Title: Bitwise

Compiled by: Wenser, Odaily Star Daily

Editor's note: Since the launch of the mainnet in August last year, Base has gradually stood out from the numerous L2 networks, with TVL soaring to over $5 billion, gaining support and recognition from many market users, and attracting attention and optimism from large institutions. Recently, the cryptocurrency asset management company Bitwise introduced the situation of Base and its backer Coinbase on its official account, expressing confidence in the development momentum of the Base ecosystem and Coinbase. Odaily Star Daily will provide a brief compilation of this.

Everything is related to Base

Coinbase released its financial report last week, showing outstanding performance. The company's financial report indicates that the net revenue in Q1 2024 reached $1.6 billion, a 72% increase quarter-on-quarter and a 116% increase year-on-year, significantly exceeding Wall Street's expected $1.36 billion. Its profitability also performed well, with a profit of $1.2 billion and total cash on hand increasing to $7.1 billion, far exceeding Wall Street's expectations.

(Note: You may have seen reports about the company's earnings per share being $4.84, compared to an expected $1.15. While technically correct, these figures exaggerate the "Beta" income per share. The company's earnings this quarter benefited from a one-time change in the accounting treatment of crypto assets on the balance sheet. Excluding this change, the company's earnings per share were $1.92, although at a relatively more reasonable level, still lower than expected. We believe this is a more appropriate comparison.)

Each business line performed remarkably. By quarter:

• Consumer trading revenue increased by 93%;
• Institutional trading revenue increased by 105%;
• Stablecoin revenue increased by 15%;
• Blockchain reward revenue increased by 59%;
• Custody revenue increased by 64%.

Since the news broke, Coinbase's stock has been in a consolidation phase, but make no mistake: Coinbase is a leading company in the rapidly growing cryptocurrency industry and is developing steadily. However, hidden behind the general numbers is a little-known native crypto business line, which we believe could be the "game changer" for the company in the long run—it's called "Base," accounting for less than 1% of the company's revenue in the first quarter of 2024, with limited attention from the media or analysts.

But it has its reasons to be worth paying attention to.

What is Base?

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

The best way to understand how L2 networks work is to think of them as a bar tab. If you go out for drinks with friends, the bar uses a credit card each time they serve you a drink, which is expensive and slow. So, they open a tab—they tally up the total number of drinks and settle the bill in one transaction.

Similarly, directly executing transactions 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, and settlement times are measured in minutes, relatively slow.

The operation of L2 networks involves tracking individual transactions, recording them in a batch, and then periodically "publishing" these transactions to Ethereum. Coinbase's launch of Base has always aimed to facilitate transactions settling in less than a second and cost control within $0.01.

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

But the key is: this is just the beginning.

In April alone, Base processed 40% more transactions than in the first quarter.

(Note: You might wonder: why did Base's transaction volume explode? The answer is simple: in March this year, the Ethereum blockchain underwent the Constantinople upgrade, making L2 networks like Base more efficient. Many experts believe that the Constantinople upgrade can reduce transaction fees on L2 networks by as much as 90%, helping Coinbase achieve its goal of low-cost transactions. The Constantinople upgrade has significantly reduced the transaction costs of L2 networks, thereby increasing their usage.)

Therefore, Base's transaction volume may increase further. Coinbase CEO Brian Armstrong stated that the number of developers building products on Base in the first quarter increased by 8 times. With these developers bringing more and more new applications, the user base may continue to grow rapidly.

What does Base mean for Coinbase?

All of this is important because, with its high gross margin, Base has the potential to become a huge source of revenue for Coinbase.

When people use Base, they submit transactions to the network they want to process. Coinbase acts as the "sorter": verifying these transactions, batching them, and publishing them to the Ethereum L1 mainnet. It's worth noting that Coinbase is currently the only sorter on the Base network.

Coinbase charges corresponding fees for this service. For example, in the first quarter of 2024, users paid $27.4 million in transaction fees to Base (including all fees), of which Coinbase was able to earn $15.5 million. In April alone, Coinbase earned another $11 million through this. All of these funds flow into Coinbase's pockets.

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

Some observers in the crypto industry have pointed out that this could put Coinbase in a position similar to Amazon. Amazon started as an online bookstore and later expanded to offer various retail products. But currently, over half of the company's profits come from Amazon Web Services, which is currently the world's largest cloud computing service provider.

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

But from the early returns of Base, it is clear that Coinbase may eventually play a more powerful role: as a provider of core infrastructure for the crypto ecosystem.

This is indeed a far-reaching matter.

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