An introduction to Base: Coinbase’s native blockchain

What does Coinbase gain from Base?

Any transaction on Base is largely immutable as soon as it has been broadcasted to Ethereum in a bundled transaction, however, to bundle these transactions from Base to form a single transaction on Ethereum, there needs to be a so-called sequencer in place. In the case of Base, its sequencer is merely in the hands of one entity namely Coinbase. This is not something out of the ordinary, as the sequencers of other Layer 2s are presently also exclusively in the hands of the respective developer. This allows Coinbase and other Layer 2s to largely censor, front-run, and move about transactions before they are bundled.

The Layer 2s, including Coinbase, are not interested in engaging in such activities, as it would severely damage their reputation and integrity. However, the main proposition of any blockchain is its decentralized nature, so trust should be in decentralized code rather than centralized entities. Because of this, not only Coinbase but largely every single Layer 2 have stated their intention to decentralize their sequencers over the coming years, but as of now, like any other Layer 2s, Coinbase has retained substantial control over Base and its sequencer.

Until Coinbase thoroughly decentralizes the sequencer of Base, it acts as the main revenue source of Base for Coinbase. The compact compression of transactions allows for a discrepancy between what users pay in transaction fees on Base relative to the settlement cost of Base of its large transactions on Ethereum. So, in essence, 100 users on Base may pay $0.1 per transaction for a total of $10, but it alone costs Base $5.0 in transaction fees on Ethereum, so Coinbase nets a profit of $5.0 without considering the computational cost of the sequencer. So far, Base has generated a total of about $7mn in fees, of which $2.5mn has been paid in fees to Ethereum, leaving Coinbase with a profit of about $4.5mn since Base launched in early August. It is too early to say how Coinbase’s plan to decentralize Base materializes, but Coinbase must wave goodbye to at least a portion of that profit whenever Base is decentralized.

This is already the case to some degree. Coinbase has guaranteed a revenue-sharing pact with Optimism; the original developer of the OP Stack, which acts as Base’s technological foundation. The revenue-sharing pact says that Coinbase must contribute 2.5% of Base’s revenue or 15% of the network’s net profits, whichever is greater, to the decentralized autonomous organization (DAO) of Optimism.

Other advantages of Base for Coinbase

For now, there is perhaps at least one additional substantial revenue source of Base for Coinbase. Together with Circle, Coinbase launched the stablecoin USDC in 2018; now the second-largest stablecoin measured in issued dollars. Circle is now the sole issuer of USDC; however, the firm shares a part of its interest income from the USD with Coinbase. In Q2 2023, this amounted to a revenue of $151mn for Coinbase, some 22% of the firm’s total revenue in that quarter.

It is possible that Coinbase has made an even greater agreement with Circle for USDC issued on Base, so Coinbase receives more of the interest than normal for every dollar issued on Base. At present, there is already about $274mn worth of USDC on Base, both bridged and natively. Provided that Coinbase has a valuable agreement in place and that this number continues to increase, then the interest income on USDC on Base could easily exceed the revenue of the sequencer in the near future.