Exploring the Potential and Risks of Coinbase's Layer 2 Chain Base
Base chain is Coinbase's new Layer 2 blockchain network, designed to enhance the performance of the Ethereum mainnet, increase transaction speed, reduce costs, and expand functionality.Author: lesley@footprint.network
In the ever-changing cryptocurrency landscape, Coinbase has established itself as a leading centralized exchange (CEX). However, Coinbase firmly believes that decentralization is key to creating an open, globally accessible crypto economy for everyone, and in 2016, they released their "Secret Master Plan," aiming to achieve their goals by launching a Dapp. In August 2023, Coinbase took a significant step towards realizing this vision by officially launching the Base chain.
The Base chain is Coinbase's new Layer 2 blockchain network designed to enhance the performance of the Ethereum mainnet, increase transaction speed, reduce costs, and broaden functionality.
Coinbase's various initiatives further underscore their commitment to openness and collaboration. For over a year, Coinbase has been working with Optimism and has contributed to the development of EIP-4844 (also known as Proto-danksharding), aimed at reducing fees and increasing transaction throughput. To ensure the decentralization of the ecosystem, Coinbase has established five key principles to create a fair competitive environment that allows users to participate and thrive without bias or barriers.
With a strong user base, Coinbase is entering the competitive field of Layer 2 blockchain solutions. Through the Base chain, Coinbase aims to bring over 1 billion users into the global crypto economy.
Base Leads a New Development Pattern in Layer 2
Currently, Layer 2 networks are playing roles in various fields, including Web3 gaming, NFTs, and SocialFi, all of which have seen widespread adoption. Many well-known companies, such as BitDAO (Mantle Network), Consensys (Linea), and Kraken, have also entered the competitive Layer 2 market.
Various decentralized applications have emerged, making Layer 2 an indispensable infrastructure within the Ethereum ecosystem. It not only significantly reduces transaction costs but also enhances the user experience.
According to data from Footprint Analytics, Base ranks third in market share within the Layer 2 space, trailing only behind established Layer 2 chains like Arbitrum and Optimism. Among emerging public chains, Base's performance is impressive.
Layer2 Daily Bridged Transactions
In the following sections, we will review Base's growth trajectory and analyze the key factors behind its rise. If you want to learn more about Layer 2, please check our previous analysis report.
Features of Base
- Ethereum-based Layer 2 public chain: Base leverages Ethereum's security, stability, and scalability while incorporating Coinbase's best practices to ensure developers can smoothly join the Base chain from Coinbase, Ethereum Layer 1, and other interoperable blockchains.
- Seamless integration with Coinbase: Base perfectly integrates with Coinbase's products, users, and tools, allowing developers to access over 110 million verified users and $80 billion in assets within the Coinbase ecosystem. This integration not only enhances the user experience but also accelerates the widespread adoption of blockchain.
- Powerful and low-cost: Base offers EVM-compatible services at extremely low costs, allowing for fee transactions for decentralized applications through simple APIs and securely building multi-chain applications using user-friendly bridges.
- Open-source and supported by Optimism: Base adheres to principles of decentralization and openness, welcoming all visionary creators. It is built on Optimism's open-source OP Stack, ensuring a permissionless and innovation-friendly environment.
Despite its promising outlook, Base still faces some challenges.
- Technology is not yet mature: Layer 2 technology is still in its early stages, meaning it requires significant development and testing to ensure its security and stability. Base is working to address this challenge by collaborating with Paradigm to develop the Breath client and creating open-source monitoring tools like Pessimism to improve technological maturity.
- Policy and regulatory issues: As a centralized company, Coinbase faces an unclear regulatory environment in the cryptocurrency space, which poses challenges to its business. However, Coinbase has adopted a proactive strategy to become a leader in addressing regulatory challenges.
- Security issues: As an open blockchain, Base hosts many inadequately reviewed protocols, leading to frequent security incidents after its official launch, as users lack the ability to scrutinize technical details.
The Layer 2 stack space is evolving, with Polygon also launching its Layer 2 stack—Polygon CDK—in September.
Polygon CDK and Optimism's OP Stack share similar design philosophies, aiming to lower the barriers for developers through modularity and composability, and to build an Ethereum-centric L2 interoperable network by parallelizing specific application chains to create an Ethereum-centric Layer 2 multi-chain interactive network.
However, there are also some differences between them:
This generic chain architecture design approach is undoubtedly one of the current trends in the Layer 2 space. Polygon and Optimism are leading this design trend, characterized by their excellent scalability and developer-friendly support. This design is expected to attract developers while gaining advantages, thereby driving rapid growth in Layer 2 technology. However, the performance and long-term sustainability of Layer 2 solutions still require in-depth observation and validation in actual market operations.
Development History of the Base Chain
The Base chain is a crucial part of Coinbase's vision for building a global open financial system, having garnered significant attention since the launch of its testnet in February this year.
According to Footprint Analytics, the TVL of Base chain exceeded $148 million on its launch day and has increased to $459 million by early December.
Attention Driven by $BALD
After its release on July 30, $BALD immediately garnered substantial capital support and sparked early interest and discussion due to its amusing connection with Coinbase CEO Brian Armstrong (famous for his iconic bald appearance). Some speculated that $BALD might be Coinbase's official token.
The hype around $BALD surged rapidly, pushing its market cap to over $100 million in just two days. However, this enthusiasm did not last. The developer of $BALD, "BaldBaseBald," initiated a malicious exit operation, withdrawing over 10,500 ETH (approximately $20 million) from the liquidity pool, severely impacting $BALD's liquidity and causing a sharp decline in Base chain's TVL. Coinbase's Jesse Pollak responded to this incident on August 14, stating that the Base chain is a "permissionless" system, making it impossible to control such events.
Market Stirred by friend.tech
friend.tech is a decentralized application (DApp) built on the Base chain, which is an Ethereum Layer 2 blockchain incubated by Coinbase. This innovative platform cleverly combines the concepts of fan economy and on-chain gaming, creating a unique synergy.
friend.tech went public on August 10, 2023, coinciding with Base's debut, and its timely launch proved to be significantly effective. The success of friend.tech is attributed not only to its well-timed launch but also to its innovative concept, revenue-sharing model, and strong influencer effect. These elements collectively propelled friend.tech to rapidly grow into a phenomenon, attracting widespread user participation and recognition. The popularity of friend.tech not only brought success to itself but also significantly enhanced the overall usage and visibility of the Base blockchain.
Achieving Excellence with Aerodrom Finance
On August 31, Velodrome, the largest DEX protocol on Optimism, launched a forked DEX project called Aerodrome on the Base network. In less than two days, Aerodrome's total locked value (TVL) reached $200 million, accounting for 50% of Base's total TVL.
Aerodrome strategically allocated 7% of veAERO to the AERO-USDC LP pool, attracting liquidity providers to purchase the scarce AERO in the market, as the rewards for providing liquidity were very enticing. This scarcity drove up the price of AERO, increasing providers' yields and creating a positive feedback loop. However, there are concerns about the sustainability of this loop.
Current Situation
With the support of Coinbase and the traffic project Friend.Tech, along with Base's active funding development efforts, Base has experienced rapid growth in just a few months, evolving into a robust ecosystem. As of November 15, this ecosystem has over 230 projects, with the main categories being infrastructure (64), DeFi (51), and gaming (26). The surge in project numbers indicates that Base is attracting diverse projects, fostering a thriving ecosystem.
Base Ecosystem Project Distribution
The diversity of project types indicates that Base is not just a center for decentralized finance (DeFi) but also a platform with a wide range of project types, applicable across different fields, from infrastructure to gaming, showcasing its potential to become a comprehensive blockchain solution for widespread applications.
Leading DeFi protocols on Ethereum and other chains are actively expanding to Base, adding vitality to the DeFi ecosystem. As of November 15, there are already 51 DeFi projects on Base. Major lending protocols like Aave and Compound have been deployed on Base. DEX projects like Uniswap, SushiSwap, and Balancer offer decentralized trading on Base. Income aggregators like Beefy Finance optimize income across multiple protocols.
Base has also integrated NFT infrastructure, such as OpenSea, ZORA, and Manifold, to support digital collectibles and NFT markets. It is collaborating with game studios like Animoca Brands to develop blockchain-based games.
With the continuous expansion of developer tools, wallets, oracles, and node services, Base is building a solid infrastructure foundation to support various dApps and services on its network. The thriving ecosystem demonstrates Base's strong growth momentum, positioning it to become a leading Layer 2 scaling solution.
Base Bridge Daily Users & Daily Transactions
However, as the market has experienced ups and downs, the sustainability of Base has become a concerning issue.
While gaining fame and influence, the Base ecosystem has also faced some security incidents. Starting with the $BALD incident, followed by the SwirlLend team absconding with $460,000 in August. About ten days later, the Magnate Finance team withdrew nearly $6.5 million worth of crypto assets from the platform. Security incidents have been frequent on Base, and in August, hackers targeted the decentralized exchange (DEX) RocketSwap, stealing over 472 ETH (approximately $869,000). Due to potential vulnerabilities, the LeetSwap DEX was suspended on August 1.
