- Fee revenue on Base spiked to above $1.6 million on March 19 amid increased activity.
- The flurry of activity on Base is being driven by memecoin traders and arbitrageurs.
- It's unlikely that level of activity will last, meaning Base won't have a big impact on Coinbase’s bottom line.
Coinbase’s layer 2 network, Base, saw revenue from fees spike on March 19 as memecoin traders flocked to the network, but Base’s fee revenue is still unlikely to be material to Coinbase’s financial results overall.
Launched by crypto exchange Coinbase in August 2023, Base is a layer 2 system built on the Ethereum blockchain, avoiding the creation of a new blockchain while inheriting the security of the Ethereum mainnet.
Lower transaction fees — called gas fees — following Ethereum’s March 13 Dencun upgrade, which dramatically cut costs for transactions on layer 2 networks, attracted new users to Base. The majority of the new users have been memecoin traders and arbitrageurs, two groups who tend to be typically less sensitive to high fees.
Popular memecoins included TOSHI, named after Coinbase CEO Brian Armstrong’s cat, and BRETT, which considers itself the best friend of PEPE, a memecoin that reached a $4.2 billion fully diluted valuation on the Ethereum mainnet.
The wave of activity led Base to clock up fee revenue of $1.67 million on March 19 — the most the network has done in one day since its launch.
Memecoin traders typically use bots as part of their strategies and will pay high gas fees to “snipe” a newly launched joke cryptocurrency before anyone else.
Sniping happens when traders know a token is set to go live and programme their bot on the Telegram messenger app to buy it as soon as it launches. Because so many traders, or snipers, are doing the same thing, it turns into a so-called “gas war,” as these bots jostle to make trades.
If the potential profits of securing a trade early surpasses the expenses from gas fees, then prioritising speed becomes a compelling choice.
Traders engaging in arbitrage strategies will send transactions through no matter the gas costs if it still makes them money. These traders buy and sell assets across different markets to exploit price discrepancies and bag profits in the process.
Defying Dencun
Ethereum’s Dencun upgrade helped lower fees across layer 2 networks, and initially, Base transaction fees were slashed 99.9% from the fees on Ethereum. But congestion issues persisted.
Roberto Bayardo, the protocol lead for Base, made a statement on the crypto-powered social media platform Farcaster about the congestion issues, saying they were caused by high demand.
While Dencun helped lower data fees associated with transactions, it didn’t increase the capacity, or total number of transactions that can be processed in a given time.
He went on to say that he thinks it would be possible to increase the capacity twofold without major issues, but, this theory needs to be tested.
On Friday, the official Base account on X stated that the layer 2 is looking into this solution, with updates to come as soon as next week.
Before Dencun, the seven-day average for transactions was around 470,000. It rose to 1.4 million after the upgrade.
The number of active users surged to around 310,000 from 96,000.
Whether these numbers will last is unclear. Even at these levels, it’s unlikely to have as much of an impact on Coinbase’s bottom line as other areas will.
Earnings impact
Coinbase launched Base to a flurry of activity in August, prompting some analysts to raise their revenue predictions for the company.
Base racked up nearly $60 million in volume over three days at the beginning of August. The layer 2 project registered nearly $1.6 million in fee revenue in its first two weeks — it achieved that in one day on March 19.
“If Base continues at this rate of activity, it could exceed Needham’s estimates of $60 million annual revenue, $15 million net,” John Todaro, a Needham analyst, told DL News in August.
Those estimates now look quite conservative following the recent surge in activity on the network.
Base’s cumulative revenue from fees is just under $16 million since August, according to DefiLlama data.
What does this mean for Coinbase? The exchange and Wall Street analysts covering the company said the network’s impact would likely be immaterial in the short run.
Coinbase is now the only node operator on Base, and as such, it collects all of the fees, less payments to Optimism. Base was developed using the MIT-licensed OP Stack, in partnership with Optimism, another Ethereum-based layer 2 network.
It is planned to become more decentralised in future, which Needham said would reduce the economic benefit to Coinbase as node operators distinct from the exchange join the network.
A spokesperson for Coinbase told DL News the company can’t speculate on the future revenue or materiality of Base as a percentage of Coinbase’s future earnings.
Coinbase posted revenue of $954 million for the fourth quarter of 2023 and over $3.1 billion for the entire year.
Even if Base managed to sustain the level of activity seen on March 19 for an entire quarter, it wouldn’t come close to challenging the revenue that comes from fees charged to retail traders on Coinbase.
Coinbase generated just over $490 million in transaction revenue from retail users in the fourth quarter of 2023, while Base made about $1.3 million in revenue from fees during the quarter.
At the peak of the last bull run, Coinbase generated over $2.2 billion in transaction revenue during the fourth quarter of 2021.
Adam Morgan McCarthy is a market correspondent at DL News. Got a tip? Email him at adam@dlnews.com.
Ryan Celaj is a data correspondent at DL News. Got a tip? Email him at ryan@dlnews.com.
