting to see. It's an economic self-cap. Yeah, it'll be interesting to see what Coinbase does, right?

Do they decide to be sort of like quote-unquote good citizens of crypto and like get to the community and say, yeah, we've increased our fees to match this. So we throttle, we self-cap our stake. Or do they decide to just like abandon that and kind of go their own way? Right. And then I don't know how Wall Street analysts will model that because that seems to be like a new, like self-cap? Why would you ever self-cap? Like, you know, this is probably a different variable than most analysts are used to. Brian, we're looking at you here. Shout out, Brian. All right. I think that we'll come to a close on the East Steaking conversation. I think the next big thing that has a ton of potential here is Coinbase's international expansion efforts, perhaps motivated by raw economic upside, but also perhaps

motivated by the push offshore that we've seen inside the United States. And so Coinbase has been working on their offshore derivatives exchange. And we've seen this before. Bitmex has come and gone. FTX has come and gone. Binance is still here. But the offshore derivatives exchange is a business model that crypto has seen a handful of times. And now Coinbase is finally entering the arena here. Michael, walk us through this part of the business that is more in the future, I would say, for Coinbase. But what's the potential here? Yeah. So I guess, just to take a step back and maybe talk about the present. Right now, Coinbase is obviously an American company, and roughly 90% of their revenue comes from the U.S. So it's got a bit of kind of concentration

risk. So I think they think about it as definitely an opportunity, but they're also trying to de-risk, especially in the face of this harsh regulatory environment. So what does this business actually look like, an offshore derivatives exchange? How is it different from the Coinbase that we know and how does it make money. So in August was the last data point that I have in front of me. So crypto is essentially traded in kind of two big ways, spot, and then perpetual as perps. And perps are kind of a novel product in crypto. There's several reasons why people prefer them. They're kind of more capital efficient. They enable leverage. And yeah, they kind of just more crypto-native. But the perps market has just exploded in recent years. So to put some rough numbers around it, the total volume

traded within perps is around three times bigger than the total volume traded in spot markets. So we're talking about like a significantly larger market here. And to date, as you pointed out, David, most of this market has happened offshore because the SEC and US regulators have yet to green light perps. So it's been non-US entities that have captured most of this market share. And we've seen it frankly be like a very volatile market. So BitMex Exploders, onto the scene and for at one point was essentially a monopoly over the perps market. Then finance came along and was and remains a major player there. And obviously this was FTCS's claim to fame for a little while, was they were kind of this institutional platform that people could go

and trade perps on. They were even doing like kind of novel perks on. They were doing like tokenized stocks and stuff like that for a minute. Anyways, long story short, Coinbase is looking at this market probably jealously for many years. And they're, you know, they're finally now a public company. They've got this interest income. So they've got a bit of kind of a buffer, a pillow underneath them. And now they're going to take a swing at what is right now probably the biggest market in all of crypto offshore perps. And as of right now, the offshore perps exchange is API only, meeting that there's no front end. You can't go to a website and click buy, sell. So it's all computers doing the trading. So it's zero retail. But, you know, obviously we,

expect some sort of slow rollout here. And I think kind of the conditions are there for Coinbase to potentially capture some serious market share. This particular market definitely has a bunch of baggage, history, historical baggage in crypto. Like I said, Bitmex come and gone. Binance, I think, has the dominant market share, FTX come and gone. It's got just a graveyard of contenders that has tried to serve this marketplace. Coinbase, obviously meaningfully different, has always been regulation-compliant regulation first. now is trying to enter this arena. But just what can we say about the overall size of this market that Coinbase is trying to enter? And is Binance their only competition that's left on the playing

field here? Yeah, I think the size is huge. I think within the past calendar year, there's been something like $23, $24 trillion of volume done on perp exchanges. For reference, that's basically the size of US GDP. So there's definitely a sizable market here as far as being able to capture a couple basis points. Right, but the take rate can't be compared to like the retail or perhaps even the institutional exchange fees that Coinbase enjoys onshore, right? On perps, the take rate's got to be a lot less, correct? I think it's something like five to ten basis points is the average take rate.

I think Michael has more exact stats on that. Yeah, so I don't have the take rate right in front of me, but what could be helpful is just to think about it from more of like a Tam or a market share perspective. So right now, Coinbase is doing essentially. no volume in this offshore perps exchange. It's totally irrelevant today. But what could it look like in the future? So we have to make a handful of assumptions here. But if we assume that Coinbase captures a flat 0.1% fee on its perps volume, that's assumption one. Assumption two, if they are able to capture Bitmex's volume over the last year, what would that mean for revenue? That would be

plus $200 million in revenue annualized, and that'd be a 6% bump to last year's total revenue for Coinbase. So, you know, decent, 6%, not crazy, but, you know, that's now a new line item that, you know, people will be talking about. All right, if we take it up one more, so from Bitmax to FTX, if Coinbase is able to do what FTX did from January 2021 to January 2020 over that year, Coinbase would make $720 million. Okay, that's a bit bigger. That'd be good for a 23% jump in Coinbase's overall revenue. So now we're getting into things that are really going to potentially move the stock. And then if we go even crazier, right, and think about Binance, which is obviously the whale in all exchange talk, if Coinbase is able to capture 25% of Binance's

volume on perks, that would not. mean 3.6 billion with a B billion revenue jump. And that's good for a 97% increase over last year's total revenue for Coinbase. And we can get crazier from there. But you know, you can kind of see how quickly, how much money, you know, this product can throw off for Coinbase. I had no idea. Is anyone else coming for that? Like, you know, obviously FTCs left a big gaping hole. And I'm aware of some DeFi projects that are gunning for the kind of perp volume, of course, right? And there may be the dark horse in this. But, you know, is it like Cracken going for it? Is you know, Gemini going for it? Or is it just basically like Coinbase and Binance right now?

So I have seen some news stories. I'm certainly not an authoritative source on this. But I do think crackin is potentially trying to set up some sort of like offshore entity or, you know, legal things. I think the short answer is all exchanges are going for this. All of the offshore ones are basically already there and trying to grow market share and all of the American ones, which is, you know, mostly just coin, Cracken and Gemini, are now pivoting and trying to go there, in part just from like a risk perspective. They want to de-risk their highly concentrated American business. But yeah, of course, they're also looking at these nuppers and saying, you know, we want a piece of that.

What can we say about the interested capital that would want this product? My naive take is just kind of saying, well, offshore capital wants the offshore derivatives product that's highly risky and speculative. What is the interest? Is there any interest that we can say that, well, they're currently serviced by Binance, but they would take Coinbase if they could. They just can't. Is there anything that we can say about the nature of who is the consumer of this product and if they would even be interested in the onshore regulated version of this offering? Yeah, the sentiment I get is, especially with what happened to FTX over the past year, is that a lot of traders are hesitant to keep significant amounts of capital on these perp exchanges. And what ends up happening is their inconvenience to where they have to use higher leverage as a solution to not wanting to risk that raw capital as a result of the number of exchange failures we've seen over the past couple years in crypto. And that being said, I think there's definitely a portion of folks that won't trust any exchange.

But given how long Coinbase has been operating in the space and how trustworthy and how buy the books that they've done things, I think there's certainly a portion of these folks that would be a lot more comfortable leaving their capital on Coinbase's international exchange versus an exchange like Binance or Bitmex and the like. Yeah, and just to add to that quickly, this is something Jay and I were actually riffing on the other day. but I'm looking at a Reuters article now. Finance stops accepting new users in the UK. I believe that came out yesterday. So just to take a step back, like what's kind of happening right now? I think there's a realization in capitals all around the world that crypto is not going away. You know what I mean?

Maybe half of its scams, maybe more, a larger percent of crypto scams. But Bitcoin, Ethereum, and then maybe a few others are not going away. They're going to be here. And they're going to be an integral part of, you know, our new financial. system where they're going to come into the existing one, whatever. It's taken a while for these politicians and these lawmakers to realize that, I think. But they're slowly starting to realize that. So what's happening now is they're saying, well, all right, if crypto is going to be a thing going forward, we want to control it. We want it to happen on our shores. We want it to follow our laws.

And we do not want some unregulated kind of shady actor that we're not sure to what's regulated by to be controlling all of it. So like, you know, you guys just had Nick Carter on. He's talked a lot about Operation Choke Point. I think he's done a great job on that. And essentially, how I see this playing out is that the U.S. and kind of the West, broadly speaking, its allies, are going to say, we want to control crypto, or we want some say in what happens. We want these big, massive public companies like Coinbase to follow our rules. And we're going to actively squeeze out other participants, all of finance, out of our markets and essentially make way for someone that we have some sort of control over. So I think, you know, a bulk case for Coinbase is actually that it's so

highly regulated, despite it having all these court battles with the SEC, the SEC probably has a better opinion of Coinbase than finance or some of these other exchanges. So, yeah, I think there's kind of a regulatory tailwind, a geopolitical tailwind there as well. Yeah, so basically there's a lot of king making going on on behalf of kind of regulators. And it seems like we could have kind of the crypto banks of the West, right, that are basically knighted. But, the powers that be, and then we'll probably have international crypto banks or kind of like Eastern crypto banks as well. But it does seem like some of the regulators are targeting non-U.S.-based exchanges far more aggressively than maybe they are. As aggressive as they've

been with Coinbase and a Cracken, they seem to be even more aggressive on these offshore exchanges. So it's very interesting. Borderline unfair at times. Yeah, like who said any of this was fair. I don't know that any of this is fair. It's just kind of like analyzing what is happening. Yeah, no, and I don't mean to endorse the strategy at all. This is just kind of what I'm perceiving. And I think it kind of fits with this like broader narrative that we're going through of technology increasingly being viewed through like a zero sum, you know, geopolitical lens where there's kind of two camps. There's like the U.S. and its allies. And then there's maybe China, Russia, whoever else. We're seeing this go on with like semiconductors, AI. My opinion is,

crypto is just as important as those technologies. Politicians might not realize it yet, but I think that they will. I think things like stable coins will make them realize that sooner than later. So yeah, I think this is like a big tailwind, I guess, most potently for Coinbase's offshore perps exchange. So this offshore purpose exchange, there seems to be just a crazy alignment of the stars. First, it's a massive market with massive volumes and has been proven by other businesses to make a lot of revenue. That's star number one. Star number two is that things like Bitmex and FTX just collapsed. So really a lot of the competition just died. Binance is still standing, but it has all of the regulatory pressure, which is the third star.

And so Coinbase has regulatory alignment, this massive market that is perps and all the dead competition. I just see a lot of alignment of stars, which onshore United States regulated exchange can go capture this thing. Whoever can get there first can probably capture a lot of incoming revenue. Is this conclusion naive or this seems to be just right for the taking by Coinbase? I think that's well said. Yeah, that was my conclusion as well after looking at it was it's wide open. This specific market is wide open for the taking. And now we're just going to have to watch, I mean, can Coinbase kind of execute and capitalize on it? And, you know, that's TBD, but I think they have a pretty decent track record so far on executing on some of their other

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All right. Let's move on to the next big thing, I think, which is potentially a massive driver for growth here. And this is custody. Custody. It's super boring. Just use Coinbase as a bank. But then I think when we enter the conversation of the Bitcoin spot ETF, things get a little bit more interesting. Jay, do you want to take us through this potential business for Coinbase? It's definitely also its current business, custody and custodian fees. But I think if I'm understanding correctly, it's pretty marginal. And talk to us about this part of Coinbase's business and where we see areas of growth. Yeah, I think this area has always existed with Coinbase, but it hasn't been as exciting

up until this point where Coinbase has been listed as the sole custodian on a number of different spot Bitcoin ETF issuers. So just to take a step back, I think breaking down what custody is, effectively, every blockchain is a decentralized permissionless ledger. and at every address, you have, I guess, every Bitcoin or every coin is attributed to a given address. And in order to move that Bitcoin or coins, you need private keys, which effectively acts as the password to that address. And in order to generate the private keys, you need something called a seed phrase. And there's effectively a function or a cryptographic

formula that maps the seed phrase to the private keys. In order, order to properly custody, you kind of have to manage each step or each layer of this. And this can get complicated quickly. And, you know, it's easy to forget or mess up the passwords or the seed phrases that are involved. So effectively, Coinbase manages all of this for you. And it's a service that Coinbase offers. So I think the business is fairly simple as far as custody revenue is really driven by the amount of the assets under custody. So, So this can go up with coin prices going up or it can come down to users depositing more assets for custody. And I think tying this into the spot Bitcoin ETF, the latest developments, as I mentioned, a number of issuers have listed Coinbase as the sole custodian.

And in addition to that, there's also a surveillance sharing agreement that Coinbase would be involved in here. I think in addition to this, as Coinbase becomes more of a brand name and as folks get more comfortable with the reputational risk and Coinbase as the custodian, I think aside from the direct impact of Coinbase cussing more assets from the spot Bitcoin TF directly, we also see more institutions or more retail users be more comfortable with Coinbase and deposit more assets for them to custody as well. Yeah, I think that's a great point. there, Jay. And I guess just to take a step back for a minute, I've seen a lot of confusion on Twitter over the difference between, well, why is a spot Bitcoin ETF so important? Why should we care? Don't we already have futures products that are very similar? We already have GBTC. Why should we care about a spot BTC ETF? And just to put some numbers around it. So existing Bitcoin funds have 29 billion in AUM. Out of that big number, out of that 29 billion, roughly 28,000,000,

billion is in spot vehicles. So historically, you know, the market has kind of spoken with its feet. People prefer spot. And that's for a variety of reasons. It's more simple. There's less complexities. There's less risk. If you're a financial advisor and you're managing a bunch of your clients' money, you probably don't want to be messing around and, you know, fancy futures products. You just want to stick, you know, a couple percentage points of your client's money into Bitcoin, sit there, forget about it and not have to monitor it. A spot vehicle, like a spot Bitcoin ETF vehicle, would do that. So I think there's a huge untapped demand right now in the market. And that's kind of the upshot. And that's, I think, at a high level why this spot ETF is such a big deal.

Am I correct in my understanding that if we were not talking about a spot Bitcoin ETF, we were just talking about custody, this part of Coinbase's P&L is kind of like not interesting and marginal. It's pretty dependent in order to actually move the needle when we talk about coin valuation, the actual equity, it's pretty dependent on actually being the custodian for a spot Bitcoin ETF. Yeah, absolutely. And I think even on that front, if we assume you can run the numbers, whether it's between $30 and $50 billion of assets under management in terms of Bitcoin custodied by Coinbase, that doesn't present a huge, I guess, direct impact to an increase in Coinbase's revenue. But I think it's really the auxiliary functions and the brand value that Coinbase gets

that drives more of a significant impact or a significant increase in Coinbase's revenue. So it's stuff like obviously, as I mentioned, the direct custody fees that Coinbase would receive, but the auxiliary functions would be stuff like the surveillance sharing agreement between the different ETF issuers and Coinbase. I think there's the primary and secondary trading volumes here. And this would just be the trading volumes associated with the primary issuance and redemption of those ETF shares. And then there's also, I guess, arbitrage opportunities that are created with this ETF, as we saw with GPDC, when there's a discount or premium to the net asset value on the ETF. And there's, I guess, a good percentage of that trading volume, whether it's from

issuance and redemption, the primary trading or the secondary trading, or the secondary, from the arbitrage opportunities would likely occur on Coinbase, and that just adds to Coinbase's bottom line. And I think lastly, with something like the spot, BTC, ETF, this drives flows into Bitcoin, which likely, I guess in a good case scenario, increases the price of Bitcoin, which further propels all the other aspects of Coinbase's business beyond just custody. So it's not just the custody fees that make us bullish about this scenario. It's just that Coinbase just becomes a more strong epicenter of just general crypto-related economic activity from the perspective of Tradfai. And there's just like a long tale of positive tailwinds that comes from being the

custodian of a bunch of Bitcoin or ether or whatever gets this bought ETF approvals. This is right? Yeah. Yeah, that's right. I totally agree with Jay. I think custody is kind of boring if we're being honest. You can think of custody as like, I don't know if you've seen the episode in Harry Potter, where they go to Gringott's Bank, and you've got to go to the vault and like unlock the vault. That's essentially custody. You're not doing anything with the funds. It's just sitting there. He's probably in cold storage and they just sit there. So it's kind of hard to have like a differentiated product, like one custody solution is probably the same as the other given that, you know, you trust both the same. So just to like throw a quick number out in this coin-based

report that Delphi put out, we had three. different assumptions. So if we assume that Coinbase captures five Bips on their custody fee, seven Bips, and then 10 Bips. And then on the other axis, in terms of AUM, 30 to 50 billion, 80 to 100 billion, and then 180 to 200 billion. So let's just go like all the way out, best case scenario, 10 Bips, max AUM, 200 billion. All that would equal is a 6% jump in Coinbase's top line revenue. So it's a significantly smaller kind of opportunity. than perks, what we were just talking about before. But I think to Jay's point, the more interesting angle here is that the virtuous cycle that a Bitcoin ETF could unlock, higher trading

volumes, more institutions onboarding a Coinbase, and trading on, you know, using products that Coinbase captures a higher fee on. So that's, I guess, kind of the more exciting angle. Interesting. Yeah. And just to emphasize that, I think everyone's heard of the nobody got fired for buying IBM quote. And this is just related to, you know, a couple decades ago, when business would pick a company for their IT solution. I think similarly in this case of BlackRock spot Bitcoin ETF is approved and they have Coinbase, they've given Coinbase their blessing as their ETF custodian

as well as their surveillance sharing agreement. It's very kind of allows for other businesses to also be comfortable and also take the reputational risk of choosing Coinbase for whatever functions that they want to do within crypto. That's a great point. Kind of de-rest Coinbase as a business. Right. Yeah, that's a really interesting. I actually didn't expect this part of the conversation to end up here, but like the custodian part of Coinbase is actually kind of just his brand. It's like the branding part of it's like the trust. Like what is a bank? A bank is trust. And if you can trust Coinbase with custodying your precious Bitcoin that provides, you know, hundreds of billions of dollars of supply to the spot Bitcoin ETF, then well, the brand of Coinbase just increases in value. It's an interesting perspective here. But understanding that custodianship is boring, I think we should move on to something a little bit more excited.

such as base, I think is the more exciting part that I think a lot of crypto-natives are going to be pretty piqued about. You know, when we think about key risk to Coinbase, there's a couple, right? We've already touched on some of the major ones. We've got regulation. We've got Gary, you know, being Gary. We've got competition. And then maybe the third big one is kind of the most nebulous.

And it's like this long-term future where, like, decentralization eats the world, right? So like if Ethereum works in this perfect world or if any of these blockchains truly scale to become, you know, these global networks, why would you ever use a centralized entity? Wouldn't decentralization just always be the right answer? And there's kind of been this tension, I think, from the very first moment that Coinbase launched when Mount Cox was still happening. Coinbase says it's pro decentralization, but its whole business model is predicated on centralization. So if centralization were to go away, what happens to Coinbase? So there was always like this weird conflict of interest there that Coinbase could never really answer. You know what I mean? I think base is their answer to that. I think base kind of solves or answers that founding contradiction. So I guess, you know, what is base? Base is an Ethereum L2 that's built on the OP stack.

And base is essentially Coinbase's attempt to help Ethereum scale, but then also to have some skin in the, you know, decentralized world. and in my opinion it kind of serves as a hedge against the rest of its business, the rest of its centralized business. And so what does base look like so far, just in terms of raw numbers? I mean, bankless listeners, well, you've done so many episodes about the OP stack with Ben Jones and Jesse Pollock, even with Brian when we had them on not terribly long ago. But just put on your hat of someone who only understands a little bit about crypto and is trying to understand how to evaluate base from the coin perspective. Like, what are the numbers telling us? Yeah, so I think when base first launched, I'd be interested to hear your opinions, but no one was really talking about it in crypto.

I mean, it was kind of like, yeah, it's going to be this, like, boring trad chain that maybe like RWA's live on and institutions used because Coinbase is like involved with it. But, like, no one really cared about it. And then the first thing that actually happened was bald, which was, you know, a meme coin based off Brian Armstrong, the Coinbase CEO's bald head. And that thing, absolutely ripped. Some guy, I think we have a headline somewhere in the report, but some guy made a million dollars off vault. So of course, you know, I see a headline like that. Everyone wants in on base. So everyone starts bridging funds over from Ethereum, from other L2s, on a base. All of a sudden, base is the hot new thing. That's where retail is headed. So base pretty quickly

after launch, within the first 69 days, saw just over 100,000 daily active addresses, which we could think of as like a very crude proxy to users. We would probably take a haircut to that. But as that first chart shows, base saw adoption far faster than, you know, comparable L2s did that early, you know, post-launch. And then how does this actually translate into money? Like, again, I don't know.

I'm coming from Tradfai. I don't know a thing about base or layer twos. How does Coinbase make money? Right. Yeah. So, you know, base started off as a meme coin chain with bald. And then pretty quickly after it had its. first kind of like real breakthrough innovative application, Frent Tech. So for those that haven't

heard of Frent Tech, it's essentially like socialify. It allows you to monetize your name and spin up a private group chat that people can buy access to the group chat. So it was a pretty novel idea in crypto and it's really taken off. And it's driven, importantly, David, to your question, it's driven a lot of transactions and a lot of fees on the base network. And I think the way that I think about blockchains from a traditional businessy perspective is blockchains are in the business of selling block space. And all block space is is access to the database. So the more access you can sell to the database being the blockchain and the higher cost that you can sell that access to. Those are the two key inputs to evaluating how much money a blockchain can make.

And then can you paint some numbers around actual like revenue for Coinbase? How much revenue has Coinbase gotten from their base chain? So yeah, I guess to take a step back, maybe one way to think about base is in relation to other L2s. So we've had L2s for a little while now. So since inception, optimism's average profit margin, you know, we could think of a profit margin as the fee that users pay to transact on the L2, subtracted by the settlement cost to send that transaction from L2 down to L1 to Ethereum. The net, of that is what the L2 brings home. That's the profit. So since inception, optimism's average profit margin was 23%. Arbitrum is a bit higher at 30%, but roughly similar. Base, as of a week or so ago,

had an average profit margin of 60%. 6.0. So that's good for pretty much double its competitors. Why is that? Yeah. Thank you for asking. So we should not expect that to last. We should not expect that level of profitability continue. Most of that was actually driven by a Metamatsk bug that was defaulting users to like the highest fee setting. So people were like egregiously overpaying to settle transactions on base. And that was at the same time we had Frentack and Bald. So there was this kind of like anomalous moment where base was raking in far more profit than its competitors.

I guess just to quickly jump to like, what does this mean for Coinbase, right? We can think about base in a couple of ways. So the easiest way to think about value accrual is by projecting out transactions. and then profit per transaction. Because again, a blockchain is just selling access to a database. So to date, the highest TPS base has ever achieved is 16 TPS. That's base is all-time high. Ethereum's all-time high is 22 TPS.

And then maybe in a limit case, we could think of 100 TPS, right? And then on the profit per transaction side, base has average six cents profit per transaction. And its competitors have average roughly something similar. So if we take those assumptions and then kind of project them out, what we get is in a base case scenario, so base maintains its all-time high TPS of 16, and it makes a profit per transaction of six cents like its competitors in this next year, that's only a 1% bump to its top line revenue. So TLDR, base is probably not going to affect

Coinbase's financials in the short term, but, you know, as we can get into, it's probably more of like a long-term plan. Is there any models or any predictions that we can make about? Like if the layer two sector grows, total transaction grows, is there anything we can say about the future growth drivers here? Yeah, so the two key levers on base are really TPS. So can it scale up? The more TPS it could do, the more money it's going to make. And to date, L2s have really struggled to scale. The max observed TPS of any L2 network is in the teens. Most days, it's usually in the single digits. So, you know, they have some work to do there before these numbers become meaningful for a Coinbase-sized company. And then the other big open question that, you know, I'd be interested

to hear what you guys think of this is, can Coinbase extract a higher fee than its competitors? Are people willing to pay a premium to use base over L2s? And as we've discussed, people have been willing to pay that premium to use other Coinbase products will base be the same. I think that's an open question right now. Interesting. Interesting. Jay, where would you add to this? I think Michael's on a great point just covering the basics of base. From my angle, I think it's very interesting to note how organic base has really grown in the past couple of months since it's launched. I think in comparison to a lot of the other L2s like arbitrarian optimism, base doesn't have a token. So on those other chains, I think there's much more of an incentive to use it with

the goal of airdrop farming, since the airdrops have been particularly lucrative. But if you take a step back and look at how the activity on base has come to fruition. It started with one of these meme coin launches that made it super popular. A lot of people bridged over. And people were bridging over before Coinbase was supporting the native bridging. So people were scanning through ether scan contracts and natively interacting with the smart contracts. And then we obviously had the propulsion of friend tech. And I think one thing as a user of friend tech, I think that they've done extremely well is they've really abstracted away the wallet from the app. So when you're using the app, it actually doesn't even feel like you're doing the traditional thing of messing with the

different nonces or setting the gas parameters. And I think it's been a very good experience relative to other Web 3 or crypto apps that I've used. And then lastly, I think these two launches have shadowed the aerodrome launch, which is a Dex, a spinoff off Optimism's Velodrome, which actually reach something like 200 million TVL within a few days of launching. So all in all, I think given the fact that base doesn't have a token, they've done an extraordinary job in attracting users attracting TVL and activity to their chain. And I think one last thing I want to add is I thought about L2s and I think one of the biggest problems is the fragmented liquidity. And the idea here is just you have so many L2s now and the number is just going to continue to grow. As a

developer, like as a builder of DAPS, how do you pick which L2 to deploy your DAP on? And I think this is where Base is particularly attractive. And for a couple reasons. I think one, Base has Coinbase's stamp of approval as far as ensuring the chain is secure, exploit-free. I know Coinbase has built a bunch of dev tools that do some linting and scanning of contracts deployed on base as a preliminary check to just reduce the chance that. that any contract deployed on base having a vulnerability or a hack exploit.

Additionally, base is built on the OP stack. So in other words, you kind of kill two birds with one stone in terms of you build your DAP on the OPE stack. You can now very easily deploy on both optimism mainnet as well as base. And then I think lastly, Coinbase just has a lot of users on their platform, a lot of monthly transacting users. And as a result, this likely will, in terms of from the developers, view, this will result in more liquidity and activity for any given that relative to other L2s,

all things equal. So in that sense, I think with all these factors combined, I think base is a very attractive L2 to build on relative to everything else that exists out there. Yeah, I would just add to that as we've talked about probably the biggest like new opportunity for Coinbase is offshore perps, then custody, then base in that order. So base is probably the smallest, at least over the next couple of years. But to Jay's point, that doesn't, you know, I don't think we should discount it whatsoever, because I think there's a bunch of different angles we could kind of think about base from.

One of the more obvious is, you know, when token. Coinbase is a stock, as we talked about. Coinbase doesn't have a token. And that's distinct from pretty much all of Coinbase's major competitors. Finance has a token. FTC, RIP, used to have a token. And if we just like, you know, look at the numbers. So peak valuations, Coinbase's peak valuation, as you mentioned, David, peaked at roughly $80 billion. Bmb's peak valuation was $109 billion. And FTT, FTC's token was $10 billion. So while sex tokens are like, you know, a little cursed in crypto, they've commanded some serious, serious value. And I think, you know, Coinbase probably looks at that and says, why can't we have some of that? You know what I mean? mean, that'd be nice for us. It'd be nice for our shareholders. So I think we could think about

base, well, I guess to back up, a coinbase token is probably not in the cards, at least not, you know, with Gary and kind of the current stance of the U.S. administration. But a, you know, decentralized base token feels a little bit different, you know, potentially more doable. So I think, you know, with base, that kind of give Coinbase the ability to launch a token, potentially, you know, stay regulatory compliant and capture that upside of a token. I think one other possibility is just the simple, like, base providing a conduit to increase the usage of USDC, which is obviously neticreative to Coinbase's value. So let's say because of base-driven USDC demand, Coinbase was able to mint another, like, with Circle, $100 billion in USDC, right? Well, like using the numbers you guys were just saying, like Fed Fund rate 5%, and then they get to keep 50% of that circle gets the other 50%.

I mean, that's easy, you know, $200 million potentially in line. So it could be that base itself is just sort of a scaffolding or like a rail for other Coinbase types of products, which is another interesting thing. I mean, Tron is absolutely crushing it with respect to like tether on Tron, right? And so it just seems like the West will probably have an answer to that. If using our entire framing of there's going to be. be like kind of a set of West type exchanges and chains and the set of Asian or East exchanges, non-Western ones, that could be what base becomes as well. Yeah, I think that's right.

I think that's a good way to think about it. And actually, Brian Armstrong, on their last earnings call, he was asked about base from, you know, the analyst. And he said exactly that. He said, we internally view base as a way to grow the pie. And I think they think about it holistically, whether it's stable coins, whether it's just helping Ethereum scale, increasing the economic potential of the on-chain ecosystem, you know, boosting trading fees, another customer acquisition tool. If you want to go use Frentec now, Frentex is hot new social app. It's really easy to onboard to Frentec through Coinbase. So they kind of own that distribution vector on chain now. So, yeah. Part of this base story comes with our partnership

with the Optimism Collective. Coinbase got 2.3.3.com.com. 3% I think of all OP tokens. So Coinbase themselves, the company has exposure to OP, the token. But that really is just like the foot in the door for the actual conversation here, which is like, yo, as a business, Coinbase has assets on the balance sheet. They have Bitcoin. They have Ether. It's not part of their core business. But if we were talking about understanding the company, this is a relevant detail here. Jay, do you know actually how much? How much money? How many crypto assets? How much crypto assets does Coinbase have on their balance sheet? Yeah, yeah, I think adding to that, according to their 10Q last year, which measured all the

crypto assets they hold at the end of Q3 of last year. I think they had something like 9,000 BTC and 130,000, 8th. So it's a pretty sizable amount. Not customer deposits, that they own. Yeah, exactly, that they own that's on their balance sheet. And I think additionally, Coinbase Ventures is another big arm of Coinbase. And I think from their 10Q, they had done something like $75 million worth of investments. And this is in a number of high quality projects like Alchemy, Magic Eden, Arbitrum, and the like.

And their mark to market fair value as of Q322 was something like 140, $145 million in these, I don't know if it's alternative. Like they're all coins or their equity allocations. but they definitely hold all together something like $500 million with the crypto on their balance sheets. Right. Yeah, of course. And then just hundreds of millions of dollars of exposure to their own venture arm for whatever that could turn into. So like it's also a VC firm baked inside of this massive company. Michael, anything you want to add to this whole just like raw exposure part of this conversation? Yeah, I mean, I think an interesting like fractal to think about the coin base base relationship. I know we're dealing with a lot of bees here is finance. and BNB chain, which is probably the closest comp that we have. And, I mean, obviously, BNB chain was huge, remains still pretty big. I think it's got top three ecosystem in all of crypto.

It's kind of under-discussed. But there was a recent deal that Coinbase Ventures did. They tweeted about it, which I thought was notable. They announced an investment in Socket. And Socket provides part of the infrastructure that powers the bridging between the Coinbase Wallet and base. And to me, that was like an early indication that Coinbase is not only going to be active in like the, you know, bootstrapping the infrastructure, like creating base, but also then seeding base with all sorts of projects. And like if you're a project, if you're a founder trying to build on base, why wouldn't you raise a check from Coinbase? Why wouldn't you stamp Coinbase's name next to your project? So Coinbase, I think, is probably going to play like a kingmaker role, certainly in base. But I also think it makes sense for, you know, projects on other. L2s, Ethereum-made net, whatnot in the EVM ecosystem to, you know, increasingly align themselves

with Coinbase. Amazing. What a power that Coinbase has. It does start to make me a little bit scared, but the centralization power of Coinbase, I think, will be a topic for a different episode down the line. I think that kind of wraps up every single major line item in their P&L that has the potential to move the needle. One of the big things that happened in 2023 was the prolonging of the bear market and also

just layoffs by every single major crypto company, including Coinbase, just operating expenses is a big conversation. We talked about all the drivers of growth for Coinbase, but just overall, operationally, how is the company doing? Jay, do you have any perspective here? Yeah, yeah. So I think on the operational expenses side, I think they've done a great job. I think peak of 2022, their net losses was something like a billion dollars per quarter. And I think this is when there were a lot of concerns raised around, hey, does Coinbase have enough runway to even last before they go bankrupt to last before the next crypto bull cycle? And since then, I know they've done two rounds of layoffs. I think the first one was something like 20%, 25% of their staff. And then they also did another

round of layoffs with a similar amount. And I think since then, the two recent quarters in 2023, their net losses were cut to be below $100 million. So they've definitely cleaned up their operating expenses. And I think what's super impressive here is while cutting their staff in half effectively, they've been able to continuously deliver on new products such as base or such as a while as a service. And I think that's very incredible to point out. I think that's super bullish for Coinbase's business as a whole. And just overall, zooming out. I remember Coinbase did a massive hiring spree in 2017-2018-2018 bull market. And then, like, culturally, operationally, like with their execution, they kind of just seem to like

stagnate for a while. And things have really changed in late 2022, early 2023, when all of a sudden they seem to be able to get rubber to meet pavement once again. But Michael, what's overall your opinion, like you gave us the rundown like Coinbase was a company back when Mountain Gox was trading? Just like overall, what's your vibe on just the direction? of Coinbase. Yeah. I mean, I agree with your framing. I think Coinbase and pretty much every other crypto company had this past bull run, I was actually working in an exchange myself. And, you know, exchanges throw off an incredible amount of money during those up cycles, like we talked about. When those transaction volumes are flowing, when people are trading on the exchange, it's just

printing money. So I think that probably led to a culture of, you know, complacency of maybe a little bit of excess, you know, Coinbase felt like they had gone public. They had made it. Look at all these trading volumes. We're done. You know what I mean? It's the end of history. And I think this past bull market was a big wake-up call for them. And if I were to like psychoanalyze them and obviously someone internal at Coinbase would be much better position to do this. But if I, from an outside perspective, it feels like Coinbase is much more focused today than they were, you know, a year or two ago. And I'm not sure exactly what did that. If I had to guess, it's probably due to just the carnage that we've seen across the centralized crypto landscape. I mean, just, you know, you throw a rock

and it's going to hit some bankrupt centralized crypto entity, you know, the fraud at FTX, Genesis, Voyager. I mean, the amount of instances of either outright fraud or just ineptitude is stunning, I think. And I think that kind of prompted like a rethink within Coinbase. And they said, just like you said, David, we've been here from the beginning. And somehow this has gotten away from us. We're no longer a leader in our own space, you know. So we're going to reassert ourselves. We're going to, like, get fit. We're going to get focused. And we're going to lead from the front. The regulation side, we're going to sue the SEC or whatever. We're going to launch an offshore perps. Yet we're going to move on chain. You know what I mean? It seems kind of like they're firing on all

cylinders, and they're really kind of reasserting themselves as that OG leader within the space. Michael, you mentioned Genesis and that company. That reminds me of a line item that we might have skipped over, which is just institutional lending. Is Coinbase looking to fill the same kind of gap that exists in the market with offshore derivatives exchanges? Well, Genesis is under, Voyager is under? Is there an equal gap in this market here? Is Coinbase interested in stepping in on this? And how big is that part of the market? Yeah, I think absolutely. I think back if you look at the peak of 2021, there was something like $100, $150 billion worth of loan originations. So this is just the process of creating a new loan. And the loan origination fees amount to something like

50 to 100 basis points on average. So if you do the back of the napkin math, I think that equates to something like a billion, a billion and a half dollars. And the total addressable market there is clearly large enough to have a sizable impact on Coinbase's bottom line. And I think what we saw there over the past year was pretty atrocious as far as a lot of these firms were exposed in that they didn't do their due diligence. They were lending cyclically in terms of assets that were deemed as collateral were counted multiple times in some circumstances. And I think Coinbase operating the way they do, I think there's definitely a gap to be filled, but I think they have the ability to step up to be very rigorous to do the due diligence required

to make a business like that work sustainably. Do we have indications that Coinbase is trying to enter this arena, or are we just guessing that they might be interested about this? I think there were some news headlines where they were trying to get the relevant licenses, but there hasn't been as many updates on this front relative to some of the other aspects of their business. Okay, so the other things that we've talked about, the offshore derivative exchange, we know Coinbase is going after that. The custodianship of a spot by Coinant, TF, we know Coinbase is going

after that. This is still speculative. So I just looked at a CoinDest had an article a month ago, September 5th. Coinbase creates new crypto lending service geared towards large investors. So it looks like that they raised outside capital for this platform. And to your earlier point, David, I think they just look at it as someone needs to fill the hole that Genesis left. Why not us? You know what I mean? And I think this kind of goes back to what I was saying earlier, was Coinbase is at a point now where they feel like if they don't lead, if they don't take advantage of these opportunities, someone else will. And that someone else, at least history has shown, tends to be a little less savory, less trustworthy than Coinbase.

I think that they view this as a way to hopefully bring liquidity back to the crypto system, but do it in the right way. Really, the context seems to be, Coinbase seems to be believing in itself to the point of like, yo, we can operate and execute anything. Like, we used to be just a wallet. Then we became an exchange. Then we became a bigger exchange. And now, now they're going off into like seven or eight different business models with like decent signs of like optimism and potential in all of them. At least that's kind of my interpretation. Would you guys share that? Absolutely. Yeah. Yeah. And I think that's something that we tried to highlight in our report was that, you know, while Wall Street and, you know, quarter to quarter financial statements, you know, interest

income is the flashing light today. And that's great. That's awesome. We talked about that. That's not going to be the flashing light tomorrow a year from now. It's going to be, to your point, some of these newer revenue drivers. And I think that's the real opportunity here with Coin is that the street, Wall Street, is looking at it as this traditional bank. And I think those that have spent some time, you know, digging in the weeds and in the crypto space, look at Coinbase as this diversified crypto juggernaut with its kind of tentacles in just about every vertical across crypto. And, you know, they're kind of poised to capitalize on just about every area of growth across the crypto space. Amazing. So Coinbase went public, opened up at $80 billion market cap, currently down at the low, low valuation of $18.something billion market cap. Jay, where do you think we can go from here? What's a reasonable direction for the actual valuation of this company? Do you have anything you can show us? Yeah, I think I don't want to spit out any exact numbers or any exact project. Come on, Jay, give us something.

Yeah, Jay. All right, all right, all right. I think a popular way to value all coins, Coinbase stock being one of them, is to compare the valuations between Ethereum and Bitcoin to coin. I think if you look at, you know, the chart, Coinbase's chart, and you quote it in Bitcoin and Ethereum, I think it comes to be something like 0.007 Bitcoin at the top when they first launched.

And I think just under 0.1Eth, I think another point here is that Coinbase has never really seen a full bull cycle where it gets to go into price discovery and the Wall Street or the popular projections of, oh, revenue has grown this much from trough to peak, it's going to continue growing that way. So Coinbase has never been able to fully see that out. And I think going into next cycle, those are definitely areas that I'll be looking for as far. as, hey, what is Coinbase trading at relative to Bitcoin and Eith? And at what point will Wall Street be making those ridiculous projections? You know, if Bitcoin goes to a million dollars or Ethereum goes to 100K, what does that mean for Coinbase's forecasts as far as their revenue and their growth in those scenarios? But here's my question here is like, if Ethereum is going

to 100K, why don't I just buy Ethereum? Like, why don't I just buy ETH? Like, why would I just buy ETH? Like, why would buy a coin, I think that's a question on investors' minds, right? Like, whether they're Tradfai or they're kind of crypto natives is if Coinbase is kind of a proxy for the crypto economy, why don't I just buy the king crypto assets, Bitcoin and Ether? Yeah, I think that's a great question. I think what coin really gives you is it gives you exposure to all the value generated within crypto, even outside of Bitcoin and Ethereum. And obviously it also provides exposure to Ethereum and Bitcoin additionally. So I guess a concrete example within crypto, even during bull markets, we get these huge fluctuations as far as price volatility goes. And Coinbase is able to capture

that value directly via its trading fees. When that happens, there's more trading volumes and therefore more trading fees that Coinbase gets. So in that sense, you can kind of think of Coinbase as an index fund across the crypto ecosystem beyond Bitcoin and Ethereum. And then another aspect that I want to note here is that the amount of value, and I alluded to this in parts of this podcast earlier, but the amount of value that Coinbase is able to accrue as a cycle goes on will steadily increase relative to what they're capturing now. And I think this is what makes me particularly bullish on coin in that everyone in crypto today is fairly crypto-native. There's folks that run their own nodes. There's folks that largely most of us self-custody. But I think as a cycle goes

on people are going to store more assets on Coinbase. People are going to be more, I guess, the new participants are more likely to stake to do things directly on Coinbase. And in that sense, Coinbase will just capture more and more of that value. And I think lastly, Coinbase stock is accessible. I think if you pull up the meme that I have linked, it pretty much just shows that on the right side, you can spend six months building internal consensus, spend three months onboarding custodians to deploy some of your AUM and Ethereum or Bitcoin, or you can use your, I guess, existing Fidelity or Shwalo account and just go buy Coinbase directly. So I think in that sense, there's a confluence of Coinbase captures value outside of Bitcoin and Ethereum, and that value

will steadily increase as time goes on. And we get less crypto-native retail participants to enter the space. And then lastly, it's just accessible as far as if you're a fund, you're an institution that wants to buy or get exposure outside of Bitcoin or Ethereum, the easiest way to do that is just to buy Coinbase stock as opposed to going through the accounting, the paperwork, the process of getting onboarded to buy all coins and whatever else. Yeah. Yeah, I think just to build on that quickly, the point that Coinbase has not seen a full bull market, I think is a good one and kind of like underappreciated by the broader market. You know, Coinbase is essentially IPO around.

the peak atop of this past cycle. So they really didn't benefit from any of the uptrend. And I think to Jay's point, Coinbase stock is highly accessible. And what that means, like, in practice is that it's a natural like shelling point for a lot of different types of people. So you could have institutions buying crypto. You could have institutional investors, whether that's like a registered financial advisor, you know, bank, whatnot. And then you could have retail all buying the stock in a much easier fashion than, you could have a registered financial advisor, maybe some native crypto assets. And I think, you know, one thing that I'll just flag is kind of a far out, maybe some hopium, is I think there's a decent chance that we could see coin turn

into some sort of meme stock. And I don't think it's as far fash as it might sound. Coinbase, you know, as we've talked about, is kind of now like the leader. They have their same with crypto campaign. So like if you're buying coin, not only are you buying the stock, but you're also kind of weirdly like supporting crypto and saying like, you know, F you to Gary. So I think that there could be very quickly this narrative that spins up around Coinbase, which, you know, could lead to some pretty explosive upside. Yeah, I don't know. For some reason, people still like stocks, I guess.

So, you know, there's a group of them. We've gone this far. And this has been a very like pro-coin base, very, very bullish episode on coin. Okay. But you guys have to give me the bare case. All right. So you said earlier, this is 90% is U.S., you know, in terms of kind of, kind of like revenue, right? Okay. So the U.S. has not lately been a hospitable welcoming place to

crypto. That's for sure. So that could be maybe part of the bare case and a headwin here. Also, maybe Coinbase's ability to execute. It looked like for a while, I mean, they got their start before Binance, but Binance is really just dominated a market share, even though it's kind of a later mover. And then for a while, it's looking like FTCS was crushing them. Of course, we know FTCX took more than a few shortcuts here. So Coinbase is looking better lately, but maybe failure to execute could be another challenge. What is the bare case for Coinbase? What do you guys think? Yeah, I think the biggest risks really stem from interest never really comes back to crypto and we don't get another cycle play out like we did in prior years. And then I think the other

aspect would be people stop trusting and using Coinbase, whether that's due to a hack, better products out there or a combination of the two. So I think it really comes down to these two risks as far as what would cause the bare case for Coinbase to play out. You don't think like Defi is a risk. Let's say these, you know, Dexas start to eat into Coinbase's lunch. Is that a potential here too? I don't see it as much. I think as I mentioned, if we do get a cycle as a cycle progresses, the marginal user that enters the space is less likely to be transacting on a Dex. And I think we're already seeing some evidence here as far as Coinbase is charging a 25% premium on their staking services, but they're still getting so much volume and traction on that product. Michael,

what do you think? Bearcase. Yeah. So I liked your framing, Ryan. I kind of think about the bare case in three-time frame. So, like, short, medium, long-term. Short-term, I think the biggest risk come from the regulatory perspective. So, you know, I think Coinbase and Gary are basically arguing over whether they listed, you know, a bunch of securities. So in theory, you know, there could be a ruling tomorrow that says everything but Bitcoin or everything but Bitcoin and Ethereum are securities. Coinbase stock is obviously going to plummet, right? That's really hard to price end all of our financial models, but I think that's probably the short-term risk. Medium-term risk is like you were saying, I think it's execution. Coinbase historically has been a little

slow-footed. They're still, you know, a leader and whatnot, but, you know, other more nimble competitors have been able to move a bit faster to them and innovate and execute. So while I don't see like an obvious threat to them in the short term, I think Binance is kind of on its back foot right now. FPX obviously blew up. There's not a real big like pure in the U.S. to Coinbase. I think medium term, you know, a challenge or it could emerge. Maybe Binance strikes a deal with regulators and everyone likes them again. That's medium term. What do you guys think of Cracken? They're definitely a friend of the show. Are they kind of a big competitor here? I feel like Gemini has kind of fallen by the wayside, but Cracken's definitely still in the game. Yeah, I think Crocken's definitely a reputable exchange,

but if you just look at volumes done on Coinbase versus Crocken, I think it's very clear that, I mean, I think Crocken is doing like an order of magnitude, less volume on their exchange versus Coinbase. Yeah. So that's where we leave things then. It does seem to me that as much as I I believe that defy and bankless money systems will eventually disrupt the centralized exchanges. First, the centralized exchanges will go disrupt the existing banking system. So we talk about like, you know, one in five Americans, 50 million Americans owning crypto, right? Well, pretty soon we'll have a third of the country and then half the country owning crypto and then 75%. And their first stop is probably still going to be an exchange like Coinbase.

And then the next stop, hopefully, is to a bankless money system. So maybe as fast as defy is eating Coinbase, Coinbase eats the banks first. And that's how we, you know, in this Python that is crypto, you know, swallow the world's money system that way. Guys, this has been a lot of fun. David, do you have any remaining questions for our guests? No, I think this was great, guys. This is exactly the kind of exploration I wanted to do.

So thank you for helping us guide the Bankless Nation down this hole. Awesome. Thanks for having us on. Thank you. Have a lot fun. Yeah, I had a great time. Thanks for having us on guys. Rists and disclaimers, Bankless Nation, got to let you know.

Of course, none of this was financial advice. never is on bank list. Crypto is risky. Stocks are risky. You could definitely lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot.