Rewritten Article:
Source: Bitwise
Translation: Odaily Daily Planet Wenser
Editor’s Note: Since the launch of the mainnet in August last year, Base has gradually emerged from a group of L2 networks, with TVL soaring to over $5 billion. It has not only gained support and recognition from many market users but also attracted attention and optimism from large institutions. Recently, Bitwise, a cryptocurrency asset management company, introduced Base and its underlying Coinbase on its official account, expressing confidence in the future development of the Base ecosystem and Coinbase. Odaily Daily Planet will provide a brief translation of this.
Everything is about Base
Coinbase released its financial report last week, which performed remarkably well. The company’s financial report showed that in the first quarter of 2024, its net revenue reached $1.6 billion, a 72% increase compared to the previous quarter and a 116% increase compared to the same period last year, far surpassing Wall Street’s expected $1.36 billion. Its profitability was also strong, with profits reaching $1.2 billion, and its cash on hand increased to $7.1 billion, both exceeding Wall Street’s expectations.
(Note: You may have seen reports about the company’s earnings per share being $4.84, compared to the 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 cryptocurrencies on its balance sheet. If we exclude this change, the company’s earnings per share are $1.92, which, although at a relatively more reasonable level, is still lower than expected. We believe this is a more appropriate comparison.)
All business lines performed exceptionally well. In terms of quarterly calculations:
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 the leading company in the rapidly growing cryptocurrency industry and is developing steadily. However, hidden within the general numbers is a relatively unknown native cryptocurrency business line, which we believe, in the long run, could become the “game-changer” for the company. It is called “Base” and accounted 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 noticed.
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 and reduce operating costs.
The best way to understand how L2 networks work is to think of them as a bar tab. When you go out for drinks with friends, the bar charges your credit card and settles the bill every time they serve you a drink, which is expensive and slow. So, they open a tab—they keep track of the total number of drinks and settle them all in one transaction.
Similarly, directly executing transactions on L1 blockchain networks like Ethereum can be expensive and slow. In the past, transaction costs on Ethereum ranged from less than $1 to over $200, and settlement times were measured in minutes, relatively slow.
The operation of L2 networks is to track individual transactions, record them on a label, and then periodically “publish” these transactions in batches to Ethereum. Coinbase’s goal with Base from the beginning has been to facilitate transactions settling within less than a second and at a cost of less than $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 transaction volume in the first quarter of 2024 increasing by 74% compared to the previous quarter.
But the key point is: this is only the beginning.
In April alone, Base processed 40% more transactions than in the first quarter.
(Note: You might wonder why Base’s transaction volume is exploding. The answer is simple: in March this year, the Ethereum blockchain underwent the London hard fork, making L2 networks like Base more efficient. Many experts say that the London hard fork can reduce transaction costs on L2 networks by up to 90%, helping Coinbase achieve its low-cost transaction goals. The London hard fork has significantly reduced transaction costs on L2 networks, thereby increasing their usage.)
Therefore, Base’s transaction volume could grow even more. Coinbase CEO Brian Armstrong stated that the number of developers building products on Base increased eightfold in the first quarter. As these developers bring more new applications, the user base is likely to 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 their transactions to the network they want to process them on. Coinbase plays the role of a “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 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 received an additional $11 million through this. All of this funding goes into Coinbase’s pockets.
If Base continues to grow, it could bring Coinbase relatively stable profits of $10 million, $20 million, or more per month. In the long run, if Base becomes the primary network for developers to build applications, Coinbase could eventually own the core of the cryptocurrency infrastructure.
Some cryptocurrency industry observers point 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, more than half of the company’s profits come from Amazon Web Services, 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 could ultimately play a more powerful role: the core infrastructure provider of the cryptocurrency ecosystem.
This is indeed a profoundly influential matter.
