By Not Staying Chain-Agnostic With Base, Could Coinbase Make a Wrong Bet?

Coinbase has become the most trusted name in crypto through a careful strategy that has allowed it to navigate both regulatory peril and crypto’s tribal rivalries. 

The exchange is already a crypto juggernaut, serving both retail and businesses, capturing revenue from all corners of the crypto world. And it’s making a big push to get more users onchain. 

With this week’s earnings report, their focus on the future Everything Exchange and the Base App made it clear that they’re eager to create new types of products and services that haven’t existed before.

But I couldn’t help but notice that their foray into this space isn’t as chain-agnostic as it’s traditionally been. In fact, they’ve been touting the benefits of how Base App and Coinbase itself will integrate Base dapps such as its DEXes. In the earnings call on Thursday, CEO Brian Armstrong even mentioned that Coinbase had made a venture investment into Base DEX Aerodrome and was set to benefit as activity there picked up. 

Given that Solana was the center of last year’s crypto mania, I wondered how risky this move is, and whether Coinbase could be stuck on the sidelines of any next craze. 

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By Not Staying Chain-Agnostic With Base, Could Coinbase Make a Wrong Bet?

As a neutral player, Coinbase has historically captured the lion’s share of crypto activity. But by being opinionated with the Base App, it risks losing out as users move onchain.

Coinbase’s Q2 earnings report Thursday encapsulated the opportunities and challenges that the company faces as it attempts to move aggressively to create an onchain economy — and profit from it.

Its Q2 earnings disappointed, with the $5.14 earnings per share being short of analysts’ expectations. But, as Jeff Roberts at Fortune pointed out, the $1.4 billion in net income was driven primarily by unrealized gains in its investment in Circle, which IPOed in June, and in its crypto holdings, namely Bitcoin, which reached a new all-time high — and given that the company has similar investments, it could see such boosts in income in future quarters as well. (In fact, in an interview with Unchained editor Steven Ehrlich, Coinbase analyst Owen Lau at Oppenheimer, said the drop in $COIN post-earnings seemed like a buying opportunity.)

The 13-year-old company, which joined the S&P 500 in May, has been a major driving force in building the crypto industry, but it, along with the greater sector, is at an inflection point. So far, growth has largely been fueled by speculative trading, but as is apparent from both business and regulatory headlines that include household names like JPMorgan, Shopify, Schwab, Robinhood, and others, the next phase is about adoption and usage. And that will lead to the step beyond: an onchain world that has nabbed the majority of the world’s population the way the internet has. 

Coinbase is already positioning for this next chapter (and, one could say, even enabled it to happen, with its political donations last year). The two big answers it has so far for this next period are the Everything Exchange, which it plans to make a platform for every tradeable asset, running 24/7, and the Base App, which is in beta after its unveiling at a July event. But with so many players entering the same arena, the question remains how Coinbase will fare in this heightened competitive space. 

In an Investor Relations Roundtable call on Friday, CEO Brian Armstrong acknowledged the potential battles it faces against “better competitors,” as he put it. He said, “It's created a real sense of urgency with the team. We've called them ‘code yellows’ internally, but essentially I gave a speech at the last town hall and said. ‘It’s wartime, right?’ The good news is we've laid the trail; the bad news is competition's coming in. We can't stay static here.”

Despite the awareness, it is possible that Coinbase’s Base App’s current iteration may not position it best to capitalize on the growth of the onchain economy.

Neutral vs. Opinionated

So far, Coinbase’s business model has been to remain mostly neutral and provide a platform for retail users who want to buy or trade crypto assets or start engaging in crypto activities like staking, borrowing, or earning, and to service institutions who want to do the same. Hence, the growth in its recurring revenue from its crypto as a service line, USDC, and custody, the last of which reached a record high of $245.7 billion in assets under custody. This is why the company’s recurring revenue was only down 6% quarter over quarter compared to down 39% for transaction revenue. 

The Everything Exchange would fit that bill — similar to today’s Coinbase trading platform, it would be asset-agnostic, and also a huge opportunity for Coinbase. Even if 3% of all equities ($127 trillion) moved onchain, it would be massive for Coinbase. “There's a lot of people in foreign countries that don't have easy access to the US stock market. Wealthy people can usually find some way to open a brokerage account, some offshore brokerage or whatever, but most people in these countries can’t. So it might be net new additive,” Armstrong said in the roundtable.

However, Base is the first major business line that is more opinionated. In the roundtable call, Armstrong said, “Think of Base and Coinbase as different brands. So Coinbase is neutral. We are chain-agnostic, so we're going to support every chain that our customers want. Base is its own separate organization and has a different brand for a reason.” 

As the onchain part of Coinbase’s business grows, that could prove to be an issue. For large chunks of 2024 and into early 2025, Solana actually dominated dex volumes (light brown in the middle of the graphic below). While the craze often did spill over onto Base, with copycat activity like memcoins and AI agents showing up on the Ethereum L2, Coinbase, which has been criticized for poor and slow servicing of Solana, was cut out of more of the crypto mania du jour than it had been in previous cycles. 

Although Armstrong said the Base App will be “Base first,” meaning it will prioritize the Ethereum layer 2, he also said, “they also have their own plans by the way, to make Base into a hub that has interoperability to Solana and other things.” It remains to be seen how well those plans are executed, and if The Base App can capture any organic crypto activity that springs up elsewhere. 

Organic vs. Top Down

Crypto’s history so far has been mostly a grassroots phenomenon — and yet it still has snowballed into a nearly $4 trillion industry. Coinbase positioned itself well during this Wild West period, gaining the trust of users and institutions. But now, users will expect crypto to offer them more real applications besides speculation and even payments, since many payments work quite well even without blockchains. 

This is where the Base App, initially called Coinbase Wallet, comes in. The new version, unveiled in mid-July, has a wait list of 700,000+ people and is the first attempt at a super or “everything” app in the U.S. In this closed period, Coinbase has been partnering with content creators, who have traditionally made little money from social media platforms, to get them started and hooked on profiting. 

Base and its head, Jesse Pollak, have already been promoting onchain activity in various ways over the last few years, and some of that has garnered criticism. Even as Base and Pollak have been trying to foster creator content on the Base App with applications like Zora, others have weighed in, calling Zora and similar apps “a toxic hypercasino hellscape.”

And despite Base’s best efforts, it doesn’t look like all their promotion has helped Zora. Both active accounts and new users are near lows. While this may change once more Base App users are let in off the wait list, the question remains how much of Coinbase’s pushing will have an effect, compared to the highs that crypto can see during true manias. 

Not that this matters for Coinbase’s bottom line — yet. Analyst Owen Lau of Oppenheimer said of Base in an interview with Unchained, “From a revenue contribution standpoint, no, [Base is] still not material — maybe less than maybe 1% or so to Coinbase revenue … but it could be getting much bigger, maybe in three, five years or so.”

During that time, Coinbase looks well-positioned to capture a healthy portion of institutional activity, B2B services, and even trading volumes, especially with its moves into derivatives, including crypto’s most popular trading product, perpetuals, and its acquisition of Deribit, the world’s largest crypto derivatives exchange.

However, in an interview with Unchained, Anil Gupta, vice president of investor relations, said, “As a crypto native company, everything we do is in service of growing the onchain economy and onchain adoption.” This means Coinbase’s north star is less the B2B products like crypto as a service, and more getting retail onchain.

The question remains whether their efforts to foster particular types of activity onchain, and on a particular chain, rather than provide chain-agnostic picks and shovels, will bear fruit or end up being the wrong bet. 

🎥 Want to go deeper on this week’s earnings?

Check out these two interviews, where Steven Ehrlich breaks down the numbers and strategies behind the headlines:

• Owen Lau of Oppenheimer on Coinbase’s earnings miss, stablecoin strategy, and bank partnerships.

• Lance Vitanza of TD Cowen on Strategy’s $10B quarter and Bitcoin treasury game plan.

They are also available on X: COIN and MSTR.

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• How Michael Saylor Will Keep Strategy From Ever Being Liquidated of Its Bitcoin

• Coinbase and Robinhood Are Converging, but Who Wins the Onchain Fintech War?

• Hyperliquid Reignited Interest in Crypto Perps. Can Coinbase and Robinhood Capitalize?