The blockchain developed by the giant Coinbase is one of the greatest success stories in the sector in 2024. Despite a technology that is not the most advanced, it benefits from a strong brand, capable of promoting the applications developed on it.

In the ecosystem of second-layer solutions for Ethereum, known as layers 2 (L2), designed to lighten the load on the main chain, Base has rapidly established itself as a major player despite strong competition.

Launched in 2023, by 2024 it had risen to second place among layers 2 in terms of the number of daily active addresses (350.000), just behind Arbitrum (520,000), according to Token Terminal data.

In the second quarter, Base even achieved the feat of being the most profitable L2, generating more than 12,000 ETH from transaction fees (or $42.5 million at the current price).

Unlike other advanced decentralisation projects, these revenues are not paid to a DAO, as is the case with Arbitrum (read our analysis) or Optimism. They go directly into the coffers of Coinbase, the leading US exchange platform, which is behind this blockchain.

Coinbase remains discreet about Base, sometimes presented as an independent project, but the revenues generated by Base are clearly visible in the Nasdaq-listed company's financial results.

In the first quarter of 2024, Base revenues were included in a dedicated category, whereas they were previously included in overall retail transaction revenues. The document sent to shareholders states: "Other transaction revenues" include Base's sequencing fees and payment-related revenues". Up 138% on the previous quarter, "the main driver of growth in the quarter was related to the increase in fees generated by Base".

Base and payments thus generated $56 million for Coinbase in the first quarter (at a time when the ETH price was higher).

Across all its activities, this category accounts for approximately 4% of the company's total revenue, valued at nearly 60 billion dollars on Wall Street. This proportion could grow further as Base continues to gain market share.

"From a commercial point of view, the current centralisation of the project is therefore rather advantageous," says Stanislas Barthélémi, crypto expert at KPMG.

How Coinbase supports Base

"Coinbase has the financial means to build a team of developers dedicated to R&D to advance OP Stack (a development standard initiated by Optimism and used by Base), infrastructure, tools such as wallets (EIP 4337) and invest in promoting the chain," Stanislas Barthélémi points out.

"The partnership with Circle to promote the use of stablecoins such as USDC or EURC is obvious. Coinbase can also offer prizes, grants, or organise hackathons with major brands," he continues.

Trust: Coinbase is one of the most respected and regulated cryptocurrency exchange platforms in the world. Its reputation for security and compliance reinforces users' and developers' trust in Base.

Marketing: Coinbase can use its well-established marketing channels to promote Base, increasing its visibility to its 110 million customers, such as during the "Onchain Summer" campaign. Base is also the only blockchain integrated into Coinbase's Smart Wallet, a more user-friendly crypto wallet technology.

Partnerships: Coinbase has numerous partnerships in the cryptocurrency and fintech industry. The latest with Stripe, which supports USDC payments on Base, is a good example of this synergy. These relationships can be leveraged to promote Base and attract quality projects.

Incitations: As a shareholder of Circle, the stablecoin issuer, Coinbase pays the fees for transactions made in USDC on Base. This type of subsidy encourages its adoption. Currently, the Base network hosts nearly $3 billion in the form of USDC.

Is it in Coinbase's interest to decentralise Base?

This question is at the heart of the debate, even though Base and Coinbase have always denied the launch of a future governance token. In the short term, this hypothesis seems unlikely as long as regulation remains unclear in the United States.

"The subject is complex," Stanislas Barthélémi points out. "On the one hand, they have an interest in launching a token and decentralising the blockchain to gain the trust of users, but they must also avoid possible attacks from the SEC in the absence of a clear regulatory framework."

"Base's current strength also lies in the fact that it does not have a token," insists this expert.

The possible arrival of a Base token will probably depend on the profile of the next SEC chairman, with Gary Gensler due to be replaced in 2025 after the departure of the Biden administration, whose action has been aggressive towards the crypto ecosystem.

"Eventually, Coinbase could be just another sequencer, which would mean sharing costs with other entities," says Stanislas Barthélémi.

What are Base's strengths?

First and foremost is its velocity.

"Base has significantly reduced transaction fees and confirmation times, bringing us closer to our goal of an average transaction taking less than a second and costing less than $0.01 worldwide," Coinbase CEO Brian Armstrong boasted on 2 May.

But that's not all: a great deal of work has been done around the user experience and quality of the wallets developed by Coinbase, facilitating access for the general public.

"The Coinbase Wallet and the work on account abstraction make it possible to link Web2 (the Coinbase site) and Web3, facilitating the arrival of new users and on-chain uses," explains Stanislas Barthélémi. "This partly explains the success of memecoins on Base since the beginning of the year," he adds.

Furthermore, Base is developed in an EVM (Ethereum Virtual Machine) type environment, enabling easy replication of applications already on Ethereum or other layer 2s.

"Base has an exceptional brand, an exceptional team and offers great opportunities to collaborate with the Coinbase ecosystem," says Paul Frambot, founder of lending protocol Morpho, which launched on Base in mid-June (more than $3 billion in value tied up in its various products).

"I think Morpho's deployment on Base will be bigger than our Ethereum deployment in the coming year," he adds. "The technology may not be as advanced as some competitors, but I think all the technology (zk, L3, provers, cross-L2 bridges, etc.) will be commoditised and open source licensed. The winner will be whoever has the distribution and the brand", he argues.

Which applications are exclusive to Base?

"Base has seen a significant increase in its business, mainly due to memecoins trading and SocialFi projects", US fund Franklin Templeton pointed out in a report in May. This can be explained by the chain's overall performance, enabling low-value tokens to be traded for modest fees, but also by its "social" culture.

Base stands out for the presence of Farcaster, a decentralised social protocol inviting developers to create applications on it. The most popular to date is Warpcast, a social network that is very similar to Twitter and Reddit in its use. Farcaster adopts a hybrid approach by storing users' identities on-chain, while all other data (posts, followers, reactions, etc.) is stored off-chain.

Farcaster has proved an ideal platform for launching memecoins, particularly since the DEGEN project carried out an airdrop on users who had posted content to its channel. This practice has since become commonplace on Farcaster, as with the BRETT and TOSHI airdrops.

Farcaster has been one of the most successful in recent months, with more than 280,000 registered users since its launch at the end of 2023. The protocol has generated 611 ETH in fees, or just over $2 million. And this is just the beginning. The project announced in May that it had raised $150 million in funding from Paradigm and a16z, the two largest venture capital funds in the crypto ecosystem.

The challenge for Base will now be to retain this type of high-potential project, some of which might be tempted to fly solo once success is achieved. FriendTech, another social network built on Base, has made an interesting choice by announcing its migration to its own blockchain (Friendchain), a layer 3 built on top of Base. DEGEN and its Degen Chain have also made this choice.

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This analysis does not constitute investment advice. It has been written without taking into account your personal circumstances, including your financial situation, risk profile and investment objectives.

Before investing in any product, investors should fully understand the risks involved and consult their own legal, tax, financial and accounting advisors.