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The Layer 2 war has been raging for several months now, and Coinbase officially entered it on August 9, when its Base scalability solution was deployed on the mainnet.
Beyond the stated goal of onboarding "the next billion users and the next million developers on blockchain", Base has above all enabled Coinbase to find new growth drivers. And from this point of view, the launch has been a success.
In just over 5 months, Base has entered the layer 2 podium in terms of total value tied up (TVL) with just under $400 million, behind Arbitrum ($2.35 billion) and Optimism ($820 million). It even made it into the top 10 for all blockchains combined, according to data aggregated by DeFi Llama.
Base generated over $5 million in revenue from transactions made by the more than 390,000 users, according to data aggregated by asset manager 21Shares on Dune Analytics.
These good figures were largely achieved thanks to the launch last summer of the FriendTech social network, whose temporary frenzy triggered a record number of Base transactions, peaking at 1.8 million on September 14 and 1.4 million on October 2.
But speculation is not the only reason for the success of Coinbase Layer 2. "Base has set up a very comprehensive onboarding system. Unlike other blockchains, it's much easier to deploy there. Thanks to this, they were able to mobilize a sizeable community fairly quickly," remarks Mounir Benchemled, CEO of DEX aggregator ParaSwap, which also deployed on Coinbase layer 2 in September.
A strategic alliance with Optimism
To launch its layer 2, Coinbase has chosen to use OP-Stack, the optimistic roll-up developed by Optimism and launched last June.
"Today, OP-Stack is the most developed layer 2 solution. Optimism also offers the advantage of providing a clearer roadmap than its competitors, and support for more advanced projects", continues Mounir Benchemled. For a company with institutional ambitions like Brian Armstrong's, these arguments are bound to set it apart.
A few weeks after the launch of Base, Coinbase announced that it shared Optimism's vision based on the principles of a "Superchain", a network of interoperable layer 2s.
On August 24, the two companies even announced a revenue-sharing agreement for Base. In return, Coinbase Layer 2 will receive up to 118 million OP tokens (around $250 million at current prices) over a 6-year period, which will enable it to participate in Optimism's governance.
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"Even though Base has had an interesting start, in the long term it will have to find differentiating elements compared with other layer 2 solutions," warns Stanislas Barthélémi, head of blockchain & crypto at KPMG.
Base has a potential user base of over 100 million, and the power of a brand that is currently one of the most reassuring on the market in terms of regulation.
"In recent years, Coinbase has spent an enormous amount of money on simplifying its user experience as much as possible, both for its platform and for its various products such as Coinbase Wallet. It could do the same for Base, and thus secure itself some interesting traction," continues Stanislas Barthélémi.
There's no shortage of possibilities, especially since USDC, Circle's stablecoin, has been available natively on Base since early September, i.e. without the need for a bridge. For Stanislas Barthélémi, "this integration opens up a wide range of possibilities for everyday payments and cross-border transactions at lower cost. Coinbase clearly has many levers to pull to make Base viable".
Decentralization in focus
In addition to facilitating access to the blockchain for its users, Coinbase has been hammering home in recent months its desire to decentralize the operation of Base to make it "an open and neutral platform where developers and users can participate freely", explains the company, which for the moment has not revealed a precise timetable.
Once mentioned as a possibility "at some point in the future" by its General Counsel Paul Grewal, the launch of a native token for Base has for the moment been totally ruled out by CEO Brian Armstrong. "We have no plans to create a token for Base," he explained to US media outlet Decrypt in early December.
"It's harder to imagine decentralizing a layer 2 without a token," raises Mounir Benchemled. "A token provides more flexibility to set up governance models or incentives to use the protocol," he adds.
It has to be said that the American environment is not necessarily conducive to such a launch, with the Securities and Exchange Commission (SEC) having drastically tightened the regulatory screws on the crypto sector since the fall of FTX. For several months now, the SEC has tended to consider the majority of cryptos or tokens as financial securities. A reclassification that Coinbase wishes to avoid more than anything else.
"Because of this threat and the lack of clarity in the rules, many projects have put their token projects on hold," confides a French entrepreneur who has just spent several months in the United States.
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Since May 2023, Lido has distinguished itself as one of the few profitable decentralized protocols. Fees collected have outstripped treasury expenses, generating over $20 million in profits over the last 365 days. With the vesting period ending in August 2023, all LDO tokens have already been distributed to investors andteam. There is therefore no longer any need to fear a simultaneous mass sale of large historical portfolios.
Since the update introducing Proof-of-Stake on Ethereum in September 2022, parity between stETH and ETH has always been maintained.
Lido is continually engaged in an effort to improve its decentralization and strives to be transparent about its activity.
The emergence of the restaking trend, driven by the EigenLayer project, seems to bring new financial perspectives to liquid staking protocols, and Lido in the first place.
The governance quorum, which designates the minimum percentage of tokens to make a vote, has been set at 5%. This means that the Paradigm Fund has the ability to pass its proposals unilaterally in the event of low participation. Like almost all DAOs, Lido's is governed by a minority of active participants.
Almostall the cash is made up of tokens directly linked to the protocol (76% LDO and 23% stETH). In the event of a major market crash, the cash position would be exposed to a sharp fall in its value and therefore potentially to a decline in its remuneration system for partner entities. Such an event could favour certain competitors.
As Lido's staking system is based on the pooling of ETHs without distinction as to the nationality of users, regulators could prevent financial companies from using it. Lido is a tool aimed more at individual users.
Despite Lido's willingness to improve the decentralization of its node operators, the latter are not yet sufficiently diversified, not least because 75% of them are based on Geth software. It is crucial to use a variety of software packages to guarantee continuity of network operation in the event of failure of one of these systems.
Price parity between ETH and stETH is maintained, as any stETH holder can exchange them for an equivalent quantity of ETH on the Lido protocol (subject to a delay of several days). If prices diverge, there is an economic incentive to arbitrage between the two tokens to restore parity.
Lido currently dominates the liquid staking market. Its total locked-in value (TVL) stands at $21 billion, far ahead of its nearest competitor, Rocket Pool, which has a TVL of $2.7 billion. More generally, Lido's TVL exceeds that of all other decentralized finance protocols, with Maker in second place ($8.2 billion). What's more, Lido accounts for a third of all ETH stakes, playing a major role in Ethereum's governance and security.
The first two are not at their first project together. They founded Cyber Fund in 2014, a structure that has invested in numerous crypto projects such as Solana and Celestia. In December 2023, Cyber Fund announced a project revival of sorts, including the launch of a $100 million venture capital fund dedicated to blockchain, robotics and AI. Generally speaking, Lido's founders communicate little about their role within the protocol. The lack of information about theteam founder and her current role in the project may make us wary, but it can also be seen as a positive point for the protocol's decentralization and autonomy. There are currently around 30 developers active on the protocol every month and an average of 3,300 users interacting with the smart contract every week.
Lido has a very large community: 165,000 followers on X and a Discord with 22,400 members, with a reactive team and almost a hundred messages a day.
LDOs were initially distributed between the protocol treasury (36%), theteam project initiator (35%), investors (22%) and partner validators (6.5%). The LDOs from the treasury are mainly used through liquidity mining programs: they are distributed to stETH users in the various DeFi protocols to promote the use of stETH and wstETH, a wrapped version of stETH designed to be more efficient in decentralized finance.
At present, the treasury is made up of around 415 million dollars (76% LDO and 23% stETH), and is replenished by the 10% commission that the protocol levies on all user staking rewards (5% is paid back to validators). The remaining 90% is distributed to users.
Among the largest holders of LDO are the American venture capital fund Paradigm (top 3 worldwide), which owns 7% of the tokens, two other anonymous addresses own 5% each and the team owns around 4%.
The DAO provides numerous resources that serve to enhance the transparency of the protocol. However, like almost all DAOs, the Lido DAO has only a small number of active contributors who own very large quantities of LDO. Indeed, the participation rate for each vote is often just over 5%, and never exceeds 8%. In most cases, the top 10 vote-getters account for over 80% of the LDOs counted for the vote.
For Lido's competitors, the challenge of bridging this gap is considerable. Lido benefits from a very powerful network effect: its wstETH is accessible on the majority of blockchains and DeFi protocols, and enjoys higher liquidity than tokens from other liquid staking protocols.
The Lido community is currently developing two new modules designed to make the integration of node operators considerably easier. Each module will represent a distinct group of operators, with a specific fee distribution structure. At present, only one module exists, grouping together 39 pre-approved validators. The envisaged new modules would offer even greater flexibility, enabling the network to be expanded to 300 node operators.
LDO's capitalization stands at $2.7 billion, placing the protocol in 32nd position in the crypto sector. Within decentralized finance, only Uniswap (UNI) does better ($3.5 billion), but Lido is the leading protocol in terms of TVL ($21 billion, compared with $8 billion for second-placed Maker).
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