Interpretation of Base and Linea: Why are crypto giants like Coinbase and ConsenSys investing in Layer 2?

Author: Biscuit, ChainCatcher

In 2023, the concept of Layer2 completely exploded. As dozens of Rollup Layer2 solutions emerged, crypto giants like Coinbase and ConsenSys also began to join the competition by deploying native Layer2 networks.

Since the birth of Bitcoin, public chains have been the most original holy grail of cryptocurrency, with countless teams eager to build a blockchain that can accommodate the next billion users. With the maturity of solutions like Rollup and modularization, more and more institutions can quickly deploy Layer2 blockchains.

Coinbase is the world's first publicly traded cryptocurrency exchange platform, with its fund Coinbase Ventures investing in over 340 crypto projects. Even former employees of the company have built more than ten well-known crypto organizations (such as Polychain, Paradigm, dYdX, etc.). ConsenSys, on the other hand, is a giant in the crypto infrastructure field, with products that tend to focus on the underlying layer, such as MetaMask.

Why are crypto giants choosing to embrace native Layer2 at this time? Is it following the trend or laying the groundwork for the next bull market? What are their respective advantages and disadvantages? This article will elaborate on the coincidences, operational strategies, and underlying logic behind Coinbase and ConsenSys launching Layer2 blockchains.

Why did Coinbase and ConsenSys launch Layer2 networks?

Despite being in different sectors, Coinbase and ConsenSys are currently facing similar situations: insufficient product innovation and a lack of value capture ability that adapts to different market cycles.

First, let's take a look at Coinbase's Base. Base is a Layer2 network built on the Optimism OP Stack, incubated internally by Coinbase. This blockchain aims to become an open ecosystem, seeded by Coinbase's products, users, and assets. The development history is as follows:

• 2022-02-23 Coinbase announced the launch of the Ethereum Layer 2 network Base and established the Base ecosystem fund.
• 2023-02-27 Base will integrate Coinbase's self-custody wallet and dApp wallet.
• 2023-03-26 The Base ecosystem fund announced four major support directions: stablecoins that can track inflation rates, reputation platforms, limit order book (LOB) platforms, and more secure DeFi products.
• 2023-04-01 The Layer2 network Base stated that it would launch on the mainnet in the coming months.

Product innovation has been a slow aspect of Coinbase's progress over the past decade. As a cryptocurrency trading platform, Coinbase's spot trading volume has been below Uniswap for two consecutive months. Jesse Pollak, head of Coinbase Protocol, stated at the ETH Denver conference that product innovation may not be a priority, but the company aims to change that situation. Launching Base is actually an investment in "creating a platform" to enable developers to better build useful products.

Linea is a zk-rollup designed by ConsenSys R&D and operated by ConsenSys. It allows developers to deploy any smart contract, use any tools, and develop as if building on Ethereum. Its features also include a Type 2 zkEVM, which can be compiled down to EVM bytecode and proven in circuits. The development history is as follows:

• 2022-10-14 ConsenSys launched the "Type 2" zk-EVM specification, allowing developers to deploy any smart contract.
• 2022-12-14 ConsenSys launched a private test version of the zkEVM testnet.
• 2023-01-10 The ConsenSys zkEVM Beta testnet opened for external user registration.
• 2023-03-28 ConsenSys zkEVM was renamed Linea and the testnet was fully opened.

Before the launch of Linea, ConsenSys had five products: MetaMask, Diligence, Quorum, Infura, and Truffle, among which MetaMask was the most successful. With the rise of account abstraction wallets, the wallet landscape is set for a significant change. Has ConsenSys also developed a sense of crisis regarding its sustainability? The frustrating user experience of MetaMask, along with the 0.875% transaction fee of the Swaps product, has made MetaMask a "dragon" in the crypto wallet space.

Compared to internal challenges, adapting to the cyclical nature of cryptocurrency is an external challenge for crypto giants. In 2022, Terra, 3AC, and FTX collapsed one after another, with BTC dropping from $69,000 to around $16,000, leaving many crypto companies facing bankruptcy or layoffs. According to Coindesk, from April 2022 to January 2023, the entire crypto industry is estimated to have laid off 27,000 people.

Coinbase and ConsenSys were not spared either. On January 10, 2023, Coinbase announced a 20% layoff, affecting about 950 people. On January 18, 2023, ConsenSys laid off 97 people. Notably, this period coincided with the preparations for the launch of Base and Linea, indicating that Coinbase and ConsenSys had made up their minds to consider strategies for cost reduction and efficiency improvement.

Accompanying the crypto collapse were challenges related to compliance. There is a saying that regulators intentionally allow crypto projects to develop during bull markets and then harvest from crypto giants during bear markets. Coinbase has been a long-time fighter in the crypto space, having engaged in multiple debates with the U.S. SEC over the question of whether "digital currencies are securities." ConsenSys has also sent letters to the U.S. Treasury, outlining industry risks and providing regulatory advice. From this perspective, the story of the brave fighting the dragon continues.

For the above dilemmas, Layer2 may be an excellent solution. First, the modular rollup infrastructure is beginning to show results, with platforms like OP Stack and Celestia allowing anyone to quickly deploy decentralized blockchains without the overhead of guiding a new consensus network. At the same time, Layer2 can operate without issuing tokens, which is beneficial for legal compliance. Adam Cochran, a business analysis professor in South Carolina and DeFi researcher, believes that Coinbase has unparalleled influence in terms of users and partnerships. Although it claims not to issue tokens, as a Rollup, transaction fees go to the sequencer, with an expected revenue of $400 million per year.

Operational Strategies

Base

Coinbase has over 110 million verified users and holds assets worth $80 billion. Therefore, Base, backed by Coinbase, can easily bridge CeFi and DeFi. The integration between Coinbase Exchange, Coinbase Wallet, and Base has the potential to be a solution for bringing real users into DeFi.

At the same time, Base does not have to worry about on-chain revenue, making it a fertile ground for more DeFi products. In a survey by data analyst Panda Jackson, among 57 Base launch partners, only 26 (45%) were invested in by Coinbase Ventures, and most partners already have tokens and well-functioning products.

Moreover, any existing products integrated with Base will maintain their original KYC/AML measures. Its CEO Brian Armstrong stated that while there are some centralized components in Base currently, it will become increasingly decentralized over time. Coinbase is responsible for transaction monitoring, and Base's current statement of "not planning to issue new tokens" also confirms this.

Linea

ConsenSys possesses significant crypto traffic, primarily through user-facing MetaMask and developer-facing Infura and Truffle, making it a standard-bearer for Ethereum products and services. In an article titled "Reflections, Reviews, and Beliefs After Six Years of Entrepreneurship" published by MetaMask co-founders Aaron Davis & Dan Finlay, it was mentioned that in 2022, MetaMask had over 30 million monthly active users. Infura co-founder E.G. Galano also revealed in an interview that Infura has over 400,000 registered developers, handling over 8.5 billion blockchain network requests daily.

With network effects, Linea can easily provide users with a smoother crypto experience. Linea will integrate MetaMask and Truffle natively, and Infura will launch a Decentralized Infrastructure Network in 2023. At the same time, ConsenSys will adjust to a more regulatory-compliant state. Last November, ConsenSys updated its privacy policy on its official website, stating that when users use Infura as the default RPC in MetaMask, it will collect corresponding IP addresses and ETH addresses.

Additionally, ConsenSys founder Joe Lubin is also a member of the original founding team of Ethereum, where he proposed using the C++ programming language to write Ethereum's architecture and was primarily responsible for the technical aspects. Joe Lubin's relationships within the Ethereum ecosystem may serve as a secret weapon for Linea.

Conclusion

The successive launches of Base and Linea indicate that blockchain infrastructure is gradually improving, and Layer2 is about to enter a stage of flourishing diversity. On the other hand, it also shows that Coinbase and ConsenSys are beginning to attempt to solve current dilemmas and expand platforms that can accommodate more users.

As public chains of centralized organizations, Base and Linea may face the biggest challenge in governance models. Previously, Binance, OKX, Crypto.com, and others have developed their own ecological public chains, but they seem to have struggled to gain acceptance from members of the crypto-native communities like Bitcoin and Ethereum. Even after Arbitrum announced an airdrop and was governed by a DAO, its foundation faced scandals over selling tokens without governance processes, suggesting that the core team has not "adapted" to decentralized operational methods.

Regardless, embracing Layer2 reflects Coinbase and ConsenSys's efforts to adapt to different market cycles and enhance their value capture capabilities. With the upcoming EIP-4844 upgrade, which further reduces Layer2 transaction fees, Layer2 may have even greater profit potential.

References:

https://www.verdict.co.uk/coinbase-and-consensys-cut-staff-amidst-cold-crypto-winter-winds/

https://base.mirror.xyz/

https://linea.mirror.xyz/

https://www.ft.com/content/949ee788-6630-4aac-9c4d-b6b0a45f4e25