Coinbase Layer-2 Success Shows Power of Marketing Over Cutting-Edge Tech

It’s quite impressive that Base has managed to reach the second position on L2Beat’s industry leaderboard, holding an 18% market share among 74 active layer-2 networks. Arbitrum One leads with a 40% share, but Base surpassed older projects from well-respected development teams, such as Starknet, Polygon, and Optimism themselves.

Layer-2 networks are constructed to process transactions quicker and at lower costs compared to the primary Ethereum blockchain. These networks employ a “sequencer” system to group transactions together before recording them, or settling, on the main blockchain – similar to how records are signed in a county clerk’s office. Often called rollups, layer-2 solutions have become essential components in the broader scaling strategy for Ethereum’s ecosystem, envisioning a future where an increasing, if not most, financial activities occur on digital rails.

In fact, the competition for dominance in blockchain technology, similar to many other industries, heavily depends on marketing skills and a substantial financial resource for customer acquisition – not just the one with the most advanced technology. Coinbase has played a significant role in boosting Base’s growth by leveraging its advertising efforts and promotional events, such as the recently concluded “Onchain Summer.

The question arises as to whether this activity can continue long-term. Are the users genuine and require the functionality provided on the blockchain, or are they simply exploring different protocols on Base out of curiosity? Do they exploit short-term promotions and quests for quick profits in crypto, or are they consistently using the system with the aim of eventually earning token rewards?

On Monday, the company announced through a press statement that more than 2 million distinct digital wallets took part in their three-month long “Onchain Summer” event this year (in contrast to approximately 268,000 in 2023), generating over $5 million in mint earnings for creators.

I was truly astonished by the outcomes we witnessed,” I shared in an email as a researcher at Coinbase. The participation of 2.2 million unique digital wallets was approximately eight times greater than what we observed last year, and it surpassed our internal forecasts more than double-fold. As the leader of Base, a division within Coinbase overseeing protocol development, I joined the company in 2017 as an engineering manager before transitioning to my current role in 2021.

Data from an independent blockchain source indicates expansion at Base, as evidenced by a graph from token data provider Token Terminal which demonstrates a speedup in the network over the past few months, contrasting with a decline observed in other layer 2 solutions.

By looking briefly at Coinbase’s latest quarterly report submitted to the U.S. Securities and Exchange Commission, it is evident that they allocated over $165 million for sales and marketing from April to June this year, which represents a significant increase compared to the same period last year, being more than twice as much.

In the initial three months of 2024, Coinbase recorded $52.5 million in income from “other” transactions, which encompasses the fees they gathered under the name “sequencer fees.

Memecoin madness

According to Rob Hadick, a general partner at VC firm Dragonfly, Base has shown strong competition against Solana, a fast and cost-effective layer-1 blockchain rival to Ethereum, as well as other Ethereum layer 2 solutions. This is particularly noticeable in the area of decentralized finance (DeFi) applications such as swapping unusual assets and money markets.

According to Hadick, in terms of daily active addresses and transactions, Base has surpassed most other Layer 2 solutions. Furthermore, for several significant DeFi metrics such as Total Value Locked (TVL) and sequencer fees, the project now ranks among the top five.

What exactly propels traffic in this case? An in-depth examination of Base’s prominent DeFi protocol, Aerodrome Finance, reveals that the majority of the key markets, excluding stablecoin exchanges, are trading pools linked to memecoins. This kind of activity is known for its volatility, and traders of memecoins have a reputation for being quick to shift platforms.

In a message, Hadick noted that among the top five tokens traded on Uniswap, two are memecoins. This is similar to Solana, which has thrived in the long-tail token trading markets, with an increasing number of young users showing interest in speculating on memecoins.

As an analyst, I can attest that one factor propelling Base’s success is the seamless transfer of tokens from Coinbase, achieved through a user-friendly smart contract wallet. This process eliminates the necessity for intricate seed phrases and simplifies transactions compared to other wallets.

Hadick stated that the smooth transition from Coinbase to Base eliminates additional steps for many retail investors who are new to decentralized finance (DeFi) and are interested in on-chain activities, making it simple for them to join this sector.

According to Oskari Tempakka, who leads growth at Token Terminal, the success of the partnership between Coinbase and Optimism lies in their solid foundational aspects. As a U.S.-listed cryptocurrency exchange, joined with Optimism’s wide reach and proficiency in areas such as decentralized governance, they form a powerful team.

According to Tempakka, the combination of “Base is strategically advantageous as it utilizes Coinbase’s reputation, reach, and collaborations.