Coinbase has recently announced Base, an upcoming L2 for Ethereum, designed to onboard a billion new users and introduce an on-chain system for its exchange. Base promises to deliver the cheapest and fastest transactions to Ethereum as of yet. Community feedback remains mixed, prompting the question: do we really need another L2?
Layer 2 networks are incredibly important in order for our young blockchain industry to mature. Ethereum continues to struggle with solving the blockchain trilemma. But maintaining all three pillars of blockchain technology (security, decentralization, and scalability) might not be so impossible with L2s.
Whether the need for a new L2 exists isn’t important. What matters is appreciating centralized exchanges moving on-chain – a welcoming surprise. Today’s article explores what Base brings to the table and how it may benefit Ethereum and DeFi. Before diving deeper into Base, let me give you a quick overview of L2s.
What Is Layer 2?
Layer 2 (L2) is a network built on top of a base-layer (L1) blockchain – such as Bitcoin or Ethereum – that enhances the performance of the underlying network. You can view L2s as tools that vastly upgrade the capabilities of existing networks. These improvements come in the form of cheaper fees and faster transaction throughput.
It’s important to note that L2s are not completely new chains, nor are they meant to act as replacements for existing chains. They are simply an additional layer of technology functioning on top of an existing and compatible blockchain.
An oversimplified explanation of how L2s work is that they process transactions in batches and send them back to an L1 as a single large transaction. The process greatly reduces network congestion for L1s by reducing the number of transactions that they process.
Reducing congestion also helps L1s remain decentralized and secure. This is because developers do not have to sacrifice one or the other for higher transaction speed – a core problem behind the blockchain trilemma.
L2s are extremely popular on Ethereum since the network frequently deals with network congestion during times of high demand. Their adoption rate is also much higher than on other networks (e.g. Bitcoin’s Lightning Network).
Some Ethereum L2s include:
Base is the newest addition to Ethereum’s L2 family. But Coinbase’s self proclaimed ‘secret master plan’ goes far beyond simply improving scalability for Ethereum. The impact of launching Base has numerous implications for both the exchange itself and the blockchain industry as a whole.
What Is Coinbase Base?
Base is an Ethereum L2 designed by Coinbase that provides developers with the ability to build low-cost and secure dApps for the blockchain industry. Base is native to Coinbase’s ecosystem and it will allow users to transfer assets between the exchange and Ethereum.
Base is supported by Optimism’s OP stack, allowing it to be an interoperable ‘superchain.’ Details regarding the L2’s ability to bridge assets with chains such as Bitcoin and Solana are still unknown.
Coinbase has worked with some of the most popular DeFi protocols when developing Base. The list includes dApps from sectors such as lending, NFTs, bridges, stablecoins, games, DEXs, and much more. Base is meant to be developed by the community, for the community.
Coinbase is part of the company’s efforts of becoming progressively decentralized. The nature and ethos behind Base show that Coinbase is committed to bringing everything inside its ecosystem on-chain, for the purpose of eventually parting away from its centralized past.
Coinbase specified that it has no plans of issuing a token for Base. This decision was likely made to avoid regulatory issues with the SEC. Moreover, it was necessary to pinpoint this decision as there are rumors of other L2s possibly airdropping tokens to active users.
How Will Base Impact DeFi?
Base is not just any L2. It’s an L2 backed by crypto’s second largest exchange. Base can leverage Coinbase’s products & services, fiat on-ramp – and more important than anything – 110 million customers and $80b in assets. Assets that can seamlessly enter DeFi via Base.
To quote Archimedes:
“If you give me a lever and a place to stand, I can move the world.”
Base might be the lever turning DeFi’s world upside down. If Base can leverage the security, reliability, trust, and assets offered by Coinbase, the decentralized finance market might change forever. Customers will gain entry to DeFi not via complex wallets and even more complicated dApps, but via an established and reputable exchange.
DeFi is not the most welcoming sector. Developers have made efforts to make onboarding users DeFi easier and dApps more user-friendly. But such efforts only help crypto-native investors migrate to DeFi. It doesn’t benefit a stock investor or technologically illiterate individual who understands neither Metamask nor smart contracts.
You might argue that Coinbase failed in a similar attempt upon building out Coinbase NFT. Most collectors believed that Coinbase’s marketplace will onboard millions of people by making investing in NFTs easier than ever. But the product flopped.
There’s a reason why history might not repeat. Coinbase built an alternative to OpenSea last time. And investors already had plenty of marketplaces to choose from. It’s a dApp from a centralized entity that no one would want to use.
Base is not a product. It doesn’t target a specific niche either. It’s a layer of infrastructure connecting a highly popular centralized exchange, its users, and liquidity, with the DeFi market and its existing selection of dApps. Base doesn’t compete with anyone. It complements DeFi and other L2 rollups.
BNB: An Example of How Base Can Play Out
BNB is a smart contract ecosystem like any other, although more centralized. But rather than compete with existing blockchains, BNB is meant to complement them – which CZ pointed out from the very beginning. The network wasn’t created for the purpose of being yet another Ethereum-killer, but to offer an alternative chain for you to gamble on.
BNB is Binance’s extended DeFi arm that connects the exchange – and its users – to a system of dApps relying on Binance’s native BNB token for fuel. Binance resorted to this move because many CEXs were losing liquidity to DEXs upon DeFi’s initial boom. CZ needed a way to not only bring back users, but also to capture demand for DeFi dApps.
A not so obvious, but important, detail is that customers accessing DeFi through BNB do so through Binance’s own set of dApps. They don’t need Uniswap, Yearn Finance or AAVE, they simply use PancakeSwap and other applications.
You can view BNB as a highway that connects off-chain and on-chain liquidity. Crypto assets held on a centralized exchange can freely move to blockchains and access decentralized financial instruments. And if willing, you can bridge assets to a different chain.
Binance users using BNB do not have to enter DeFi by starting from scratch. They use existing infrastructure that’s readily available, user-friendly, and most importantly, already has contact with customer funds. You don’t need to create new wallets or figure out how DeFi works all on your own.
BNB can serve as a story for how Base might play out. Coinbase customers will suddenly find themselves with a venue for accessing DeFi markets. Assets on Coinbase can freely move the exchange’s numerous list of products, services, and potentially, native dApps.
Base is Coinbase’s way of saying: “Our future is on-chain.” The exchange has plans for not only scaling Ethereum, but also for connecting its customers to Ethereum, Solana, and Bitcoin. That future might also involve developers creating dApps native to Coinbase, in a way that’s similar to what Binance has done.
No, we don’t need another L2. But Base is much more than L2. It’s our way of knowing that the second largest crypto exchange – and the most important crypto entity in the U.S. – is making its official entrance to DeFi. Given that the exchange dominates in the west, we might see a never seen before inflow of capital from western jurisdictions into DeFi.
Will Coinbase successfully complete its secret master plan? No one knows. But having a goal of onboarding a billion new people to crypto and DeFi is a narrative that might dominate 2023.
Confused by all the technical mumbo jumbo going on in Ethereum recently? I recommend catching up by reading some of the following articles:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.
Web3 represents the future of the internet, a future in which everyday users create, share, and own the content they create. Take a few minutes to learn more about what's next for the internet and how crypto plays a part in its future.
The crypto community has reached a consensus on at least one topic: the best crypto wallet for DeFi. There is not a single soul that doesn’t know how to use MetaMask and if you are one, you can read this simple beginner’s guide to better understand what MetaMask is all about.