Disclaimer: This post contains thoughts on crypto, a volatile and risky asset class. It is not investment advice, and you should do your own research. All information is for educational purposes only. Please don’t take risks with money you’re not willing to lose.

While the mass appeal of crypto is rapidly growing, the native community of collectors, traders, and builders is still microscopic. For perspective, it’s estimated that only ~580 million people hold crypto worldwide, less than 8% of the global population. Of this demographic, around 5 million unique addresses are actively participating in DeFi. The internet, for comparison, has roughly 5.35 billion users, 9x as many token holders and >1000x as many onchain participants. Assuming the goal is to entirely recreate the web, our industry is still very much in its infancy.

As it stands, crypto-native consumers primarily derive from niche communities of gamers and artists due to the current product landscape. As these verticals share underlying values with blockchains, it’s no surprise that startups are focused on tangents such as in-game ownership and digital auction houses. These innovations effectively utilize the core technology, but are limited in their scope. Onboarding the next billion users requires applications that are globally meaningful and extend beyond the few pre-existing sub-cultures.

The Killer App

While it’s now difficult to imagine a reality without the internet, the early days reflect eerily similar to the modern blockchain era. In fact, before corporate networks like Facebook and Twitter began consolidating power, the vision for the internet was to be open and permissionless, two leading values of decentralization. Birthed with the US military’s ARPANET, the first two decades of the internet were defined by this nature, fundamentally attracting only a small group of researchers and developers. Up until the inception of application-layer protocols such as SMTP (Simple Mail Transfer Protocol) and HTTP (HyperText Transfer Protocol), the outlook for the internet was bleak as it lacked any mainstream functionality. SMTP, for example, suddenly invited thousands of new entrants to marvel at the idea of instant and global communication - a sector that was previously limited IRL. As a result, digital messaging quickly became far more popular than its physical counterpart.

Aside from Bitcoin’s revolutionary demonstration of ultrasound money, crypto is still looking for its ‘killer app’: the use case that convinces Web2 users why decentralized networks are worthwhile. Layer 1 blockchains like Ethereum and Solana best represent the vision for developer-friendly open protocols similar to the aforementioned of the early internet as both leverage open code infrastructure to enable the seamless creation and integration of dApps (DeFi, consumer, gaming) within their respective ecosystems. They effectively lay the foundation for the new internet, but the mainstream ‘aha’ moment has yet to come.

What is a Layer 2?

A universal issue that faces blockchains is how to simultaneously be (close to) 100% decentralized and optimally efficient. Due to this, protocol design choice has inevitable advantages and disadvantages. Ethereum favors probabilistic finality (liveness always, consistency eventually) while Solana prioritizes deterministic finality (consistency always, liveness eventually). In less technical terms, Ethereum is more secure whereas Solana is faster.

Ethereum’s respective design is more aligned with Bitcoin’s values, but has collaterally made the chain slow and transactions expensive (to the average consumer). This is especially the case when network volume increases, causing concerns around mainnet scalability.

Layer 2s are the novel solution to Ethereum’s scaling problem. These chains lie adjacent to L1s, working to reduce congestion by independently handling some of their capabilities. The most common Layer 2 solutions are sidechains and rollups. Sidechains often have their own consensus mechanism and operate via a two-way bridge that enables asset transfers. Rollups, on the other hand, bundle processing transactions into a single piece of data to be settled on the parent chain. Both are viable solutions, but rollups are more popular.

The most well-known Ethereum L2s include Polygon, Arbitrum, and Optimism. Base and Blast were both launched in the last year, but are quickly garnering attention, users, and value.

What is Base?

Built and backed by Coinbase, Base is an EVM-compatible Layer 2 powered by Optimism’s open-source OP stack. It maintains the security of Ethereum, while drastically reducing transaction fees. This allows developers to seamlessly leverage the EVM codebase at speeds and costs that are unachievable on the main chain. Effectively laying the foundation for an application-friendly open financial system, Base is an “all in commitment to onchain - the most important builder platform since the internet (online)”.

Coinbase Integration

Unlike the majority of L2s, Base is already bootstrapped with users and liquidity as it’s a product of Coinbase - the first crypto startup to go public / the second largest exchange in the world.

With Base as their latest incubation, Coinbase product’s suite is continually expanding with tooling for individuals, businesses, and developers. Among these products are a self-custody DeFi wallet, a derivatives trading platform, and the novel WaaS (Wallet as a Service). Collectively, the Coinbase ecosystem has around 100 million users - Base serves as the bridge for their retail customers (exchange users / devs) into an open and efficient financial system.

Base Ecosystem

Although mainnet launched less than a year ago, the Base ecosystem has already grown exponentially with both native and cross-chain applications. In addition to being built on an already popular L2 template (OP stack), Coinbase has leveraged it’s reputation to seamlessly integrate many of the services that already exist on Ethereum and other rollup chains (i.e. Aave, Chainlink). Aerodrome, Seamless, and FriendTech are among the most popular Base-native products while Parallel, Animoca, and Zora represent interoperable developers.

By the Numbers

Consistent with the broader crypto market, Base’s metrics began soaring earlier this year as sentiment turned bullish. At the previous local top, Base daily volume was consistently exceeding $500m, vastly outperforming all other Layer 2s at the time.

As a result of this increase in volume, Base is contributing roughly $50m in daily revenue to Coinbase.

Base now ranks sixth amongst all DeFi chains with a total value locked (TVL) of $1.65B. The only L2 competitor with greater is Arbitrum, despite having less daily active addresses.

Future Outlook

A bet on Base is a bet on Ethereum, as is the case with any EVM-compatible L2. However, unlike most protocols, Base has no native token and has mentioned that they have no plans to issue one. While the validity of these claims is muddied by Coinbase’s ongoing lawsuit with the SEC as well as consistently stringent US policy, the sheer onchain volume is still enough to find lucrative opportunities beyond hoping for a eventual token generation event (TGE).

Solana ultimately remains my top horse for this cycle, but Base is capable of onboarding the next wave of retail users with its comparable transaction costs and speeds. L2s are necessary to scaling Ethereum to be more consumer-friendly, and Coinbase has the tooling and userbase to best achieve this.

In fact, next up in their product suite is the launch of Smart Wallets, which is focused on seamlessly bringing people (and their assets) onchain.