March 01, 2023

Coinbase Releases Its Own Blockchain Dubbed “Base”

Last week, we covered Coinbase’s Q4 earnings, and in a word, they were disappointing:

“Putting it all together, Q4 wasn’t the best showing for the ‘premier’ crypto exchange. The financials weren’t great, the earnings call was boring, and regulation continues to be a major factor.”

We also offered up a few possibilities for how they can turn things around by focusing on new business opportunities. This included acquiring a digital identities company, doubling down on SaaS revenue through Coinbase One, and more focus on its prime brokerage business.

And sure enough, less than one week after the earnings release, Coinbase released a new project to diversify their revenue. Only, it’s something we didn’t anticipate at all.

That something is Base, Coinbase’s own Layer-2 (L2) blockchain.

What Are L2s?
Layer-1 (L1) blockchains are the ones that we all know and love. Think Ethereum, Solana, and Avalanche.

The problem with L1s is that they all fall short in either decentralization, security, or scalability, known as the blockchain trilemma. Using our previous examples, Solana and Avalanche lack decentralization, while Ethereum is famously unscalable.

This unscalability makes Ethereum basically unusable for everyone but whales during busy times, as gas fees (the cost of doing business) rise with congestion.

So, to solve this problem, people have developed L2 blockchains, which are built on top of Ethereum to improve scalability. What L2s do is take transactions, roll them up into a batch, and then send them to Ethereum. The result is much cheaper transactions on L2s.

Many people (including ourselves) believe L2s to be the future. We even wrote about it in our crypto trends to watch for in 2023 report.

“L2s, meanwhile, are some of the hottest projects on the market. Optimistic rollups Arbitrum and Optimism are home to some of the most innovative projects in DeFi, while zero-knowledge rollups (which many believe are the future) like Scroll and zkSync should be unveiled in 2023.

We would not be surprised to see Ethereum + its L2s reach greater than 75% crypto Total Value Locked (TVL) dominance in 2023.”

CoinBASE
Base is Coinbase’s attempt at an L2. Reading the official announcement, it looks like a pretty standard one, but there are some key things to point out:

There will be no BASE token. This makes sense as tokens are usually used by protocols that need to incentivize usage. Coinbase, with its 110 million users and $80 billion in assets, doesn’t have a usage problem. So, in its place, ETH will be the official token of Base, a bullish development for ETH holders.
Base is built using the Optimism OP Stack. What this means is that, for all intents and purposes, Base is a copy and paste of a fellow L2 – Optimism. More specifically, Base is the first participant in the Superchain, which is Optimism’s vision to scale Ethereum through a bunch of connected OP Stack chains. Coinbase throwing its considerable weight behind this plan is hugely bullish for Optimism. Learn more about OP in our writeup here.
Coinbase sees Base as a bridge, not an island. Their stated goal isn’t to lock Coinbase’s users on Base, but for Base to be a friendly entry point into DeFi. This means it’ll be easy for users to transition from Base to Optimism, Ethereum, and even other L1s like Solana. This is extremely bullish for DeFi, which has been in the dumps for over a year now. Even if just 5% of Coinbase’s 80 million users use Base, that’s still 4 million fresh DeFi participants.
At the start, Coinbase will be Base’s sole sequencer. A sole sequencer is the entity that actually sends the transactions to Ethereum. This would make Coinbase responsible for processing every transaction on Base. Considering that Coinbase complies with federal regulations, it is possible that Base is DeFi’s first KYC-only blockchain. If Base does take off the way Coinbase wants it to, it could be the first domino to fall in DeFi’s eventual shift from permissionless to heavily regulated.

Looking Ahead
Coinbase needed to make a splash, and they did so with Base. By creating a potential flagship blockchain, they also have created a place to build on-chain products. Who knows, maybe we’ll see a Coinbase decentralized exchange, lending platform, or an on-chain game in the future.

Anything is possible now, and this is great for Coinbase’s future.

Moreover, analysts are already suggesting that through Base and Coinbase wallet native swaps, the company could potentially be adding roughly ~$0.7 billion (bear market) – $7 billion (bull market) annually to its bottom line in profit. 👀

Overall, Base is a stroke of genius by Coinbase and the stock is up more than 11% since last week’s close.

New web3-native crypto tax software launches just in time for tax season

Every year, the crypto community faces one common nightmare — taxes. We pay hundreds of dollars for products that don’t work and spend days manually fixing transactions.

Well, this year is going to be different. Just in time for tax season, Awaken has launched the first tax software that can accurately handle DeFi and NFTs.

Awaken is 10x more accurate. They have best-in-class support for 25,000 tokens, NFTs, wallet transfers, liquidity providing, staking, bridging, and much more. It’s the only DIY software that captures all of your transactions and calculates the cost basis correctly.
Awaken is 10x faster. Their software learns as you use it. When you label 1 transaction, 30+ others can be automatically labeled for you, saving you hours of time.
Awaken is 10x easier to use. Crypto taxes can be complicated, but Awaken is designed to make the process easy for everyone.

It’s a fully anonymous product. You just sign up with an email and that’s it. They will never ask you to connect your wallet or type in your private key.

Claim up to $50 of free transactions (first 300 signups)

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Wormhole Hacker Counter-Exploited

Last February’s hack of the Wormhole bridge was an unforgettable moment. Not just because of the massive loss (120,000 ETH, worth $325 million, the 5th largest all-time), or because of its status as one of the first major blows of the (still ongoing) bear market, but because it was amazingly instantly refilled by trading firm and Wormhole investors, Jump Crypto.

At the time, most people assumed that Jump would write off the hacked amount and eat the loss. After all, they aren’t hurting for money. How could you when you made a cool $1.28 billion on Terra?

Well, it turns out that might not be the case after all.

In a stunning turn of events, Jump has counter-exploited the Wormhole hacker for the 120,000 ETH it lost.

Wait, what??

The Wormhole Hack
Wormhole is what is known as a bridge. Basically, it is a cross-chain protocol that allows users to transfer assets between blockchains. So, if you wanted to transfer money from Solana to Ethereum, you would use a bridge like Wormhole.

These bridges work great, but they are also prime targets for hacks and exploits as they typically hold a significant amount of assets. They also are controlled by a small set of validators, making them not super secure. In other words, bridges are like cat-nip to hackers.

And we’ve seen this play out time and time again, as bridges account for 3 of the 5 biggest exploits of all time.

In Wormhole’s case, all it took was a clever hacker noticing a bug in the code. This hacker used the bug to trick Wormhole into crediting them with depositing 120,000 ETH on Ethereum, allowing them to mint the equivalent in wrapped whETH (Wormhole ETH) on Solana, which they then ran off with.

Unfortunately for the hacker, they were noticed before they could get off-chain. Because of the blockchain’s public and transparent nature, this means that their stolen ETH was “marked”. There was now no way for the hackers to get to a centralized exchange to sell the stolen funds without it being confiscated.

So, they decided to screw around on-chain instead, even buying the dip at one point. Eventually, the hackers and their stolen ETH found their way to the lending protocol Oasis.

And this is where the counter-exploit happened.

The Counter-Exploit
The counter-exploit is a bit difficult to understand, so we’ll break it down in timeline format:

Oasis is controlled by a 4 of 12 multi-sig. Basically, it takes 4 admin votes for anything of note to happen in the protocol.
On February 16th, a whitehat hacker discovers a previously unknown vulnerability in the design of the admin multi-sig. The whitehat realizes this vulnerability enables a counter-exploit, and tells the Oasis team about it.
On February 21st, the High Court of England and Wales orders Oasis to “take all necessary steps that would result in the retrieval of certain assets involved with the wallet address associated with the Wormhole Exploit”. In other words, do what needs to be done to get the money back.
On February 22nd, in collaboration with Jump, Oasis uses the vulnerability to take the ETH out of the Wormhole exploiter’s vault and into a wallet controlled by Jump.

This is obviously a huge win for Jump, but we’re not as sure it’s a positive development for DeFi.

Two Wrongs Don’t Make A Right
DeFi was meant to be a place that is permissionless and censorship-resistant – a financial arena free from the influences of the rich and powerful.

If DeFi protocols are now removing money from people’s accounts because of court orders, as is the case with the counter-exploit, this is sadly no longer the case.

And this is a very slippery slope for DeFi to go down.

Decentralization is what makes DeFi, DeFi. Without it, DeFi is nothing more than on-chain traditional finance. The problem with this is on-chain traditional finance is not as valuable as a decentralized, permissionless, and censorship-resistant financial system. The world doesn’t need tokenized stocks. But it does need a form of money free from tyranny.

Unfortunately, it looks like this dream is slowly slipping away.

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📝 TWEET OF THE WEEK

Jake Chervinsky @jchervinsky

I'm old enough to remember when most bitcoiners believed in economic freedom and open market competition.

I can't believe the number of self-professed bitcoiners now saying some version of "I'm fine with the government picking winners and losers as long as the winner is my bag."

Feb 27, 2023

2.9K Likes 442 Retweets 347 Replies

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