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Coinbase’s Blockchain Gambit: A Solution to Six Consecutive Quarters of Losses?

Coinbase is set to launch its layer-2 scaling solution for Ethereum (ETH) called Base, a move aimed at potentially reversing the company’s six consecutive quarters of losses. This new platform is designed to empower developers to create their own cryptocurrency applications, diversifying Coinbase’s revenue streams beyond its primary trading business.

Base functions as a blockchain, providing users with the capability to send money, trade on decentralized exchanges, borrow and lend cryptocurrencies, and even create non-fungible tokens (NFTs). Alesia Haas, Coinbase’s chief financial officer, outlined in a recent interview that the exchange stands to earn fees from every transaction conducted on the network, assuming developers build popular applications on Base. This strategic expansion positions Coinbase to capture additional revenue opportunities within the evolving cryptocurrency ecosystem.

Alesia Haas acknowledges that it might take several years before Base, Coinbase’s layer-2 scaling solution for Ethereum (ETH), generates significant revenue for the company. This launch follows six consecutive quarters of losses reported by Coinbase, primarily attributed to lower trading volumes and a 20% decrease in active users on the platform in the last quarter.

Traditionally, Coinbase has heavily relied on fees generated from customer trades as its primary source of revenue. However, in a notable shift, the last quarter saw non-trading revenue surpass trading revenue for the first time in Coinbase’s history. This change highlights a transformation in Coinbase’s business model, with the introduction of new revenue streams beyond its core trading activities, including the potential revenue from its Base layer-2 scaling solution.

Base, as a layer-two blockchain developed on the Ethereum network, has the primary goal of enhancing transaction costs and speed. It achieves this by adopting a strategy of batching and compressing a substantial number of transactions before they are broadcasted to the Ethereum blockchain.

Jesse Pollak, who oversees Coinbase’s initiatives on the blockchain, provided an analogy to illustrate the difference: “On Ethereum, everyone’s driving in a single car, that’s really expensive because everyone has to pay for their own car. With Base, we have public transportation, so now you could fit hundreds of people into a single train.” This analogy captures the efficiency gains and cost reductions achieved by Base’s approach to transaction processing compared to the traditional model on the Ethereum blockchain.

Investors Rush to Send Millions to Base Ahead of Launch

Investors have already transferred over $130 million worth of cryptocurrencies from Ethereum to Base in anticipation of its launch. In the past month, the blockchain has seen over $200 million in trading volumes, with more transactions occurring in just two days than established networks like Arbitrum.

Despite not being open to the public yet, traders are drawn to the blockchain, aiming for potentially lucrative returns, particularly from meme coins. However, the open and “permissionless” nature of Base, where anyone can participate anonymously, presents reputational risks for Coinbase.

Recently, Base encountered a scam involving a meme coin named BALD token, leading to significant losses for investors. This incident underscores the challenges and risks associated with the openness of the platform.

In response to recent incidents, Coinbase has announced plans to introduce additional tools aimed at helping users assess the trustworthiness of products on the Base platform without compromising its open and permissionless nature. This move is likely in an effort to address concerns related to scams and illicit activities on the blockchain.

It’s noteworthy that Coinbase’s Base launch is occurring amidst significant regulatory scrutiny. In June, the Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase, alleging a violation of exchange registration rules. With Coinbase playing a central role in the creation of Base, there’s a possibility that regulators could hold the company accountable for any illicit activities taking place on the blockchain, as suggested by Omid Malekan, an adjunct professor at Columbia Business School. However, he also points out that such an approach could be shortsighted from a regulatory perspective.

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I want to save money. Will cryptocurrency work?

Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

Every cryptocurrency has two main components: the units of digital exchange called “coins” and the network within which the exchange takes place. These units can be transferred between wallets and exchanged on exchanges. The networks in which these coins exist are called blockchains, which translates to “chains of blocks.”

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