Layer 2 Base could turn Coinbase into the NVIDIA of the DeFi world

Launched in August 2023, Base is a secure, low-cost Ethereum Layer 2 solution built to scale Coinbase's on chain user base for faster transactions. Coinbase's vision is to decentralize Base and create a global open cryptocurrency ecosystem, leveraging the security of the Ethereum Primary Network and making it easily accessible to everyone.

According to Coinbase's Q1 report, volume on Base surpassed its competitors, especially after the implementation of Ethereum's Dencun upgrade. DeFi exchanges on Base have seen volume surpass $1 billion per day, bridging the gap between volume on Coinbase's main centralized exchange, which houses nearly 250 coins. electronically traded.

The Dencun upgrade has significantly enhanced performance on Base. In a short period of time, Base has experienced a spike in volume and daily revenue, surpassing competitors such as Optimism and Arbitrum . The upgrade reduced costs for Layer 2 scaling chain like Base and led to a spike in user engagement and volume .

Since the upgrade, Base has consistently processed more than 3 million daily transactions, significantly increasing fee revenue. If this pace is maintained, Base has much greater growth momentum. Since the Dencun upgrade, the fees collected by Base have surpassed other Ethereum scaling networks.

The spike in Base's revenue is due to its support of DeFi protocols, with around 250 protocols currently active on the network. Its impressive market share increase in such a short period of time illustrates Base's potential and reinforces the possibility that Coinbase can become the NVIDIA of DeFi as a long-term industry leader.

Coinbase Custodial Fee Revenue is Expected to Increase

Coinbase's revenue from transactions is roughly half of its net revenue. The other half comes from non-transaction revenue, including subscriptions and services: stablecoin revenue, custody fees, blockchain rewards, and interest income. Non-trading revenue has grown strongly over the past two years and can offset fluctuations in trading revenue, which is highly correlated with cryptocurrency prices.

Coinbase is the custodian of eight of the 11 new Bitcoin ETFs launched on January 10. These ETFs reached nearly $60 billion in Assets Under Management in the first quarter of 2024. Coinbase also counts fees for assets being deposited.

As Assets Under Management in these ETFs increase, Coinbase's custodian fees will also increase. Coinbase custodial fee revenue was $19.7 million in Q4FY2023. After launching the Bitcoin ETF in mid-January, Coinbase's revenue from custodial fees increased 90% to $32.3 million.

Cryptocurrency custodians have a similar Vai to banks in traditional finance – settling transactions, managing regulatory reporting, and storing and managing customer assets. However, for the cryptocurrency market, the process is more complicated because it is more specific to digital assets. Additionally, technology, security, and storage requirements vary.

The facility offsets future declines in volume

While Base has the potential to become Coinbase's top revenue contributor, it will likely take a long time to expand. The additional revenue stream could help Coinbase's stock price loosen its correlation with future cryptocurrency prices.

Overall, there is still huge potential for cryptocurrencies to grow thanks to the 11 US Bitcoin ETFs. Likewise, six Bitcoin and Ethereum ETFs launched in Hong Kong in April, and the Australian Stock Exchange may also approve the first Bitcoin ETFs before 2025.

These factors are likely to provide consistent support for the cryptocurrency over the long term, which will benefit Coinbase's trading and non-trading revenues. While falling cryptocurrency prices could hurt Coinbase's stock price in the short term, Coinbase's revenue diversification will likely result in stronger stock price growth in the long term.

Outlook for the second quarter

One of the main price driving factors is that the Bitcoin halving event has ended. The prospect of cryptocurrency returning revolves around macroeconomic factors such as interest rates, inflation, and market direction. stocks and geopolitical tensions. The Federal Reserve's “higher for longer” stance is one of the catalysts that could create risk aversion in markets and put downward pressure on risky assets. .

Coinbase issued a helpful note for Q2 2024, but warned that results will depend on cryptocurrency prices. Since Bitcoin peaked in mid-March, volume have declined and the second quarter will likely be weaker than the first, especially if cryptocurrency prices continue to slide.

In the long term, Bitcoin's bull run will continue. Higher prices are possible. But in the short term, market weakness may appear soon.