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Interpreting Base and Linea: Why are crypto giants like Coinbase and ConsenSys laying out their strategies for Layer2?

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Why did the crypto giant choose to proactively embrace native Layer2 at this time?

Original Title: "Interpreting Base and Linea: Why are Crypto Giants such as Coinbase and ConsenSys Laying Out Layer2?"

Source: ChainCatcher

By 2023, the Layer2 concept will fully explode. As dozens of Rollup Layer2 solutions emerge, major players in the crypto industry such as Coinbase and ConsenSys are also entering the competition by deploying native Layer2 networks.

Since the birth of Bitcoin, public chains have always been the most native holy grail of encryption, and countless teams have been eager to build a blockchain that can accommodate the next billion users. With the maturity of solutions such as Rollup and modularity, more and more institutions can also quickly deploy Layer2 blockchains.

Coinbase is the world's first publicly traded cryptocurrency trading platform. Its fund, Coinbase Ventures, has invested in over 340 cryptocurrency projects, and even former employees of the company have built more than 10 well-known cryptocurrency organizations, such as Polychain, Paradigm, and dYdX. ConsenSys, on the other hand, is a giant in the field of cryptocurrency infrastructure, with products that are more focused on the underlying technology, such as MetaMask.

Why did the encryption giants choose to actively embrace native Layer2 at this time? Are they following the trend or laying out the next bull market? What are their respective advantages and disadvantages? This article will elaborate on the coincidence of Coinbase and ConsenSys launching Layer2 blockchains, their operational strategies, and explore the logic behind them.

Coinbase and ConsenSys: Why are they launching Layer 2 networks?

Even though they belong to different tracks, Coinbase and ConsenSys are facing similar situations at present: insufficient product innovation and a lack of ability to capture value in 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. The blockchain will use Coinbase's products, users, and assets as seeds, with the goal of becoming an open ecosystem. The development process is as follows:

2022-02-23 Coinbase announced the launch of 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 Base Ecology Fund announces four major support directions: stablecoins that can track inflation rates, reputation platforms, limit order book (LOB) platforms, and safer DeFi products.

2023-04-01 Layer2 Network Base announced that it will launch Base 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 lower than Uniswap's for two consecutive months. Jesse Pollak, the protocol lead at Coinbase, stated at the ETH Denver conference that product innovation may not have been a top priority, but the company is now aiming to change that. The launch of Base is actually an investment in "creating a platform" to enable developers to build more useful products.

Linea is a type of zk-rollup designed by ConsenSys R&D and operated by ConsenSys. It allows developers to deploy any smart contract, use any tool, and develop just like building on Ethereum. Its features also include 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 has launched the "Type 2" zk-EVM specification, allowing developers to deploy any smart contract.

2022-12-14ConsenSys launches zkEVM private testnet beta version.

2023-01-10 ConsenSys zkEVM Beta testnet has opened registration to external users.

2023-03-28 ConsenSys zkEVM has been renamed to Linea and the testnet is now fully open for testing.

Before the launch of Linea, ConsenSys had 5 products: MetaMask, Diligence, Quorum, Infura, and Truffle, with MetaMask being the most successful. With the rise of account abstraction wallets, the wallet landscape will undergo huge changes, and ConsenSys may also feel the crisis of sitting and eating the mountain. MetaMask's bumpy user experience and Swaps product's high transaction fees of 0.875% have made MetaMask the "dragon" in the cryptocurrency wallet race.

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

Coinbase and ConsenSys have also been affected. On January 10, 2023, Coinbase announced a 20% layoff, involving about 950 people. On January 18, 2023, ConsenSys laid off 97 people. It is worth noting that this period is also when Base and Linea are preparing to launch, it seems that Coinbase and ConsenSys have made up their minds to consider cost-cutting and efficiency-increasing strategies.

Along with the cryptocurrency crash comes the challenge of compliance. There is a belief that regulators intentionally allow cryptocurrency projects to develop during bull markets, and then harvest the cryptocurrency giants during bear markets.

Coinbase is a long-term fighter in the encryption industry and has had multiple debates with the US SEC on the issue of "whether digital currency is a security." ConsenSys has also sent letters to the US Treasury Department stating industry risks and providing regulatory suggestions. From this perspective, the story of brave warriors fighting evil dragons continues.

For the above dilemma, Layer2 may be an excellent solution. Firstly, modular rollup infrastructure such as OP Stack and Celestia have proven effective, allowing anyone to quickly deploy decentralized blockchains without the cost of bootstrapping a new consensus network. Additionally, Layer2 can operate without issuing tokens, which is applicable to legal compliance. Adam Cochran, a business analysis professor in South Carolina and DeFi researcher, believes that Coinbase has unparalleled influence on users and partners, and although they claim not to issue tokens, as a Rollup, transaction fees go to the sorter, with an expected $400 million per year.

Operation Strategy

Base

Coinbase has over 110 million verified users and holds assets worth over $80 billion. Therefore, Base can easily bridge the gap between CeFi and DeFi with the backing of Coinbase. The integration between Coinbase exchange, Coinbase Wallet, and Base could be a solution to bring real users into DeFi.

At the same time, Base does not need to worry about on-chain revenue, which is conducive to becoming a fertile ground for more DeFi products. According to data analyst Panda Jackson's survey, only 26 out of 57 Base launch partners (45%) were invested by Coinbase Ventures, and most of the partners already have tokens and well-functioning products.

In addition, any existing products integrated with Coinbase and Base will maintain their original KYC/AML measures. CEO Brian Armstrong stated that there are currently some centralized components in Base, but over time it will become more decentralized. Coinbase is responsible for transaction monitoring, and Base's statement that they currently have no plans to issue new tokens confirms this.

Linea

ConsenSys controls a huge amount of encrypted traffic, mainly including user-oriented MetaMask and developer-oriented Infura and Truffle, which can be regarded as the standard setters for Ethereum products and services. In the article "Reflections, Reviews, and Beliefs Six Years After Entrepreneurship" published by MetaMask co-founders Aaron Davis & Dan Finlay, it was mentioned that by 2022, MetaMask's monthly active users had exceeded 30 million. E.G. Galano, co-founder of Infura, also revealed in an interview that Infura has registered more than 400,000 developers and can handle over 8.5 billion blockchain network requests per day.

With the network effect, Linea makes it easy for users to experience a smoother encrypted experience. Linea will integrate MetaMask and Truffle locally, and Infura will also launch a decentralized infrastructure network in 2023. At the same time, Consensys will adjust to a more regulatory-compliant state. In November of last year, ConsenSys updated its privacy policy on its official website, stating that when users use Infura as the default RPC in MetaMask, corresponding IP addresses and ETH addresses will be collected.

In addition, Joe Lubin, the founder of ConsenSys, was also a member of the original founding team of Ethereum. At that time, he proposed to use the C++ programming language to write the architecture of Ethereum and was mainly responsible for the technical part. Joe Lubin's relationship in the Ethereum ecosystem may become Linea's secret weapon.

Conclusion

With the successive launch of Base and Linea, it indicates that the blockchain infrastructure is gradually improving, and Layer2 is about to enter a stage of diversified development. On the other hand, it can also be seen that Coinbase and ConsenSys are beginning to try to solve the current dilemma and expand platforms that can accommodate more users.

As a centralized organization's public chain, Base and Linea may face the biggest challenge in governance mode. Previously, Binance, OKX, Crypto.com, and others have developed their own ecological public chains, but they seem to have not been accepted by members of the native communities of cryptocurrencies such as Bitcoin and Ethereum. Even after Arbitrum announced the airdrop and was governed by DAO, its foundation was exposed to scandals of selling tokens without going through the governance process, and the core team seems to have not "adapted" to the decentralized way of operation.

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