There's no denying that the crypto market downturn last year and the ensuing crypto winter have taken a huge toll on Coinbase Global (COIN +0.19%), which is down significantly from its 52-week high of $206.79.
Although Coinbase reported better-than-expected quarterly revenue and earnings in February, the underlying metrics look bleak: Transaction volume is down, monthly active users are down, and there is no clear signal yet that retail investors are ready to return to the Coinbase platform.
That's why I'm excited about the latest innovation from Coinbase: the launch of a new Layer 2 scaling solution for Ethereum (ETH 0.75%) called Base. This could be a way to change the narrative around Coinbase and convince investors to rethink the company's growth prospects.
What is Base?
According to Coinbase, Base will be a secure, low-cost, and developer-friendly blockchain enabling anyone to build decentralized applications on top of it. It was built using open-source blockchain technology from Optimism (OP +13.45%), another Layer 2 scaling solution for Ethereum. Unlike Optimism, however, Base will not have a native token of its own.
Image source: Getty Images.
Coinbase has also signed up to become a core developer of the Optimism blockchain ecosystem, and has said that Base will eventually be interoperable with Layer 1 blockchains other than Ethereum, including Solana (SOL +3.25%). In fact, Coinbase says the ultimate vision is for Base to become part of a "superchain" that completely integrates Optimism, Base, and a host of smaller Layer 2 scaling solutions.
What are Coinbase's plans for Base?
There's clearly a bigger picture here. Why would Coinbase go to all the time and expense of building an entirely new Layer 2 blockchain if there weren't some future payoff? One idea is that Coinbase could use Base to create a decentralized finance (DeFi) portal for large institutional investors.
In layman's terms, Coinbase would carve out a specific portion of the Base blockchain for customers and make it entirely safe and easy for large institutional investors to access new DeFi protocols.
From my perspective, this move into DeFi could eventually be as big as the BlackRock (BLK +0.00%) partnership that Coinbase signed last year. As part of that partnership, Coinbase made it possible for large institutional investors to buy and sell crypto safely and easily.
So the Base blockchain project can be viewed as a potential sequel to this. First, give large pension funds and endowments the ability to buy and sell crypto safely, and then make it possible for them to access the full world of decentralized finance.
NASDAQ: COIN
Key Data Points
This could be really big. People think about Coinbase as a retail crypto company, but its future could be with institutional investors. In short, people might be dumping Coinbase stock now because they've given up on the cryptocurrency exchange ever bringing back its retail client base. But they could be overlooking the fact that Coinbase is making a huge play to attract deep-pocketed institutional investors.
Reasons to be skeptical
That being said, there are plenty of reasons to be skeptical about Base. One reason is that Base is still in "testnet" mode, which means it's not yet ready for prime time. And there are plenty of Layer 2 scaling solutions out there, including Polygon (MATIC +0.00%), so developers might not be willing to move over to Base.
Another reason is that it will take time to build any type of DeFi portal for institutional investors, so there won't be any immediate results to see. This might explain why Coinbase shares are only up 6% since the unveiling of Base.
Lastly, Coinbase doesn't exactly have a stellar track record of launching big, splashy products. Remember when the launch of a non-fungible token (NFT) marketplace on Coinbase was supposed to be a big deal? Nearly one year later, there's already talk of Coinbase pulling the plug on the project.
Should you buy Coinbase?
If you think Base has the potential to be big, there are several different options available. You could choose to invest in Coinbase as a long-term growth play, confident in the ability of Base to bring in serious institutional money to the Coinbase platform.
Or you could choose to invest in the Optimism ecosystem, which is what a lot of people are doing right now. Optimism tokens related to decentralized finance are on fire right now.
Or, you could choose to invest in Ethereum. Layer 2 blockchains such as Base and Optimism would not exist if it were not for Ethereum, which is still the premier Layer 1 blockchain for DeFi.
At the end of the day, I'm with Cathie Wood of Ark Invest when it comes to Coinbase. I think the company is still a great long-term play on the future of the crypto industry. The launch of Base might not produce immediate results, but it's the long-term vision here that's so attractive if you're investing for the long haul.
