What is Coinbase Layer 2 Network (Base)?

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What is Coinbase Layer 2 Network (Base)?

What is Coinbase Layer 2 Network (Base)?

Summary

  • Base is a Layer 2 optimistic rollup developed by Coinbase on the Ethereum blockchain in partnership with Optimism to provide a low-cost, secure, and Dapp-friendly ecosystem for its users.
  • Base is very compatible with Ethereum Virtual Machines (EVM) wallets, combined with its open-source nature, making it easily compatible for developers to use their Ethereum Smart Contracts to build various decentralised applications like DeFi, etc.
  • Base leverages Coinbase’s extensive ecosystem and has various use cases like payment systems, token swaps, liquidity provision, token bridging, and Dapp & DAO launches.

Table of Contents

Introduction

On the 2nd of February 2023, Coinbase launched the Base Network on its TestNet. After garnering almost a million users on its TestNet, Coinbase launched the Main net of the Base Network on August 9th, 2023.

Base is a Layer 2 optimistic rollup developed by Coinbase on the Ethereum blockchain in partnership with Optimism (the world’s second-largest Layer two protocol).

Ever since its launch on Main net, Base has garnered over one million users and has over $390 million in its total value locked (TVL). This has put the Network in the number 8 ranked chain regarding TVL and has overtaken Cardano and Solana.

This move by Coinbase makes it the first Centralised Crypto Exchange to launch its own Layer 2 protocol on the Ethereum Network. However, the goal of Coinbase is to use the Base Network to attract a larger audience and bring more users into the Web3 space.

In this article, we will deeply dive into Base: how it works, its outlook, and more.

What Are Layer 2 Networks?

In the crypto space, Layer 2 networks have become increasingly important as they are designed to solve the deficiencies of major blockchain networks like Ethereum and Bitcoin.

Layer 2 networks are protocols built on an existing blockchain network like Ethereum. They aim to improve the scalability, efficiency, and transaction speed of the primary blockchain networks they are built on.

Today, Ethereum is the most known blockchain to support various layer two networks like Arbitrium, Optimism, and now Base.

Examples of Layer 2 networks include:

  • Rollups: They work alongside the mainchain by combining multiple transactions into one, thereby boosting efficiency. Examples of rollups include Optimism, Arbitrum, zkSync, and Loopring.

  • Sidechains: These are secondary blockchains that run alongside the main chain. They’re quicker, but may compromise some security for efficiency.

Examples include Polygon, xDai, Binance Smart Chain, and Skale.

  • Channels: These layer-two solutions facilitate direct, low-cost transactions without broadcasting to the main chain—examples: Lightning Network, Raiden Network, Connext, and Celer Network.

These Layer 2 solutions address blockchain scalability while upholding security and decentralization.

What is Base and How Does It Work?

Base is an open-source Ethereum layer two network that leverages the OP stack, the same foundation that powers the Optimism protocol. As an L2, it enhances transaction speed, cost, and scalability while preserving security.

Base is very compatible with Ethereum Virtual Machines (EVM) wallets, combined with Its open-source nature, making it easily compatible for developers to use their Ethereum Smart Contracts to build various decentralised applications like DeFi, etc.

Base is slowly expanding its ecosystem and contributing to Ethereum’s development with the aim of a more accessible and transparent financial Web3 ecosystem.

How is Base Layer 2 Protocol Different?

Base stands out in the crypto space for several reasons:

  • Trusted Partnership

Base benefits from a robust foundation from Coinbase (a leading global exchange), and Optimism (a prominent Layer 2 solution provider).

  • Scalability and Efficiency

It utilises optimistic rollups to batch multiple transactions and work on them off-chain before sending them back to the mainchain, thereby enhancing Ethereum’s scalability and reducing congestion on the blockchain.

  • Broad Compatibility

Base is compatible with all Ethereum wallets and smart contracts, thereby providing seamless possibilities for developers to build decentralised applications, decentralised finance, and non-fungible tokens at large.

  • Vibrant Ecosystem

Base is integrated with Coinbase’s vibrant ecosystem, which comprises over 100 million users and over $110 billion in assets, facilitating seamless user onboarding and interaction.

Use Cases of Base

Base has the following use cases:

  • Payment Apps: Base enables instant and cost-effective cryptocurrency transactions, even across different blockchains like Ethereum.
    Note: Users of the base network can easily bridge ERC-20 tokens between Ethereum and Base. When ERC-20 tokens are being bridged from Base to Ethereum, it takes users seven days to complete whereas Ethereum to Base bridging only takes a few minutes.
  • Token Swaps: These refer to the direct exchange between different cryptocurrencies without the need for centralised exchanges.
  • Liquidity Provision: Base allows users to provide liquidity for various decentralised applications and protocols on Ethereum, potentially earning interest or rewards.
  • Token Bridging: It permits seamless transfer of tokens between different blockchains, expanding accessibility and utility.
  • Launching DAOs: Base provides a platform for creating and managing decentralised autonomous organizations governed by smart contracts and community votes.

Strengths and Weaknesses of Base

Base is a layer two network designed to leverage Ethereum’s EIP-4884 proto-dank sharding proposal, which was developed by the Ethereum team in 2022.

By leveraging the proposal, Base is saving and cutting down transaction costs for Ethereum users. Although this network has a good number of benefits, it also has its weaknesses.

Let’s discuss the strengths and the shortcomings of the Base network.

Strengths

  • Enhanced Transaction Efficiency: Base is an optimistic rollup that streamlines transactions for quicker processing with reduced congestion and gas fees on Ethereum.

  • Broad User Access: Integration with Coinbase’s extensive user base and assets facilitates easy adoption and interaction with the Layer 2 network by its users.

  • Diverse Use Cases: Base has many use cases, including payment systems, token swaps, liquidity provision, token bridging, and Dapp & DAO launches.

Weakness

  • Dependency on Optimism: Base relies on Optimism as its Layer 2 solution provider, potentially facing competition and scrutiny from other solutions.
  • Centralisation Issues: This is a primary concern around the network as Coinbase is the only sequencer node on the Base network. This means that Coinbase has total control of every transaction on the network and can determine the fees to process transactions.
  • User Adoption Challenges: This is a result of the long withdrawal period on the network. Users of the Base network have to wait for seven days before transactions are approved.

This is because Base makes use of Optimism’s fraud-proof scheme. Within seven days, users can challenge transactions and submit potential fraud proof. This is a security measure but can potentially slow down the user adoption rate on the network.

What's Next for Base?

Coinbase has many interesting plans in store for its L2 network:

  • Expanding the Ecosystem

Base’s vision involves becoming an open ecosystem welcoming decentralised applications (DApps), decentralised finance (DeFi), and non-fungible tokens (NFTs). It has recently partnered with notable DApps like Aave, Sushiswap, and Magic Eden.

Further integrations with diverse protocols from blockchains like Solana, Polygon, and Binance Smart Chain are on the horizon. Users should expect seamless fiat onramps and enhanced Coinbase product integrations to empower developers.

  • Contributing to Ethereum

As part of Optimism’s OP Stack, Base actively contributes to Ethereum’s evolution. Coinbase currently serves as a core developer within the OP Stack community, working to enrich the ecosystem through the Base network.

Additionally, Base’s contribution to EIP-4844 (proto-dank sharding) aims to reduce Layer 2 transaction fees on Ethereum by a substantial factor.

Conclusion

Base has attracted significant attention since its launch and managed to hit a total of over one million users as of September 2023.

As the first blockchain launched by a publicly traded company, Base has opened broader possibilities to attract a bigger audience, and eventually introduce more people to the world of Web3.

This could drive mass adoption, as the network seeks to be more decentralised and more resistant to censorship in the coming years.

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