Base: Coinbase’s Layer-2 Blockchain Success Story

In the dynamic landscape of layer-2 blockchains built on Ethereum, Base, developed by the U.S. crypto exchange Coinbase, has quickly risen to prominence. While it may not be the most technologically innovative project—it was launched last year utilizing code from the Optimism team and its OP Stack framework—it has nonetheless achieved remarkable success. Base now holds the No. 2 position on the L2Beat leaderboard, commanding an impressive 18% market share among 74 active layer-2 networks. Although Arbitrum’s Arbitrum One leads with a 40% share, Base has outpaced established rivals like Starknet and Polygon, as well as Optimism itself.

Layer-2 networks are designed to enhance transaction speed and reduce costs compared to the Ethereum base layer. They employ a mechanism known as a sequencer to aggregate transactions, subsequently recording or “settling” them on the main blockchain, akin to documenting records in a local government office. Often referred to as rollups, these layer-2 solutions play a crucial role in Ethereum’s roadmap for scaling the network to accommodate the future of finance on blockchain technology.

Interestingly, the competition for dominance in the blockchain realm, similar to other industries, heavily relies on effective marketing strategies and substantial financial resources to attract users, rather than merely on technological superiority. Coinbase has significantly fueled Base’s growth through strategic advertising campaigns and engaging promotional events, including the recent Onchain Summer.

The pressing question now is whether this surge in activity is sustainable. Are the accounts active users with genuine needs on-chain, or merely a swarm of beta testers exploring various protocols on Base? Are they speculative “degen” crypto traders capitalizing on temporary promotions and quests in search of quick rewards? According to a press release from Coinbase, the three-month Onchain Summer event attracted participation from over 2 million unique wallets— a staggering increase compared to about 268,000 in the previous year—resulting in over $5 million in mint revenue for creators. “The results really blew us away,” a Coinbase spokesperson remarked in an email. “The 2.2 million unique wallets participating was about 8 times what we saw last year, and more than double our internal expectations.”

Base is led by Jesse Pollak, who joined Coinbase in 2017 as an engineering manager and later transitioned in 2021 to oversee protocol development. Independent blockchain data corroborates Base’s growth trajectory. A recent chart from on-chain data provider Token Terminal indicates that while other layer-2 networks have faced a decline, Base has continued to accelerate in recent months.

A glance at Coinbase’s latest quarterly report, filed with the U.S. Securities and Exchange Commission, reveals that the exchange invested over $165 million in sales and marketing during the three months ending June 30—more than double the amount spent during the same period the previous year. In the first quarter of 2024, Coinbase reported “other” transaction revenues of $52.5 million, which includes sequencer fees collected by Base.

Memecoin Mania

Base has successfully positioned itself to compete with Solana—a layer-1 blockchain known for its swift and economical transactions—as well as other Ethereum layer-2 solutions, particularly in decentralized finance (DeFi) applications involving the exchange of diverse assets and money markets, according to Rob Hadick, a general partner at VC firm Dragonfly. In terms of daily active addresses and transactions, Base has surpassed other layer-2 networks and has moved into the top five for several key DeFi metrics, such as total value locked (TVL) and sequencer fees.

However, what precisely drives traffic to Base? A closer examination of Base’s leading DeFi protocol, Aerodrome Finance, reveals that nearly all of the top markets, particularly when excluding stablecoin swaps, are linked to memecoin trading pools. This type of activity is known for its volatility, with memecoin traders often shifting their focus based on the latest trends. “When we look at Uniswap on Base, we see a similar pattern, with two of the top five traded tokens being memecoins,” Hadick noted in an email. “Much like Solana, Base has effectively tapped into these long-tail token trading markets, attracting younger users eager to speculate on memecoins.”

Another factor contributing to Base’s success is the seamless process for transferring tokens from Coinbase. This is facilitated through a smart contract wallet, eliminating the need for seed phrases and the complications associated with other wallets. “This ease of transition from Coinbase to Base automatically brings many on-chain curious retail investors into the fold, who would otherwise have to navigate extra steps to engage in DeFi,” Hadick explained.

According to Oskari Tempakka, head of growth at Token Terminal, the success of Base can be attributed to the solid foundation provided by the collaboration between Coinbase and Optimism. As a U.S.-listed crypto exchange paired with Optimism’s scalability and expertise in decentralized governance, this partnership “positions Base exceptionally well by leveraging Coinbase’s brand, distribution, and partnerships.”