Written by Bitwise
Compiled by: Wenser, Odaily Planet Daily
Editor's note: Since the launch of the mainnet in August last year, Base has gradually stood out from a number of L2 networks, and its TVL has soared to over $5 billion. It has not only been supported and recognized by many market users, but has also gradually gained attention and optimism from large institutions. Recently, crypto asset management company Bitwise introduced the relevant situation of Base and Coinbase behind it on its official account, and expressed confidence in the Base ecosystem and Coinbase's subsequent development momentum. Odaily Planet Daily will briefly compile this.
It’s all about Base
Coinbase released its financial report last week, and its performance was very impressive. The company's financial report showed that its net income in Q1 2024 reached $1.6 billion, a 72% increase from the previous quarter and a 116% increase from the previous year, far exceeding Wall Street's expectations of $1.36 billion. Its profitability also performed well, with profits reaching $1.2 billion and total cash on hand increasing to $7.1 billion, both far exceeding Wall Street's expectations.
(Note: You may have seen reports that the company earned $4.84 per share, compared to expectations of $1.15. While technically correct, these overstate the “beta” of earnings per share. The company’s earnings this quarter benefited from a one-time shift in the accounting treatment of crypto assets on corporate balance sheets. Excluding this change, the company’s earnings per share were $1.92, which, while at a more reasonable level, was still below expectations. We think this is a more appropriate comparison.)
Each business line performed well. On a quarterly basis:
C-end consumer transaction revenue increased by 93%;
B-end institutional transaction revenue increased by 105%;
Stablecoin revenue increased by 15%;
Blockchain reward revenue increased by 59%;
Hosting revenue grew 64%.
Coinbase stock has been trading sideways since the news broke, but make no mistake: Coinbase is a dominant company in the fast-growing cryptocurrency industry and is growing steadily. Hidden in the headline numbers, however, is a little-known crypto-native business line that we believe could be a game-changer for the company in the long run — it’s called “Base,” and it accounted for less than 1% of the company’s revenue in the first quarter of 2024, with limited media or analyst attention.
But it has its own reasons for being worthy of attention.
What is Base?
Last August, Coinbase officially launched Base, a new L2 network built on Ethereum. The L2 network connects with traditional L1 blockchain networks, such as Ethereum, and it aims 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 it as a bar bill. If you go out drinking with friends, the bar would have to take your credit card and settle the bill every time they serve you a drink, which is expensive and slow. So, they create a total bill - they determine a total number of drinks and settle it all in one transaction.
Likewise, executing transactions directly on L1 blockchain networks such as 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, which is relatively slow.
The L2 network works by tracking individual transactions, recording them in a tag, and then periodically “publishing” those transactions in batches to Ethereum. Coinbase’s goal from the beginning when launching Base was to facilitate transactions settled in less than a second and at a cost of less than $0.01.
L2 network usage is surging, driving an explosion in transaction activity on the Ethereum blockchain. It’s a no-brainer: If something is cheaper, faster, and easier to use, people will use it more. Base is the fastest-growing L2 network, with transaction volume up 74% quarter-over-quarter in Q1 2024.
But here’s the key: this is just the beginning.
In April alone, Base processed 40% more transactions than it did in the first quarter.
(Note: You may be wondering: Why did the number of transactions on Base explode? The answer is simple: In March of this year, the Ethereum blockchain underwent the Cancun upgrade, which made L2 networks such as Base more efficient. Many experts say that the Cancun upgrade can reduce transaction fees on L2 networks by up to 90%, helping Coinbase achieve its goal of low-cost transactions. The Cancun upgrade has significantly reduced the transaction costs of L2 networks, thereby increasing their usage.)
Therefore, Base's transaction volume may be even higher. Coinbase CEO Brian Armstrong said that the number of developers building products on Base increased eightfold in the first quarter. As these developers bring more and more new applications, the number of users may continue to grow rapidly.
What does Base mean to Coinbase?
The reason all of this matters is that Base has the potential to be a huge revenue generator for Coinbase thanks to its sky-high gross margins.
When people use Base, they submit transactions to the network they want to process. Coinbase plays the role of a "sequencer": verifying these transactions, arranging them into batches, and publishing them to the Ethereum L1 mainnet. It is worth mentioning that Coinbase is currently the only sequencer on the Base network.
Coinbase collects corresponding fees from this. 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 receive $15.5 million. In April alone, Coinbase earned another $11 million from this. All of this money flows into Coinbase's pocket.
If Base continues to grow, it could generate a relatively steady $10 million, $20 million, or more in profit per month for Coinbase. In the long run, if Base becomes the main network for developers to build applications, Coinbase could end up owning a core part of the crypto infrastructure.
Some crypto industry observers have pointed out that this could put Coinbase in a similar position to Amazon, which started out as an online bookstore and later expanded to offer a variety of retail goods. But now makes more than half of its profits from Amazon Web Services, the world’s largest cloud computing service provider.
People think of Coinbase as a cryptocurrency exchange, and it’s one of the largest exchanges in the world.
But Base’s early returns suggest that Coinbase could eventually take on a more powerful role: a core infrastructure provider for the crypto ecosystem.
This is indeed a major event with far-reaching impact.
