Crypto exchange Coinbase has built its own Layer 2 on Ethereum: Base. The test net went live on Thursday and the actual chain will go live in a few months. Coinbase has worked side by side with developers from Optimism, using the so-called OP Stack, an open-source developer toolkit.

A layer 2 is a chain that settles on Ethereum but can process more transactions and at a much lower cost. Examples of existing layer 2's are Polygon, Arbitrum and Optimism itself.  

Why build yet another layer 2 on Ethereum? According to Coinbase, they want to build a chain where they can tweak the parameters to their own liking, in such a way that their customers are served best. Base won't have a native token: it will use ETH to pay for transactions. 

100 million potential people can go crypto native

Coinbase has over 100 million customers. With the chain, it wants to provide people who haven't tried 'pure crypto' yet a trusted interface: a gateway to crypto, if you will. For example, decentralized finance, gaming, metaverse, the whole shebang.

As the chain's software is open source, this will create a big pull for developers of new apps. They will have a big audience, which is any new project's biggest challenge.

Bullish for Ethereum ecosystem

The good news for Ethereum is that a giant like Coinbase recognized its network effects as too large to be ignored. Apparently, Coinbase reasoned it would be wiser to engage and benefit from the Ethereum ecosystem than to silo itself off with a separate Layer 1. 

This looks like bullish for Ethereum, as it sets a precedent. Coinbase is a publicly listed company. If more companies will build chains and/ or apps on Ethereum, it reaffirms the narrative that Ethereum will stay the dominant Layer 1 for smart contracts. 

Transparency

As a centralized company, Coinbase has decided to take a first step moving away from convenient but opaque custody services. After the Celsius and FTX debacle, the crypto industry is looking for ways to gain back trust from its customers. On-chain proof of reserves (can an exchange prove it really holds the coins you deposited?) is in high demand by customers. Who knows if in the future Base is used to establish a type of proof-of-reserves. 

The news is good publicity for Optimism as well - the layer 2 on Ethereum that Coinbase collaborated with in building Base.

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