Coinbase Launches Base: Building a New Bridge to DeFi
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We normally write about the intersection of web3 and business strategy, often highlighting how successful web2 platforms and other large companies are beginning to employ digital assets to grow their brands, enhance customer loyalty, and once in a while, just have fun.
But sometimes the news out of the digital asset space is just too big to ignore. This week’s editorial by Bankless Consulting’s head of legal, Gaurav Gopinath, highlights one such development. Coinbase, the publicly traded and heavily regulated US-based company most well known for its centralized exchange, is launching its own blockchain, and its using a tech stack that gets many crypto natives excited. Its tech of choice was developed by Optimism, the Layer 2 scaling solution that also helps fund web3 public goods.
Coinbase has been making a gentle push into decentralized finance since it launched its Coinbase Wallet during the last bull market. With Base, its new Layer 2 blockchain, it is building an inroad not just for its own wallet, but creating on-ramps and off-ramps for bringing fiat on-chain, and for bridging not just between Ethereum, but other blockchain ecosystems, like Solana. With an ambitious roadmap and unlimited capital, many are excited by the potential of Base to onboard its 110 million customers to DeFi, but this excitement must be measured against the existential threats of regulatory overreach.
As Guarav writes, “creating a homegrown ecosystem on Base that interacts with other L1s and provides permissionless access to builders is likely to cause furrowed brows in Washington D.C.” That may be so, but if anyone can figure out how to successfully navigate the shifting labyrinth of D.C.’s expectations, it’s Coinbase. We’re certainly rooting for them.
Coinbase Launches Base: Building a New Bridge to DeFi
Author: Gaurav Gopinath
On February 23rd, Coinbase opened a new frontier in crypto by announcing Base, a developer-focused Layer 2 (L2) blockchain built on Ethereum and powered by Optimism’s tech stack. Optimism is best known as an Ethereum scaling solution that also funds web3 public goods, and it’s one of the most exciting ecosystems in crypto.
The primary function of L2s is to help L1s scale. Ethereum has seen heavy usage and a number of L2s, such as Optimism and Arbitrum, have emerged to reduce network fees. The Coinbase announcement further cements Ethereum’s status as the dominant L1 and represents an important step forward for the Coinbase ecosystem, which currently includes custodial services, trading software, and on/off ramps integrated with USDC, the second-largest stablecoin by market capitalization.
We are cautiously optimistic that Base represents a positive step forward for the crypto ecosystem, but its success is not guaranteed. User onboarding and adoption in crypto is extremely difficult and should not be taken for granted.
The Devil in the Details
Many of the details about Base are still unclear. Coinbase has indicated that Base will function as a bridge rather than a self-contained ecosystem, allowing users to access other L2s and even other L1s such as Solana. It is not yet clear how this bridging functionality will be implemented. Crypto natives will doubtless observe that bridges, while sometimes necessary, carry significant security vulnerabilities. The Solana-based Wormhole bridge, for example, suffered a large-scale exploit in 2022. Given that Base is likely to have more active users and higher transaction volumes than Solana, a hack would have severe consequences.
Furthermore, as a US-regulated entity, Coinbase is required to implement compliance measures including customer identification (KYC). It is not yet clear how KYC will function on Base, and if Base is indeed to be a bridge to other L1s and L2s, as Coinbase assures us it is — the extent to which Coinbase’s KYC measures will track usage on other platforms.
The Race Is On
The Base announcement is a shot across the bow to a different L1. Binance’s BNB chain is the undisputed gorilla in the room, with significantly more daily active users than Coinbase. Binance’s launch of BNB chain (originally called Binance Smart Chain) was propelled to hypergrowth by Binance’s investment arm, which funded the development of decentralized applications (dApps) on BNB chain.
Coinbase seems to be looking to do much the same. Base is currently in the testnet stage and open for dApp development. Coinbase has partnered with a number of builder organizations, including The Graph protocol, to build on Base. Coinbase’s investment arm, Coinbase Ventures, will doubtless focus its efforts on incentivizing builders to develop on Base in the hope of creating a thriving ecosystem of dApps to turn Base into a compelling competitor to Binance.
The open question, as usual, is regulatory enforcement. Binance is currently in the regulatory crosshairs: Paxos, a NY-based firm that issues a class of Binance’s stablecoin, was recently forced by the SEC to cease all issuances despite the fact that Paxos holds a NY Bitlicense (notoriously difficult to obtain). The fact that Paxos’s stablecoins were fully collateralized did not deter the SEC’s threatened enforcement action, suggesting that Binance is now sailing in very choppy waters indeed.
But regulatory enforcement in crypto is notoriously unpredictable, and there is no safe port in this storm. The SEC action against Paxos suggests that US-based companies are not immune, and NASDAQ-listed Coinbase is about as US-based as an entity can get. Creating a homegrown ecosystem on Base that interacts with other L1s and provides permissionless access to builders is likely to cause furrowed brows in Washington D.C.
The race is very much on, and competition is good for the ecosystem. To quote innumerable degens, “LET’S F***ING GOOOOOOOOOO”.
Gaurav is a humble crypto-lawyer surfing the wild, wild waves of our industry. He is Chief General Counsel at Bankless Consulting, and operates a legal practice which touches DeFi, GameFi, and much more. His hobbies include ‘90s rap (particularly Nas), fine Scotch, Oxford commas, and putting real-world assets on-chain. He is a proud member of the Bankless Nation. He incessantly shitposts at @decentralawyer - give us a follow, mate.
Web3 Business Developments
Curated News on Recent Blockchain Adoption and Innovation
Starbucks Polygon NFTs Are Already Selling for Thousands
Author: Kate Irwin
Earlier this year, Starbucks launched an NFT loyalty program for their customers, giving them the option to earn or purchase digital assets that unlock exclusive benefits or rewards. Early adopters of the closed beta-NFT driven rewards program called Starbucks Odyssey are already flipping the NFT stamps for nearly $2,000 apiece, with the "Holiday Cheer Edition 1 Stamp" having a floor price of just over $2,000. Since it is Starbucks’ first-ever NFT, many are speculating on the NFTs possible future value and are flipping them for higher prices.
Starbucks plans to offer benefits such as access to private events and international trips to NFT holders. The program is still in closed beta, and it's unclear when it will be available to the public. Starbucks also plans to sell limited-edition premium NFTs. Odyssey users earn points by completing tasks or buying drinks that can be redeemed for NFT stamps or unlock future rewards.
YouTube Has a New CEO Who Actually Gets NFTs
Author: Shalini Nagarajan
YouTube's new CEO, Neal Mohan, who was previously YouTube's Chief Product Officer, has hinted at potential plans for integrating NFTs into the video sharing platform. Mohan has also discussed YouTube's interest in the metaverse and making the viewing experience more immersive.
“Giving a verifiable way for fans to own unique videos, photos, art, and even experiences from their favorite creators could be a compelling prospect for creators and their audiences. There’s a lot to consider in making sure we approach these new technologies responsibly, but we think there’s incredible potential as well.”
Neal Mohan, YouTube CEO
Google has already expressed interest in blockchain technology this year with the launch of a cloud-based service for Ethereum projects and developers called the Blockchain Node Engine. The company is exploring how to support customer needs in building, transacting, storing value, and deploying new products on blockchain-based platforms.
Bored Ape Band Curates NFT-Gated Playlist For Spotify Pilot
Author: Shalini Nagarajan
Spotify is testing NFT playlists that can only be accessed by NFT holders, enabling web3 communities to create music playlists for their members, access themed virtual worlds, and unlock products and other experiences.
Only a select few NFT communities, including gaming startup Overlord and Bored Ape band KINGSHIP, are currently part of the pilot program. Overlord's Creepz NFT tokens can unlock the "Invasion" playlist, while the KINGSHIP Key Card NFT allows access to a curated playlist featuring tracks from popular artists like Queen and Snoop Dogg. In the near future we can expect more communities to partner with Spotify as a way to attract and retain loyal customers, and create a sense of exclusivity and community.
“This is just the beginning of our audio adventure,”
Overlord said about its Spotify playlist.
A Scottish Golf Course May Soon Land in the Hands of LinksDAO
Author: Bessie Liu
LinksDAO, the first DAO for golf enthusiasts, is seeking to purchase Spey Bay Golf Club in Scotland for $900,000. The DAO is set to finance the purchase through an NFT fundraiser that raised $10.4 million within 24 hours of launch. While the Scottish golf course would be its first purchase, LinksDAO aims to maintain its focus on purchasing a US course in the future.
Over 88% of members voted in favor of the proposal, setting in motion a negotiation period that is expected to last between one to two months before a final deal is reached later this spring. The success of LinksDAO is just one example of how communities can form around shared interests to pursue business opportunities.
Peloton’s Robin Arzón Is Building a Web3 Community Around Working Out
Author: Megan DeMatteo
Economists have known for decades that incentives drive behavior change. The fitness industry already uses gamification methods to motivate customer behavior, and now web3 technology is being explored as a potential tool to improve overall health.
Robin Arzón, the head instructor at Peloton, has founded Swagger Society, a web3 lifestyle membership club that aims to use decentralized protocols to incentivize participation and create a sense of community. The combination of the economic approach of web3 with the fitness industry is exemplified by move-to-earn (M2E) games, which reward consumers with crypto tokens for exercising. However, Arzón believes that gamification can only go so far, and the true benefits of fitness come from consistency and community. NFT membership models may provide a more sustainable way to create a sense of community, granting holders entry to a community led by their favorite instructors without third-party intermediaries and centralized platforms.
Many fitness clubs currently use data-tracking apps to monitor and document progress over time, while the web3 culture places a significant focus on incentivizing participation through economic rewards. The most prominent example is STEPN, a Solana-based M2E game, which reported $122.5 million in profits in Q2 2022 with its ecosystem token GMT having a total market cap of over $231 million. The success of STEPN suggests that M2E gaming has the potential to be an effective motivator for behavior change.
Arzón believes that gamification can certainly motivate behavior, but beyond any new gimmicks and gadgets, it will be good old-fashioned consistency that unlocks the true benefits of fitness as a lifestyle. For this level of transformation, a person needs more than a game or a token, they need an accountability partner.
“Finding like-minded, values-driven folks who are willing to put those values into action is what gives [a new behavior] ‘stickiness,’” said Arzón.
“That's certainly what Swagger Society will be based on, community as the linchpin of everything that we do.”
Asset Tokenization Is Shaping Up To Be Crypto’s Theme of the Year
Author: Shalini Nagarajan
Financial institutions continue to explore the use of blockchain technology and tokenization is quickly gaining traction as a powerful tool for imbuing ownership and other benefits onto blockchain-powered assets. However, many market observers have yet to fully appreciate the potential of this revolutionary technology, as they may be too focused on the tokens themselves.
Traditional methods for trading assets involve limitations, such as restricted market hours and slow settlement times. By tokenizing real-world assets like stocks or commodities, businesses can unlock several key benefits, including increased liquidity, 24/7 trading, lower transaction costs, and enhanced transparency and security in trading real-world assets.
Given these advantages, it's clear that businesses can benefit significantly from embracing tokenization and the potential of blockchain technology. By leveraging this innovative approach, companies can streamline their operations, reduce costs, and unlock new opportunities for growth and success. Some examples of businesses adopting blockchain technology to tokenize assets include:
Goldman Sachs recently launched its Digital Asset Platform (DAP), which is built using a private (permissioned) blockchain stack known as Canton, created by Digital Asset. The platform will enable Goldman Sachs to offer issuance, registration, settlement, and custody services for digital assets. The European Investment Bank (EIB) was the first to collaborate with the platform, using it for its first digital bond.
Hamilton Lane, a global investment manager, is partnering with digital asset securities firm Securitize to tokenize investment products. Hamilton Lane's flagship direct equity fund will be available to select US investors through new tokenized feeder funds, providing exposure to direct equities, private credit, and secondary transactions.
Hong Kong's government successfully issued its first tokenized green bond worth $100 million in February under its Green Bond program. The Central Moneymarkets Unit used Goldman Sachs' tokenization protocol DAP for the issuance, and the bond was underwritten by four banks priced at a 4.05% yield.
Siemens, a German manufacturing giant, issued a €60M digital bond on Polygon. Although the bond was issued on-chain, proceeds from investors were collected via traditional banking channels. Siemens highlighted that moving away from paper and towards blockchain would make transactions faster and more efficient.
Swarm Markets, a DeFi infrastructure firm, launched tradable, DeFi-compatible stocks and bonds on Polygon. These tokenized securities include Apple and Tesla stocks and two US Treasury bond ETFs, bringing them to DeFi.
“But tokenizing a wide variety of assets – from equities and index funds to real estate and carbon credits – offers huge potential in terms of not only enhancing transparency, auditability and efficiency, but also access to people who otherwise might not be able to tap into traditional markets.”
Daniela Barbosa, executive director of Hyperledger Foundation.
“Zooming out, if done at scale, these kinds of transactions are poised to make markets far more efficient.”
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