Why Bitwise Bullish on Base and Coinbase?

Since its mainnet launch in August last year, Base has gradually emerged from among various L2 networks, with TVL skyrocketing to over $5 billion. It has not only garnered support and recognition from numerous market users but has also attracted attention and optimism from large institutions.

Recently, cryptocurrency asset management company Bitwise provided an overview of Base and its backer Coinbase on its official account, expressing confidence in the Base ecosystem and the future development trajectory of Coinbase.

The company’s financial report shows that net revenue in Q1 2024 reached $1.6 billion, a 72% increase compared to the previous quarter and a 116% increase year-over-year, significantly surpassing Wall Street’s expected $1.36 billion. Its profitability is also robust, with profits reaching $1.2 billion, and cash on hand increasing to $7.1 billion, both far exceeding Wall Street’s expectations.

Every business line has shown outstanding performance. On a quarterly basis:

• Consumer trading revenue increased by 93%.
• Institutional trading revenue increased by 105%.
• Stablecoin revenue increased by 15%.
• Blockchain rewards revenue increased by 59%.
• Custodial revenue increased by 64%.

Since the news broke, Coinbase’s stock has been consolidating, but don’t be mistaken: Coinbase is a leading company in the rapidly growing cryptocurrency industry and is growing steadily. However, hidden behind the general figures is a lesser-known native crypto business line that we believe, in the long run, could be the company’s “game-changer” — 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 reasons worth paying attention to.

What is Base?

In August last year, Coinbase officially launched Base, a new L2 network built on Ethereum. L2 networks are connected to traditional L1 blockchain networks like Ethereum and aim to increase the throughput of L1 blockchain networks while reducing operating costs.

The best way to understand how L2 networks work is to think of them as a bar tab. If you’re out drinking with friends, it’s expensive and slow for the bar to use a credit card every time they provide you with a drink and settle the bill. So, they open a tab — they keep track of the total drinks and settle them all in one transaction at the end.

Similarly, executing transactions directly on L1 blockchain networks like Ethereum can be expensive and slow. Transaction costs on Ethereum have ranged from less than $1 to over $200, and settlement times are measured in minutes, relatively slow compared to historical standards.

The operation of L2 networks involves tracking individual transactions, recording them on a ledger, and then periodically “posting” these transactions in batches to Ethereum. Coinbase’s goal with Base from the outset has been to facilitate transactions settled in under a second and costs kept under $0.01.

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 transaction volume in Q1 2024 increasing by 74% compared to the previous quarter.

But the key is: this is just the beginning.

In April alone, the transaction volume handled by Base increased by 40% compared to Q1.

You might wonder: why is the transaction volume of Base exploding? The answer is simple: in March this year, the Ethereum blockchain underwent the Cancun upgrade, making L2 networks like Base more efficient. Many experts believe that the Cancun upgrade could 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 transaction costs on L2 networks, thereby increasing their utilization.

As a result, the transaction volume of Base may increase even more. Coinbase CEO Brian Armstrong stated that the number of developers building products on Base in the first quarter increased eightfold. With these developers bringing more and more new applications, user numbers may continue to grow rapidly.

What Does Base Mean for Coinbase?

All of this is important because, with its high gross margins, Base could become a significant source of revenue for Coinbase.

When people use Base, they submit transactions to the network they want to process. Coinbase plays the role of a “sorter”: verifying these transactions, batching them, and posting them to the Ethereum L1 mainnet. It’s worth noting that Coinbase is currently the only sorter on the Base network.

Coinbase charges fees for this service. For example, in Q1 2024, users paid $27.4 million in transaction fees to Base (all fees included), of which Coinbase was able to capture $15.5 million. In April alone, Coinbase earned another $11 million from this. All these funds go into Coinbase’s pocket.

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

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

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

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