Is Coinbase's New Layer 2 Network Base A Rising Star Or Just Hype?

Coinbase has rolled out its Layer 2 network, Base, built on Ethereum. This platform has quickly gained traction with 100,000 users and hosting more than $200 million in assets.

The impressive adoption of Base in the crypto sector is already evident. 

Needham analyst John Todaro initiated a Buy rating on Coinbase Global Inc (NASDAQ: COIN) with a price target of $120.

According to the analyst, Base is gaining momentum due to its user-friendly design and the innovative projects it hosts.

Nevertheless, transitioning between Layer 1 network Ethereum and a Layer 2 Ethereum network such as Base can be challenging. Most of Base's audience are currently those well-acquainted with the crypto world, and it might take some time before it resonates with the average Coinbase user.

Assets linked to the Base network have crossed the $230 million mark.

To interact on Base, users need to transfer assets from Ethereum Layer 1, allowing them to tap into Base's suite of decentralized applications that guarantee quick transactions and minimal fees, as opposed to the pricey Ethereum Layer 1.

Base is still nascent, considering the total value it has attracted. It represents a mere 2% of the total value stored across the top five second-layer solutions, implying room for growth.

The financial implication for Coinbase stems from the sequencer margin on Base, which is the spread it earns from its operations on the network. With plans for decentralization, Base might host multiple node operators distinct from Coinbase itself. Currently, Coinbase is the sole node operator.

Assuming Base maintains its current trajectory, projections suggest Coinbase could earn more than $60 million in annual revenue, translating to approximately $46 million in gross profit, assuming the sequencer margin remains consistent at around 75%. 

And, in an optimistic scenario, if Base manages to amplify its current activities tenfold, the daily transaction count could parallel that of Binance Smart Chain.

On Aug. 9, Coinbase launched the mainnet for Base, catering to users keen on interacting with applications created by developers. Designed similarly to other Layer 2 solutions, Base seeks to reduce the costs affiliated with Ethereum Layer 1 transactions.

Coinbase initiated an Onchain Summer campaign to boost Base's activities, offering more than $300,000 in incentives to budding adopters and creators for first month, post-launch.

Contrasting with Coinbase's NFT venture, which found itself racing with platforms like OpenSea and FTX, Base's introduction stands as a pioneering move. This debut has won acclaim from crypto enthusiasts, underscoring Coinbase's innovative approach.

Despite this, revenue from Base is still in its formative stage, contributing around $2 million. Consequently, its impact on the overall revenue remains uncertain at this juncture.

JMP Securities analyst Devin Ryan also weighed in, reiterating a Market Outperform rating and a $107 price target.

COIN Price Action: Coinbase shares closed lower by 4.35% at $75.76 at publication Thursday.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.