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On February 23, 2023, one of the largest cryptocurrency exchanges, Coinbase, announced the launch of a test network of its own Layer 2 solution built on top of Ethereum, called Base.
On August 9, 2023, Base launched the mainnet and began to quickly gain its momentum. At the time of the launch, the Base ecosystem already included more than 100 dApps. In less than a month of operation of the main network, Base has already managed to enter the top 8 blockchains by TVL, surpassing such networks as Solana and Cronos in this indicator. Today, TVL Base is $408 million and has positive dynamics:
In this report, we will analyze the rapidly developing Base network, assess its development potential, possible risks, and compare it with its main competitors.
As long as, Coinbase incubates the Base project, that’s why it is extremely important to understand the place the exchange is in the crypto market and who is behind the project.
Coinbase was founded in 2012 by Brian Armstrong, a former Airbnb engineer, and Fred Ehrsam, a former Goldman Sachs trader. In 2017, Fred left Coinbase, and in 2018 he became a co-founder of the tier-1 crypto fund called Paradigm Capital.
During the seed rounds, Coinbase raised a total of $575 million. Among investors were such funds as Polychain Capital, a16z, Tiger Global, Blockchain Capital, etc.
In April 2021, Coinbase became a public company. The listing occurred on Nasdaq through an IPO (with a valuation of $47 billion). The company's shares have the ticker “COIN” and are 65% concentrated in the hands of institutional investors, including Vanguard, ARK Invest, BlackRock, Morgan Stanley, etc.:
Coinbase is one of the largest exchanges in terms of trading volume and number of platform users. According to the company's latest quarterly reports, trading volume on Coinbase for Q1 2023 was $92 billion with 7.3 million active users (an active user is defined as a person who made at least 1 trade during the month). As for the number of registered users, at the end of 2022 their number exceeded 100 million people:
Today, Coinbase is not just an exchange, and it represents an entire ecosystem of products, including Coinbase Wallet, Layer 2 Base solution, LSD token (cbETH), etc. In addition, Coinbase together with Circle are issuers of the second largest stablecoin by capitalization - USDC.
Layer 2 Solutions
Since Base is a second-level solution, it is essential to make sure what Layer 2 blockchains are, what problems they solve, and what types they have.
Blockchain scalability is one of the most important issues in Web3. For example, Bitcoin's throughput is only 7 TPS (transactions per second), compared to Visa's 24,000 TPS:
Source: Kaiko Research
In addition, during periods when there are too many transactions in process, limitations in network capacity immediately affect the amount of commissions paid by users. To solve these problems, various Layer 2 projects exist and are being developed.
Layer 2 is a protocol that is built on top of the main blockchain, Layer 1. The main goal of Layer 2 is to “offload” the main network by processing transactions outside of the main network. At the same time, L2 solutions not only expand the throughput of the underlying blockchain but also strengthen its security level.
Potentially, the L2 solution can be deployed on any network, but today most projects are trying to address the Ethereum scalability issue:
There are many different types of L2 solutions, and each tries to solve the scalability problem in its custom way, the main ones are called rollups.
The roll-up operating principle boils down to the fact that transactions made on Layer 2 are “compressed” into batches according to a certain principle, and then sent to Layer 1 network. Simolteniuoslly, these transactions are not validated on Layer 1. Instead, validation happens at the moment when the user exits the rollup.
Rollups allow you to process a large number of transactions in parallel and are divided into 2 main types: Optimistic rollups and ZK rollups.
Optimistic rollups are called this way because they assume that all transactions made on the L2 network are valid. After Optimistic Rollup submits a batch of transactions to Layer 1, there is a time window of around 7-14 days when anyone can challenge the results of the rollup transaction by providing evidence of fraud.
If fraud is detected, the rollup cancells the transaction and then updates the rollup state. At the same time, the person responsible for including an incorrect transaction in the block (sequencer) receives a fine.
If the batch of transactions proposed by the rollup remains uncontested (i.e. all transactions are completed in a correct way), after a specified period of time, all transactions are accepted on Layer 1.
The advantage of Optimistic Rollups, in addition to the scalability of the blockchain, is the reduction of fees for users. A transaction in Optimistic Rollup can be 10-15 times cheaper than a transaction in Layer 1.
The main limitation of Optimistic Rollups is the long withdrawal time. Users have to wait about one and two weeks to withdraw their assets from Optimistic Rollups.
Examples of Optimistic Rollups: Optimism, Arbitrum, and Base.
If optimistic rollups work on the “presumption of innocence” principle, ZK (Zero Knowledge) rollups work on the principle “do not trust, but verify.” Just like in optimistic rollups, ZK rollups “roll up” transactions into one batch, which is transferred to the Layer 1 network. To confirm transactions on L1, ZK rollups use so-called zero-knowledge proof (ZKP - zero-knowledge proof).
ZKP is a technology that allows you to verify if the information is true without disclosing this information:
The prover provides a mathematical proof that can only be obtained by him;
Using this mathematical proof, the verifier can confirm the validity of the transaction.
The advantage of ZK Rollups is also an increase in blockchain scalability and a reduction in transaction fees. However, it is worth noting that transactions in ZK rollups are more expensive than in Optimistic rollups, because they publish more data. At the same time, ZK rollups are more reliable than Optimistic ones.
According to the Ethereum’s creator, Vitalik Buterin, this type of roll-up, in theory, is the most preferable, but extremely difficult from the point of view of practical implementation.
Examples of ZK Rollups are zkSync Era and Starknet.
Base is an optimistic rollup built upon the OP Stack.
OP Stack is a standardized and open technology stack (a set of technologies used for development). It consists of various modules that form Optimism's L2 rollup and can be used to create a network of shared, interoperable L2 blockchains. OP Stack aims to simplify the creation of L2 blockchains. The main goal of the OP Stack is to create a Superchain — a network of multiple L2 solutions that share a common security, communication, and open-source development stack. If Superchain is successfully implemented, all L2 solutions will be able to seamlessly interact with each other.
Source: OP Stack Docs
OP Stack is run and updated by a community of developers and companies and it is called the Optimism Collective. Management in Optimism Collective is carried out by holders of the $OP token, who in turn make decisions about updating the protocol, awarding grants, etc. Coinbase, as a member of the Optimism Collective, has stated that it will provide the community with a percentage of the fees generated from transactions on Base.
From a technical point of view, the implementation of Base is not much different from Optimism (both are implemented on OP Stack). At the same time, in OP Stack, at the moment, the so-called fraud proofs (evidence disputing the state of a transaction) have not yet been fully implemented. Against this background, Arbitrum looks like a more mature solution.
Commissions on the Base network are paid in ETH. At the same time, unlike Optimism and Arbitrum, Base does not have its own token. Moreover, the project team has stated that it does not plan to issue a token:
Despite the semi-jockey phrase “If the team says that there will be no drop, then there will definitely be a drop”, - it is worth considering that Coinbase is a public US company. This means that all its actions must strictly comply with current laws and regulatory requirements. Regulatory uncertainty in the allocation of tokens to users through airdrops, as well as regular attacks on Coinbase by the SEC, significantly reduce the chances of an airdrop.
Disadvantages and Potential Risks of Base
Decentralization. The project documentation states that Base has a single sequencer, and this role belongs to Coinbase. Sequencer - receives transactions from users, processes them, combines them into blocks and sends them to Layer 1.
The presence of a single sequencer directly affects the centralization of the network. In particular, the sequencer can censor users when sending transactions. In addition, the sequencer could potentially block the user's access to his capital. It’s important to note that the majority of existing L2 solutions also have a single sequencer;
Limitations of Optimistic rollups. Optimistic rollups take a very long time to withdraw funds from the rollup to L1. This delay is caused by the technical features of this type of roll-ups and serves to avoid possible fraud. Transferring funds from Ethereum to Base takes only a few minutes, while transferring funds from Base to Ethereum takes about 7 days;
Dependency on OP Stack. Considering that Base is implemented on the OP Stack, therefore it inherits all its potential vulnerabilities. Updates from OP Collective - may carry risks of bugs and related exploits/attacks, etc.
In this part of the report, we will look at the dynamics of Base’s key indicators, and also compare Base with its competitors: primarily with other Optimistic roll-ups such as Optimism and Arbitrum. Considering that the mainnet Base came out about a month ago, all graphs presented will be for the last 30 days.
Among all Layer 2 solutions on Ethereum, Base is the 4th in terms of TVL, with a market share of 4.04%:
Number of Daily Transactions
In terms of the number of daily transactions, the top 3 optimistic rollups are quite close to each other.
On August 21, the number of transactions in Base reached a whopping 1.37 million. The main reason was the high activity of the SocialFi application friend.tech, implemented on Base. Friend.tech recorded more than half a million transactions:
Number of Active Addresses
Active addresses are unique wallets that have made a transaction in the last 24 hours. According to this indicator, Base gives in to its closest competitors:
Over the past 30 days, Base and Starknet have earned the most commissions among L2 networks:
Optimism was one of the first rollups built on Ethereum. In many ways, it’s the main reason for its initial success. At the same time, not a single system-forming protocol was launched on Optimism, thanks to which users would use only this network To date, there are not many applications deployed on Optimism that deserve serious attention. Velodrome could be an exception. It’s a fork of Fantom’s protocol - Solidly with its innovative tokenomics model ve (3,3).
Arbitrum came out a few months later after Optimism, and it could win the users’ attention thanks to a unique application deployed on its network — GMX. GMX was one of the first to apply the real yield model and created around itself an entire ecosystem of projects that interact with its main index token GLP: PlutusDAO, Jones DAO, GMD, Dopex, etc. Another successful protocol deployed on Arbitrum is Radiant Capital.
Base is just at the beginning its journey, and its success will largely be determined by the availability of interesting, innovative applications. In less than a month of operation of the Base main network, such popular protocols as Uniswap, Sushiswap, Balancer, DoDo, Odos, 0x, Aave, Compound, QiDao, Magic Eden have already connected to it.
Base continues the trend of centralized exchanges that creates their own blockchains. The first and most succes. However, there were less successful examples such as KuCoin Community Chain (KCC) from the KuCoin exchange and OKTChain from the OKX exchange.
At the same time, it is worth noting that the Coinbase team took into account its competitors’ experience and chose a different path — they did not waste time and resources on creating another Ethereum “killer”. Instead, Coinbase decided to create a Layer 2 solution based on Ethereum, accepting its undisputed leadership in the market.
Coinbase listed the reasons why they chose to develop in this direction in their blog post. Coinbase is moving forward with its plan to engage 1 billion users in the crypto economy. The exchange admits that initially most of its products, in fact, had nothing to do with Web3.
Over the last few years, they have started to change this: USDC, cbETH, Coinbase Wallet, etc. Coinbase aims to become an on-chain hub for its products. In this context, the emergence of Base is a logical step in the development of the ecosystem.
In the first month after the mainnet’s launch, Base showed impressive results. In terms of TVL, Base has already surpassed Solana, and is approaching zkSync Era. In many ways, this success can be explained simply: Base is behind one of the largest exchanges in the industry. Coinbase has been on the market since 2012, and has experienced more than one bearish cycle in its history. Besides this site has a vast loyal user base of 100+ million people.
To promote their L2 solution, Coinbase had an extremely successful marketing campaign called “Onchain Summer”, which took place in collaboration with Coca-Cola, Atari, OpenSea and other 50+ projects, artists and influencers.
The Base has already shown how to make an extremely successful product launch. Now it is the turn of projects and developers to create unique applications upon the network that will give it an additional impetus for further growth. Today, many of the largest representatives of the so-called “DeFi 1.0 protocols” have already joined the network - these are Uniswap, Sushiswap, Balancer, Aave, Compound, etc.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.