Published On - March 2, 2023
Coinbase launches its layer 2 network
Optimism, Arbitrum, Polygon, Starknet, Scroll and now Base. Last week Coinbase launched its own blockchain network. Named Base, it is an Ethereum layer 2 network created using the Optimism stack.
This launch is not just significant in terms of onboarding more participants to web3 (Coinbase has over 100 million users). It also represents a playbook we may well see other large companies embrace to launch their own public blockchain networks.
By creating Base as an Ethereum layer 2 network, users will benefit from lower transaction fees and the strong security guarantees of the public Ethereum network.
Onboarding the next generation
No doubt a key motivation in creating the network was for Coinbase to use it as a platform to help onboard their millions of users to a native web3 experience consisting of decentralized exchanges, stablecoins and lending protocols, NFTs and DAOs.
Coinbase already has a non-custodial wallet, and when combined with Base, there is a relatively smooth mechanism by which Coinbase will be able to bring their users onto the new network, to start using decentralised applications that have been deployed there.
For instance, many of the leading Ethereum applications such as Uniswap, Aave and stablecoins such as USDC have been deployed to multiple layer 2 networks. It will be a governance decision for these apps as to whether they deploy on Base too. However, given the number of potential users on Base, it's likely to be a no-brainer.
Coinbase already has a non-custodial wallet, and when combined with Base, there is a relatively smooth mechanism by which Coinbase will be able to bring their users onto the new network, to start using decentralised applications that have been deployed there.
For instance, many of the leading Ethereum applications such as Uniswap, Aave and stablecoins such as USDC have been deployed to multiple layer 2 networks. It will be a governance decision for these apps as to whether they deploy on Base too. However, given the number of potential users on Base, it's likely to be a no-brainer.
The Optimism Stack
Base uses the recently announced Optimism (OP) Stack. The OP Stack is the latest iteration of the technology used to run the Optimism layer 2 network. The Optimism Collective, who are behind both initiatives, believe in a future that is made up of multiple layer 2 networks built on this technology. Longer term these will all be linked together by a Superchain.
Optimism is a class of layer 2 network that uses optimistic rollups. One of the network participants runs a sequencer, which is responsible for sequencing transactions submitted to the layer 2 network and if accepted they are then committed to the Ethereum network in a batch.
This means that whilst one entity is responsible for running and maintaining the sequencer underpinning the layer 2, all transaction and network states can be recovered from the Ethereum mainnet if required.
It is possible for users to send transactions directly to the Ethereum network instead of the sequencer (the sequencer will still pick them up), but users lose the benefits of using a layer 2 network with this approach as they will have higher fees to pay.
Optimism is a class of layer 2 network that uses optimistic rollups. One of the network participants runs a sequencer, which is responsible for sequencing transactions submitted to the layer 2 network and if accepted they are then committed to the Ethereum network in a batch.
This means that whilst one entity is responsible for running and maintaining the sequencer underpinning the layer 2, all transaction and network states can be recovered from the Ethereum mainnet if required.
It is possible for users to send transactions directly to the Ethereum network instead of the sequencer (the sequencer will still pick them up), but users lose the benefits of using a layer 2 network with this approach as they will have higher fees to pay.
App-chains
Layer 2 networks have for some time been considered the solution to Ethereum's scalability problem, and Base will be a catalyst for other organisations spinning up their own layer 2 networks.
For the past year, the layer 2 networks that have been launching on Ethereum have been horizontal in nature. They have not been going after a specific vertical. We've seen the major players in this space all competing directly with one another using technologies such as optimistic and zero-knowledge rollups to scale these networks.
Coinbase could have decided to use one of these existing layer 2 networks, but they decided to create their own. In creating their own network they have the opportunity not just to onboard more users from their platform, but to create a public network that they can capture significant value from themselves.
For the past year, the layer 2 networks that have been launching on Ethereum have been horizontal in nature. They have not been going after a specific vertical. We've seen the major players in this space all competing directly with one another using technologies such as optimistic and zero-knowledge rollups to scale these networks.
Coinbase could have decided to use one of these existing layer 2 networks, but they decided to create their own. In creating their own network they have the opportunity not just to onboard more users from their platform, but to create a public network that they can capture significant value from themselves.
Why launch your own app-chain?
Base is a public blockchain network in the sense that it’s publicly accessible and anyone with Ether can use it to pay transaction fees on the network.
However, as Coinbase has such a significant number of users on their platform, they will no doubt want to place some constraints on the applications on the network they choose to share with their users.
This parallels how Apple requires developers to fulfil criteria in order to have their apps listed on the App Store. Although, there will not be anything preventing people from deploying apps on Base if they can pay the transaction fees. But, in order to be put in front of millions of users there will be rules to adhere to.
This will be in part to ensure that Coinbase can continue to comply with AML/KYC/etc being a U.S. company. It will also be to provide its users with the safest and smoothest experience also. The last thing they will want is for users on their blockchain network to be taken advantage of by rogue blockchain developers.
This ability to influence users and developers on the network is something they simply wouldn't have been able to do had they used one of the existing layer 2 networks, which is likely why they chose this route.
For similar reasons, this approach is no doubt appealing to any organisation with an established large customer or user base. Without a decent user base, any new layer 2 networks have to bootstrap their own traction which is expensive and time-consuming.
However, as Coinbase has such a significant number of users on their platform, they will no doubt want to place some constraints on the applications on the network they choose to share with their users.
This parallels how Apple requires developers to fulfil criteria in order to have their apps listed on the App Store. Although, there will not be anything preventing people from deploying apps on Base if they can pay the transaction fees. But, in order to be put in front of millions of users there will be rules to adhere to.
This will be in part to ensure that Coinbase can continue to comply with AML/KYC/etc being a U.S. company. It will also be to provide its users with the safest and smoothest experience also. The last thing they will want is for users on their blockchain network to be taken advantage of by rogue blockchain developers.
This ability to influence users and developers on the network is something they simply wouldn't have been able to do had they used one of the existing layer 2 networks, which is likely why they chose this route.
For similar reasons, this approach is no doubt appealing to any organisation with an established large customer or user base. Without a decent user base, any new layer 2 networks have to bootstrap their own traction which is expensive and time-consuming.
We've may have been here before
It's not all rosy for any companies looking to go down this route. Companies may face some similar issues launching layer 2 networks akin to those experienced previously creating private blockchain networks.
Typically, there is one organisation driving corporate blockchain initiatives. They may be able to incentivise their customers to use a layer 2 network they launch to use it. But will they be able to encourage other competitors or partners to join them on these initiatives?
For instance, would Santander participate in a layer 2 network launched by BNP Paribas, or would Vodafone participate in a layer 2 network run by O2? The implication is that were app-chains widely embraced, we end up with a very large number of these chains, resulting in many different platforms for users.
If they are layer 2 networks underpinned by Ethereum, transferring assets between them will be possible, but it seems overkill this level of fragmentation and a headache for users.
In addition, layer 2 networks in their current form make use of a centralised sequencer. This sequencer is run by a single organisation on behalf of the rest of the network and the operator collects fees on transactions. These points could be less desirable in the eyes of larger network participants and could put them off from participating in one company’s layer 2 network.
It’s important to highlight that teams are working hard to make sequencers in layer 2 networks decentralized so that there isn’t this controlling organization. However, we are not there yet for Ethereum.
Typically, there is one organisation driving corporate blockchain initiatives. They may be able to incentivise their customers to use a layer 2 network they launch to use it. But will they be able to encourage other competitors or partners to join them on these initiatives?
For instance, would Santander participate in a layer 2 network launched by BNP Paribas, or would Vodafone participate in a layer 2 network run by O2? The implication is that were app-chains widely embraced, we end up with a very large number of these chains, resulting in many different platforms for users.
If they are layer 2 networks underpinned by Ethereum, transferring assets between them will be possible, but it seems overkill this level of fragmentation and a headache for users.
In addition, layer 2 networks in their current form make use of a centralised sequencer. This sequencer is run by a single organisation on behalf of the rest of the network and the operator collects fees on transactions. These points could be less desirable in the eyes of larger network participants and could put them off from participating in one company’s layer 2 network.
It’s important to highlight that teams are working hard to make sequencers in layer 2 networks decentralized so that there isn’t this controlling organization. However, we are not there yet for Ethereum.
Will users care?
There is no doubt that the launch of Base is a significant event for the blockchain community. Coinbase's position as a leading crypto exchange coupled with its goals to onboard more users to proper web3 experiences should be celebrated.
If Coinbase can onboard tens of millions of new users to web3 it will make the Base network very valuable. However, there's going to need to be some compelling reasons to convince users on their exchange they should jump through the hoops required to become a web3 native. It’s not necessarily clear what they are just yet, given a significant number of their users are likely crypto speculators.
There is no doubt however that Base represents the first of many layer 2 app-chains to be launched, and it will be exciting to see who follows Coinbase's example next.
If Coinbase can onboard tens of millions of new users to web3 it will make the Base network very valuable. However, there's going to need to be some compelling reasons to convince users on their exchange they should jump through the hoops required to become a web3 native. It’s not necessarily clear what they are just yet, given a significant number of their users are likely crypto speculators.
There is no doubt however that Base represents the first of many layer 2 app-chains to be launched, and it will be exciting to see who follows Coinbase's example next.
