Bitwise: Why are we optimistic about Base chain and Coinbase?

Original Title: 《It's All About That Base (and Other Thoughts on Coinbase)》

Author: Bitwise

Compiled by: Wenser, Odaily Planet Daily

Editor’s Note: Since the mainnet launch last August, Base has gradually stood out among various L2 networks, with its TVL soaring to over $5 billion. It has not only gained support and recognition from numerous market users but has also begun to attract attention and optimism from large institutions. Recently, the crypto asset management company Bitwise introduced Base and its background with Coinbase on its official account, expressing confidence in the Base ecosystem and Coinbase's subsequent development momentum. Odaily Planet Daily will provide a brief compilation of this.

It's All About Base

Coinbase released its financial report last week, showing impressive performance. The company's financial report indicates that Q1 2024 net revenue reached $1.6 billion, a 72% quarter-over-quarter increase and a 116% year-over-year increase, significantly exceeding Wall Street's expectation of $1.36 billion. Its profitability was also strong, with profits reaching $1.2 billion and total cash on hand increasing to $7.1 billion, both far surpassing Wall Street's expectations.

(Note: You may have seen reports about the company's earnings per share being $4.84, while the expectation was $1.15. While technically correct, these figures exaggerate the "Beta" revenue of earnings per share. The company's earnings this quarter benefited from a one-time change in the accounting treatment of crypto assets on corporate balance sheets. Excluding this change, the company's earnings per share would be $1.92, which, while relatively more reasonable, still falls short of expectations. We believe this is a more appropriate comparison.)

Every business line performed excellently. On a quarterly basis, among them:

• C-end consumer trading revenue grew by 93%;
• B-end institutional trading revenue grew by 105%;
• Stablecoin revenue grew by 15%;
• Blockchain rewards revenue grew by 59%;
• Custody revenue grew by 64%.

Since the news broke, Coinbase's stock has been in a consolidation phase, but don't get it wrong: Coinbase is a dominant player in the rapidly growing cryptocurrency industry and is developing steadily. However, hidden within the broad numbers is a little-known crypto-native business line that we believe could become the company's "game changer" in the long run—it's called "Base," which accounted for less than 1% of the company's revenue in Q1 2024, with limited media or analyst attention.

But it has its reasons for being noteworthy.

What is Base?

In August of last year, Coinbase officially launched Base, a new L2 network built on Ethereum. L2 networks connect with traditional L1 blockchain networks, such as Ethereum, and are designed to increase the throughput of L1 blockchain networks and reduce operating costs.

The best way to understand how L2 networks operate is to think of them like a bar tab. If you go out for drinks with friends, and the bar charges your credit card every time they serve you a drink, it becomes both expensive and slow. So, they open a single tab—determining a total number of drinks and settling it all in one transaction at the end.

Similarly, executing transactions directly on L1 blockchain networks like Ethereum can be expensive and slow. Historically, transaction costs on Ethereum have ranged from less than $1 to over $200, with settlement times measured in minutes, making it relatively slow.

L2 networks work by tracking individual transactions, recording them on a label, and periodically "posting" these transactions in batches to Ethereum. From the beginning, Coinbase's goal with Base has been to facilitate transactions that settle in less than a second and keep costs under $0.01.

The usage of L2 networks is skyrocketing, driving explosive growth in transaction activity on the Ethereum blockchain. It's evident: if something is cheaper, faster, and easier to use, people will use it more. Base is the fastest-growing L2 network, with transaction volume increasing by 74% quarter-over-quarter in Q1 2024.

But the key is: this is just the beginning.

In April alone, the transaction volume processed by Base was 40% higher than in the first quarter.

(Note: You might wonder: why has the transaction volume on Base exploded? The answer is simple: in March of this year, the Ethereum blockchain underwent the Cancun upgrade, making L2 networks like Base more efficient. Many experts say the Cancun upgrade can reduce L2 network transaction fees by up to 90%, helping Coinbase achieve its low-cost transaction goals. The Cancun upgrade has significantly lowered transaction costs on L2 networks, thereby increasing their usage.)

Therefore, Base's transaction volume could increase even more. Coinbase CEO Brian Armstrong stated that the number of developers building products on Base grew eightfold in the first quarter. As these developers bring more new applications, the number of users may continue to grow rapidly.

What Does Base Mean for Coinbase?

The reason all of this is important is that, with its extremely high gross margins, Base has the potential to become a significant revenue source for Coinbase.

When people use Base, they submit transactions to the network they want to process. Coinbase acts as a "sorter": verifying these transactions, batching them, and posting them to the Ethereum L1 mainnet. Notably, Coinbase is currently the only sorter on the Base network.

Coinbase charges corresponding fees for this service. For example, in Q1 2024, users paid $27.4 million in transaction fees to Base (including all fees), of which Coinbase was able to capture $15.5 million. In April alone, Coinbase earned another $11 million from this. All of this money flows directly into Coinbase's pocket.

If Base continues to grow, it could bring Coinbase a relatively stable profit of $10 million, $20 million, or more each month. In the long run, if Base becomes the primary network for developers to build applications, Coinbase could ultimately own a core part of the crypto infrastructure.

Some observers in the crypto industry point out that this could place Coinbase in a position similar to Amazon. Amazon started as an online bookstore and later expanded to offer a variety of retail goods. However, currently, more than half of the company's profits come from Amazon Web Services (AWS), which is now the largest cloud computing service provider in the world.

People think of Coinbase as a cryptocurrency exchange, and it is one of the largest exchanges in the world.

But from the early performance of Base, it can be seen that Coinbase may ultimately play a more powerful role: as a core infrastructure provider for the crypto ecosystem.

This is indeed a far-reaching development.