Bitwise: Why are we bullish on the Base chain and Coinbase?

##Original title: "It's All About That Base (and Other Thoughts on Coinbase)"

Author: Bitwise

##Compiled by: Wenser, Odaily Planet DailyEditor’s note: Since the mainnet went online in August last year, Base has gradually stood out from a number of L2 networks, and its TVL has soared to over 5 billion US dollars. Not only has it been affected by The support and recognition of many market users has also gradually attracted the attention and optimism of large institutions. Recently, the crypto asset management company Bitwise introduced Base and the Coinbase behind it on its official account, and expressed its confidence in the Base ecology and the subsequent development momentum of Coinbase. 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 Q1 net income in 2024 reached US$1.6 billion, a 72% month-on-month increase and a year-on-year increase of 116%, which greatly exceeded Wall Street's expectations of US$1.36 billion. Its bottom line also fared well, with profits reaching $1.2 billion and total cash on hand rising to $7.1 billion, both well ahead of Wall Street 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 are overstatements of earnings per share. "Beta" revenue. The company's earnings for the quarter benefited from a one-time shift in how crypto assets are accounted for on corporate balance sheets. If you exclude this change, the company would have earned $1.92 per share, albeit in a more reasonable position. level, but still lower than expected. We think this is a more appropriate comparison)

Every business line performed well. On a quarterly basis,

• B-side institutional transaction revenue increased by 105%;
• Stablecoin revenue increased 15%;
• Blockchain reward revenue increased by 59%;
• Custody revenue increased by 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 doing well. Hidden within the blanket numbers, however, is a little-known crypto-native business line that we believe could be a “game-breaker” for the company in the long term — it’s called “Base.” , accounting for less than 1% of the company's revenue in the first quarter of 2024, has received limited media or analyst attention.

But it has its own reasons worthy of attention.

What is Base?

Last August, Coinbase officially launched Base, a new L2 network built on Ethereum. The L2 network connects to traditional L1 blockchain networks, such as Ethereum, and is designed to increase the throughput and reduce operating costs of L1 blockchain networks.

The best way to understand how an L2 network operates is to think of it like a bar bill. If you're out drinking with friends, the bar has to use your credit card and settle the bill every time you serve a drink, which is expensive and slow. So, they'll create a total bill - they'll determine a drink total and settle it all in one transaction.

Similarly, 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, measured in minutes, are relatively slow.

The L2 network works by tracking individual transactions, recording them in a tag, and then periodically "publishing" batches of these transactions to Ethereum. Coinbase’s goal from launch of Base has been to enable transactions to settle in less than a second and cost less than $0.01.

Usage of the L2 network is soaring, prompting an explosion of 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 increasing 74% sequentially in the first quarter of 2024.

But the point is: this is just the beginning.

In April alone, Base processed 40% more transactions than in the first quarter.

(Note: You may be wondering: Why has the number of transactions in Base exploded? The answer is simple: In March this year, the Ethereum blockchain underwent a Cancun upgrade, making L2 networks such as Base more efficient . Many experts say that the Cancun upgrade can reduce transaction fees on the L2 network by up to 90%, helping Coinbase achieve its goal of low-cost transactions. The Cancun upgrade has significantly reduced the transaction costs of the L2 network, thereby increasing its usage. . )

Therefore, Base’s trading volume may be higher. Coinbase CEO Brian Armstrong said the number of developers building products on Base grew eightfold in the first quarter. As these developers bring more and more new applications, the number of users is likely to continue to grow at a rapid pace.

What does Base mean to Coinbase?

The reason all of this is important is that, with its extremely high gross margins, Base has the potential to become a huge source of revenue for Coinbase.

When people use Base, they submit transactions to the network they want to process. Coinbase acts as a “sequencer”: validating these transactions, queuing them into batches, and publishing them to the Ethereum L1 mainnet. It’s worth mentioning that Coinbase is currently the only sequencer on the Base network.

Coinbase charges corresponding fees. For example, in the first quarter of 2024, users paid Base $27.4 million in transaction fees (all fees included), of which Coinbase was able to receive $15.5 million. In April alone, Coinbase took in another $11 million. All of this money went into Coinbase’s pockets.

If Base continues to grow, it could bring Coinbase a relatively stable profit of $10 million, $20 million, or more every month. In the long term, if Base becomes the primary network for developers to build applications, Coinbase could end up owning a core piece of crypto infrastructure.

Some crypto industry observers have noted that this could put Coinbase in a similar position to Amazon. Amazon started as an online bookstore and has since expanded to offer a variety of retail items. But now, 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 think of Coinbase as a cryptocurrency exchange, and it’s one of the largest exchanges in the world.

But as Base’s early return performance suggests, Coinbase may ultimately play a more powerful role: a core infrastructure provider for the crypto ecosystem.

This is indeed a far-reaching event.

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