Coinbase announces its level two network

There is no doubt that exchanges are the biggest players in the cryptocurrency industry. When Binance or Kraken sneeze the market catches a cold, and when a trading platform announces some big new launch or project, investors should really sit back and pay attention. This is especially true in the event that an exchange reveals its own platform, which is something that US exchange Coinbase did last week when it introduced Base to the world.

As detailed in an official blog, Base will be a tier two sidechain for Ethereum, which Coinbase hopes will provide “a secure, low-cost, developer-friendly way for anyone, anywhere, to create decentralized apps or onchain ‘dapps’.” While Base itself won’t have its own native token, it’s clear that the arrival of the second tier will provide a big boost to the cryptocurrency market in general, as well as some other platforms in particular.

In fact, with Base developed from open source code written for Optimism (another Ethereum-based tier two solution), OP will be a token that should witness steady gains once Base gets going. And with Coinbase also aiming to “bring the next billion users to web3”, Ethereum itself will perhaps be the main beneficiary, given that all Basic transactions will be settled on the Ethereum blockchain. This could make 2023 a very strong year for ETH, which will also likely benefit from the ongoing development initiated by last year’s merger.

Coinbase Announces Base, Optimism and Ethereum Rally

Coinbase announced the launch of the Base testnet last week, meaning the Layer Two network is already accessible to developers and other early testers. In fact, early reports suggest that over 100 developers have already started contributing to the project, while a growing number of platforms have already revealed that they will join the Base ecosystem and collaborate with the project. This gives some indication of how big it might become.

As written in the blog above, Base will be built with a focus on four main features:

  • Secure and settled on the Ethereum blockchain

  • Designed to integrate with existing Coinbase products, services and features

  • Full compatibility with Ethereum Virtual Machine (EVM) and low fees, including transactions without developer fees

  • Open source and based on Optimism’s development software stack

As for this final core feature, Coinbase has also joined Optimism as the second lead developer on Optimism’s open-source OP stack, meaning the exchange will actually write code for Optimism and for itself.

Perhaps more interestingly, Coinbase also wrote in an accompanying blog that, with Optimism and its developers, it has a “shared vision for a superchain.” This means that the use of Optimism’s OP Stack will potentially give rise to two other layers besides Base and Optimism, and that these sidechains “will gradually increase their interoperability until they form a ‘mesh’ or ‘Superchain’ that jointly scales Ethereum.”

In other words, Coinbase doesn’t see itself as a competitor to Optimism or other tier two networks for Ethereum, but rather a contributor. As the exchange explains, the exchange believes that “this decentralized effort will create the foundation for a much more vibrant developer ecosystem than would be possible from a single chain alone.”

This focus on interoperability and collaboration is key here, because it explains why Optimism’s native token – OP – increased by as much as 35% in the 24 hours following Coinbase’s submission of Base. And it remains up 30% over the past 30 days, with investors expecting optimism to grow only in the long term, now that Coinbase is part of its ecosystem.

As a pre-existing second-tier network, Optimism currently represents a total blocked value of $950 million (more than Cardano, Fantom and Solana). This TVL has already increased by 90% since the beginning of the year, indicating an increase in the use of Optimism, but it is likely to increase further in the coming months and years.

But let’s not forget Ethereum, which as the underlying settlement layer for Base and Optimism will be the ultimate beneficiary of Coinbase’s new venture. Remember that Coinbase has the stated goal of bringing one billion more users to the cryptocurrency ecosystem, and given its resources and scope, it could come close to achieving that goal.

Combined with lower fees and faster transactions, this would ultimately mean much more use of Ethereum, which in turn means greater demand for native ETH tokens and a higher price for the altcoin. As a prominent Ethereum supporter (Anthony Sassano) put it, “Ethereum is becoming the settlement layer of the world.”

Questions and losers

Of course, not everyone is stunned by Coinbase’s news, and for a variety of reasons. First, some have raised legitimate questions about whether the development of Coinbase’s base can somehow invite more decentralization or more restrictions into the tier two and broader crypto ecosystem.

For example, podcast host Chris Blec noted in a tweet that “Coinbase is subject to the Bank Secrecy Act, the Patriot Act, and more.” He then asked, “How will Coinbase comply with these laws without requiring KYC on bridge funds?”

This is an important question, and so far Coinbase doesn’t seem to have answered. Assuming the exchange should apply KYC checks to all Basic users, this could limit its growth, with some potential users discouraged by the need to identify themselves to use it. That said, it’s questionable whether Base is likely to appeal to the kind of people who wouldn’t have a problem with KYC anyway, including many within the mainstream.

At the same time, it is also possible that other second-tier networks will not be optimistic due to the entry of Coinbase. This is supported by the fact that Polygon (MATIC) and Loopring (LRC), for example, have both declined by 15% and 16% respectively in the last two weeks.

It’s also possible that Binance’s BNB chain could be damaged by Coinbase’s launch of Base. Because with the American exchange throwing its weight behind the Ethereum network and ecosystem, the latter is destined to become more usable and efficient in the not too distant future, putting BNB Chain at a potential disadvantage. This could explain why BNB has fallen 2% in the last week, fortnight and month, when many coins are rising.

Regardless of what happens to rivals, Coinbase’s unique position at the top of the cryptocurrency food chain means that Base has the solid foundation it needs to become a highly used tier two for Ethereum-based transactions. In the long run, this potentially means more people using NFT, more people using Web3, and more people entering the metaverse. This can only be a good thing for encryption as a whole.

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