The Breakdown - 5 Takeaways From Coinbase's 'Base' Layer 2 Chain Launch

Episode Date: February 24, 2023

In this episode, NLW examines Coinbase's announcement of its new layer 2 chain, paying particular attention to: Exchanges moving from layer 1s to layer 2s No token  Wall Street not getting it  Developer competition On-chain know-your-customer (KYC)? Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh. Image credit: Coinbase, modified by CoinDesk.  Join the discussion at discord.gg/VrKRrfKCz8.  

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDess. What's going on, guys? It is Thursday, February 23rd, and today we are talking about five takeaways from Coinbase's layer to chain launch. But before we get into that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation. come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, guys, well, yesterday Coinbase got the crypto industry quite a flutter

when it tweeted a cryptic video of a blue dot and the date to 2323, which is, of course, today. Speculation was rampant at first but started to consolidate pretty quickly when, around half an hour after that initial tweet, the Twitter account for optimism, which is an Ethereum Layer 2 chain, tweeted an image of two wing suitors. One had a red dot backpack, which is optimism symbol, while the other, the one who is diving off the cliff, had the same blue dot that Coinbase had just shared. And so the speculation started to hone in on the idea that Coinbase was launching something in conjunction with optimism. Still within that, there was a pretty broadband of expectations. Gigabare, for example, represented the Prepare to Be Underwhelmed

Perspective. They tweeted, watch the Coinbase thing be Optimism USDC support. or in other words, something fairly incremental. Now, on the far other end of the spectrum, was the extreme expectation of actually launching a chain and a token, which would, of course, fly in the absolute face of the SEC. Moon Overlord tweeted, If Coinbase actually drops a token, shit is about to pop off.

This is how bull markets start, to be honest. At first, it's the same old people on Twitter playing circus, but enough positive things happen or tokens go nuts, and suddenly people love crypto again. What if Coinbase drops a token of their own token coin? Brian said literally last week, go back around and find out. The NTSBF, the final boss, the Omega Chad?

Will they do it? Investor Adam Cochran was also excited. He wrote, If there ends up being a coin-based token that airdrops to users that saves the market, were pulling a portion of it and creating a giant bronze statue of Armstrong with an extra shiny bald head

and sending it to their office. Them's the rules. Then, of course, there was a sort of in-between view, represented by Gammie Chain, who wrote, My speculation, they're making a K-Y-C zone on optimism. Basically, a blockchain you can only enter if you have a Coinbase account, and they are handling access via a chain link CCIP node. Institutions would love this, a K-YC-DFI portal. Can still use optimism open and free like usual, but if you want to get in the Coinbase

layer, you got to go through their KYC-C-CIP bridge, and then you get access to big institutional liquidity pools. Could be the on-ramp, TradFi has been craving. So what did we get? Well, ultimately, it was closer to this middle perspective than anything else. On Thursday morning, Coinbase announced, Base. It's a layer 2 network that is indeed built on top of Optimism's OP stack. Coinbase will be joining Optimism as a core developer on the open source stack, and will even be contributing 20% of sequencer revenue, which is the money they make for ordering and executing transactions, and then submitting them to the Layer 1 chain to fund public goods. That said, base won't be limited to Ethereum and will bridge to other L2s and

L1s like Solana. Their announcement post makes their goals clear. It's all about applications. They write, Hello, World, meet Base, an Ethereum L2 that offers a secure, low-cost, developer-friendly way for anyone, anywhere to build decentralized apps. Our goal with base is to make OnChane the next online and onboard 1 billion-plus users into the crypto economy. Base will be the on-chain home for Coinbase, an open ecosystem where anyone anywhere can build apps that reach the next billion users, a bridge that brings our users on-chain and enables them to go anywhere, including L1, other L2s, and ecosystems like Bitcoin and Solana. end quote. So now let's talk about what base is not. It is not and does not have a token, and they say this everywhere. The second tweet in their announcement thread says,

important, base is not a token. We do not plan to issue a new network token for base, and we will use ETH as the native gas token. Hell, there's no tokenist is even in their Twitter bio, which reads a new Ethereum L2 incubated by Coinbase and built on the open source OP stack. We have no plans to issue a new network token. Still, I think to really start to understand what base is trying to achieve, it's important to put it in a broader context. Luckily, one of the project's first contributors, Jesse Pollock, wrote a thread doing exactly that. Jesse writes, Today I join 100 plus contributors from Coinbase to launch base. Bases by the builders of Coinbase for the builders of the world. I joined Coinbase in early 2017, six years ago and six months after Brian

Armstrong wrote the Coinbase Secret Master Plan for creating an open financial system for the world. Plan had four phases. One, build the protocols, Bitcoin and Ethereum. Two, build the exchange. Coin Coinbase. Three, build the consumer interface, Coinbase wallet. Four, build the DAPs that reach one billion plus users. The outcome? An open crypto economy that would increase economic freedom globally. For 10 years, Coinbase has relentlessly executed against this plan, onboarding 110 million users and helping grow the crypto economy, now with a market cap of $1 trillion plus. And recently, we've been obsessed with phase four, enabling the DAPs that can onboard a billion plus users. Before we could help the world build DAPs, we wanted to start at home. Today, the majority of

of Coinbase products are not DAPs. They are Web2 products with some crypto in them. Recently, we started to change this with products like USDC, Coinbase Wallet, and CBEath. As we looked toward the future, we wanted to help our teams build more products like these, leveraging the full power of the on-chain platform. Our belief, if we could enable our teams to make that change, we'd be able to enable other developers too. As we dug in, we saw teams were getting stuck on two simple questions. How should they build DAPs, e.g. what toolkit? Where should they deploy their DAPs, e.g. what change? More often than not, this was stopping them from building before they could even start.

So in early 2020, we aligned Coinbase around a paved road for on-chain Dap development. How? Ethereum Virtual Machine is our primary development platform. Where? Ethereum L1 for high-value Daps. L2 for scale. With this clarity, we began working to make the paved road as easy and powerful as possible. Throughout 2022, we spent time with nearly every team working on scaling Ethereum and L2. Across the board, we were blown away by their creativity and insight, as well as the collaboration.

collaborative mindset they brought to scaling Ethereum. And through these convos, we had a major change in perspective. Before, a single L2 would emerge as quote-unquote dominant and gradually absorb all activity. After, many L-2s will have significant activity, serve as hubs for different ecosystems, and work together to scale Ethereum. With this vision of the future, we asked ourselves, in a world with many L-2s, can we accelerate Coinbase's mission in the broader crypto economy by building one ourselves? Coinbase has considered launching a chain two times before, 2018 and 2020, and both times we decided not to. This time we said yes because we can both create an on-chain home for Coinbase and connect us more deeply into the larger crypto economy.

And thus, Base was born. We believe Base will unlock the next generation of DAPs from Coinbase and developers everywhere that will bring 1 billion plus of users into the global crypto economy. As we started building, we identified that building a chain is very different from other Coinbase offerings. In particular, it's meant to be a platform, whereas most things we've built thus far are products. Building a crypto platform with a vision for decentralization and scale means that we need to build on the incredible legacy of decentralized platforms that predates our work. So as we've built, we've defined four key principles that shape our work. A bridge, not an island. We're designing base with easy, secure access to Ethereum, other L2s, and other L1s like Bitcoin

and Solana. Open source. We believe that the foundation for the crypto economy should be open source and freely available. Decentralized. Decentralization is essential to ensuring the crypto economy remains open, global, and accessible to everyone. While base is incubated by Coinbase, we are deeply committed to decentralizing the platform. For everyone, base is an open ecosystem where Coinbase will put our products, users, and assets as a seed, then work with the community to truly bring the chain to life. Jesse's thread is actually a little bit longer, so I suggest that if you want the full thing, you go check that out.

But at this point, let's take a step back and try to metanuse this thing and understand what it actually means. I've organized the most important takeaways and discussions I've seen following the news into about five broad buckets. The first is a big change in how exchanges think about their own chains. One of the most financially lucrative moves in crypto's history was Binance launching their own Binance smart chain as a cheaper, faster alternative to Ethereum. They made a bet that it would open up new opportunities for devs who are willing to trade efficiency for decentralization, and in so doing, it would also open up new financial opportunities. Let's hold aside skepticism for a moment

around the intentions of devs using BSC. It's entirely possible that there are big categories of crypto applications that actually don't require full decentralization. And yet, it's clear that layer ones being directly tied to centralized companies has created some problems. In the case of BSC, the chain literally does not live without Binance, which begets regulatory issues and even though we held our skepticism aside for a minute, does attract particular types of projects based on having incentives and motivations that are aligned with Binance. We've even seen, however, the problems of chains simply associated with exchanges. After the collapse of FTX, Salana has had to do work to sluff off the perception of it being just another Sam coin. Now, it certainly appears that that's more of a PR

and perception issue than a structural issue, given how extensive the developer community continues to be around Solana, but it's still not an insignificant hurdle. In that light, then, Coinbase's move to invest in a layer two that is meant to be decentralized is definitely taking a different approach. Now, reasonable people might disagree about the extent to which the move is altruistic and community-oriented versus just a different approach to trying to win the long game. There are many who are excited that Coinbase is contributing to open source in the way that they are. There are others who see Coinbase as trading the short-term upside of crypto games like Owned-O-1s and tokens, which we'll get into in a minute, for the long-term upside of more

activity happening through Coinbase plumbing and infrastructure. However, even if it is that second one, I think there's a pretty good argument that that's healthier for the ecosystem in many ways. Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web 3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Emmerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.com or check the link in the show notes. But as to our second point, let's get to that related question of not having a token.

As mentioned before, Coinbase could not be clear that there is no intention of doing a token. There are a few things to say about that. First, it's part and parcel of that long-term approach, not dealing with the potential short-term incentive warping that comes with a token. Brycent, who is deep on Web3 gaming, wrote, I know base goes against the Web3 ethos of token, token, token, but I think the lack of token shows how committed Coinbase is to creating real sustainable value and not a speculative gateway. Second, it seems at least in part to be a concession to the U.S. regulatory regime.

Even before Coinbase's announcement, GCR Classic wrote, believe it to be extraordinarily unlikely Coinbase would launch their own token slash security. Being regulatory compliant is the biggest edge they have on other exchanges. Wouldn't make sense to endanger this. Coinbase already has their own altcoin. It just happens to be a stock. Third, I do think there is a narrative disruption here in a pretty big way.

Tokens are simply presumed at this point by the non-Bitcoin crypto community, which makes it not surprising that Bitcoiners were some of those pointing out that this showed that you didn't need to launch a token in general. Swan Stephen Lubka quote tweets the announcement and says, You can simply build on an L1, use the native token, and not issue a token? Now, when someone pointed out in the comments that Arbitrum, the biggest Ethereum L2, also doesn't have a token, Stephen responded, I knew someone was going to point this out. It is the exception not the rule, though, i.e. Uniswap could easily have no token. It could

just take transaction fees like Arbitrum does. But regardless, I'm obviously a Bitcoin guy, but would say that DeFi would be much stronger if there were less tokens. End quote. I think from my perspective, the more things don't have tokens, the less it will be assumed that things have to have tokens, which will mean the more people are skeptical, or at least wanting to understand why when there is a token, and ultimately, that sort of consideration is probably healthier for the ecosystem overall. Third, takeaway, Wall Street seems not to get it. As you can probably tell from the tone of a lot of these conversations, the crypto industry is pretty stoked about this, so wouldn't investors holding coin also be?

Well, as I'm writing this, coin is actually down about 1.3% on the day. Investor Adam Cochran writes, very clear that Wall Street has no idea how to price an L2 with Coinbase still trading at prices of less than last week despite this announcement. Their loss, my gain. Coins' earnings next cycle will be a game changer. When someone responded to Adam, I also don't see the bullish theory here. Adam responded, L2s make 100 million plus per year on sequencer fees even in a bare market, with less than 500,000 users. Coinbase has 110 million users. Account-obstracted chain means the ability to use Coinbase K-YC to add real-world assets, and fast-scalable cheap L2 plug directly into the app makes it easy for retail to use Defi.

In a separate thread, Adam compared it to Binance, saying Binance chain did over $1.2 million in fees yesterday, same rough volume as arbitram and transaction scale, according to DeFi Lama. That's $438 million a year of revenue in a down market. No reason base chain can't do similar just on-chain fees, never mind all the other features like real-world assets and ramps. Now, while Adam may be right that most of Wall Street isn't getting it, at least one Wall Streeter is not messing around.

Kathy Wood's Ark bought $13 million worth of Coinbase shares today, adding to the $9.2 million she ordered earlier this month. Fourth takeaway is sort of an obvious one, but reinforces the point that when it comes to these chain battles at L1 or L2, especially within the smart contract ecosystem, it's really all about attracting developers. Brian Armstrong writes, base is a platform for developers to build the next generation of decentralized apps in the

crypto economy. It is designed as a secure, low-cost developer-friendly platform that enables anyone anywhere to build. And by the way, if you dig into all the announcement collateral, 90% of it at least is aimed at developers. Fifth takeaway, in that competition, Coinbase seems to be positioning itself as the K-YC option. Let me turn to Maksie for this explanation. They write, let me explain this to you, Anon. Coin is a legal fund for for foreseeable future as the USG cracks down on centralized exchanges. Instead of defending centralized approach, they're aligning their stack and business model with Web3 Rails, making a compliant Fed chain L2 that brings user activity on-chain. Gigabrain. Instead of wrapping and shuffling smart contract

ownership in private SQL databases, they're investing in the differentiated features of crypto tech. This is a completely disruptive approach to the centralized exchange model, which builds on their in-app-mPC wallet and curated DAP browser. Presumably they'll add value by bringing TradFi features, Identity Tax, AML, onto their L2, which is something only they are positioned to do. This runs counter to prior centralized exchange paradigm of bringing smart contracts onto Tradfai Rails. End quote. Now, many people think that this whole opportunity for them really makes Coinbase sort of the default option for things like real-world assets and securities coming on chain.

Adam Cochran again tweets, given base chain has account abstraction and Coinbase has KYC slash AML data for 110 million users, they can easily launch. launch real-world assets on chain and restrict to approve wallets. Would easily let you put securities on chain, 100x value easy. Now, so far, this strikes me as a fairly significantly under-discussed aspect of all this. The narrative and move to put real-world assets on chain strikes me as something that is growing in importance rather than shrinking, and this does feel like the default place. It's also worth noting, however, that KYC moving on chain is something that many think is a

genuinely bad thing. Rainer-Styles Grant retweeted Maksie talking about bringing Tradfive features to L2 and said, quote, but putting KYC on chain was always the Machiavellian goal, laid out by the Financial Action Task Force. It's not just that this only normalizes it, but enshrines it in killer app network success. It's an ideal outcome for the federal government and capitalism. To that Macy's responded, it seems like a reasonable compromise to have an isolated L2-KYC Fed chain if people want a fiat denominated and financialized ecosystem. If crypto is going to be max disruptive, it should be entirely self-contained and circular and exists without Fiat, on and off-ramps, can't have both, in my opinion. I think that conversation about what it looks like to move so much

of the on-chain ecosystem into a K-Y-C compliant environment is a really, really good one to have, and I hope we see more of that over the next coming days. For now, I'm going to leave it there. There is a lot more than we can dig into, and I'm sure I'll touch on it in future shows. But for now, that is your introduction to base, and what it's saying about the state of the crypto industry right now. As always, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.