Have you ever wondered why there are so many Ethereum L2s on the market?

I certainly have, and quite frankly, I am beginning to lose track of the new L2s launching every other day.

Taking a 30,000ft view, many of them are seemingly just forks of one another; and while they boast about their superior tech capabilities, most are underutilized due to their lack of real world applications.

Furthermore, in today’s market, the number of L2s are increasing disproportionately to the number of genuine devs and real users on them.

This then begs the question - “do we actually need this many L2s?” Probably not, at least not all of them.

Amongst all the noise and chaos, one of the L2s is arising to become the evident dark horse of this cycle - Base.

Project background

Base is an Ethereum L2 incubated by Coinbase and is built on the OP Stack. It aims to bring the next billion users onchain.

The next billion users

To attract the next billion users, Base is building a diverse dApps ecosystem with real world use cases, ranging from DeFi to SocialFi, and more.

To facilitate user onboarding, Base has been educating users around the crypto-economy and encouraging onchain interactions through promotional events. They have also put infrastructure in place for easy onramping and bridging from 190+ global partners, heavily leveraging the Coinbase platform.

Coinbase

Coinbase is the big-brain behind Base. It is the largest regulated company in the realm of crypto, counting over 100 million users across 100+ countries, and trades at a market cap of $50bn+.

In their Secret Master Plan, released in 2016, Brian Armstrong envisioned the digital currency industry to go through four major phases of evolution, comparative to the Internet. The first three phases centered around protocol development and building tools that enable easy accessibility for all users, and the final phase is the rollout of an open financial system that encompasses thousands of dApps with real use cases onchain.

While Coinbase has tinkered with the idea of launching a chain in 2018 and 2020, it wasn’t until 2022 did they finally feel ready. In preparation leading up to this point, Coinbase co-developed USDC and released Coinbase Wallet to facilitate onchain transactions, and launched cbETH, an $ETH Liquid Staking Token (LST) that enables native DeFi activities onchain.

Now that phase four has kicked-off, Coinbase is aiming to build Base into the home of its onchain products, and the first stop for new entrants to the onchain world, especially those coming from the Coinbase platform.

High-level transaction flow for Base

When a user submits a transaction, it goes into the Base mempool.

Coinbase, as the sequencer, picks up these transactions and determines their validity. The invalid ones are omitted and the valid ones are sorted in order, get batched together and submitted to the L1.

If the sequencer’s output is not challenged within seven days, the transactions are considered valid, finalized, and confirmed. If the output gets challenged, Base full nodes will run the transactions again to determine their validity. These full nodes are in charge of data availability and enforcing consensus.

Roadmap

Base is committed to building a powerful developer platform, growing its dApps ecosystem, and developing a deep onchain capital market that connects seamlessly with other L1/2s.

Base’s smart wallet feature is expected to hit mainnet imminently, which will be used in conjunction with account abstraction techniques to provide better wallet and onboarding experience.

Consumer and retail-focused

Base aims to attract the next billion users onchain by offering a wide selection of useful consumer dApps, fast transactions (<1 second), and affordable fees (<$0.01). This has already been achieved at times.

Does Coinbase have what it takes to pull it off?

Coinbase is a true OG, having been around for more than a decade in a nascent industry. Not only do they have an established track record and technical knowhow, they are also one of the few that have successfully scaled over time, navigating the treacherous regulatory waters. They understand how the game is played!

In addition, being a public company under the purview of the SEC, they are unlikely to take on excessive risk or rug without repercussions. Their stablecoin with Circle, USDC, is also the first MiCA compliant stablecoin globally.

These restrictions and qualifications give Coinbase credibility and provide a level of comfort to users, especially those that aren't on CT everyday. To users that don’t know where to start or how to differentiate between all the L2s, Base is the perfect ground zero, knowing that regulators are watching over them.

Credibility is an invaluable attribute to have in an industry plagued with hacks and exploits. And as a result, Coinbase is one of the few qualified companies TradFi institutions can partner with - a prime example is Coinbase Custody servicing most of the largest BTC ETF providers.

Most importantly, Coinbase will directly contribute to Base’s success by onboarding and sending its 100 million users over.

Coinbase enables easy onboarding for its users

It is Base’s priority to minimize friction in the onboarding process. As such, Coinbase allows users to move assets between their platform and Base seamlessly via a smooth UI/UX, without needing to set up additional external wallets. Base also offers instant bridging to/from Ethereum Mainnet and free on/offramping of USDC.

Smart wallet functions will also offer improved UX and more customized features. Namely users can create a wallet in seconds by using a passkey-based or biometric security, which is convenient and secure; versus writing down 12/24-word recovery phrases, which may be lost or stolen. Smart wallets can also enable functions such as gasless transactions, bundling, and enhanced functionality when interacting with dApps onchain.

Onchain Summer

Onchain Summer was first introduced in August 2023 as a way to onboard new users to the Base ecosystem. Base partnered with major brands, such as Coca-Cola, and offered new onchain activities everyday for users to explore (e.g. NFT mint). This effectively showed plebs the ropes of navigating the onchain world; and in the first season, Base saw over 700,000 mints from over 268,000 wallets.

Base brought Onchain Summer back for season two in June 2024 that lasted for three months; but this time around, they focused on builders instead. Builders were asked to launch projects that make it easier for users to get onchain, with categories ranging from payments to gaming and social. In the end, the event saw over $5m in onchain revenues earned by builders, over 2 million unique wallets participated, and over 24 million onchain assets minted.

No native token

Base does not have a native token, and the team has also stated that they do not intend on launching one. We will explore whether this is just all talk in a later section, but it’s worth understanding how this has played out in Base’s favor so far, or perhaps it was by design.

Coinbase as a for-profit company is the sole sequencer on Base, and they expect to generate $50m+ per year of net revenue from sequencer fees alone. Because of its other profitable business lines, Coinbase does not need to launch a token to generate additional income, and with Coinbase’s backing, Base did not need to sell native tokens to fund development.

Instead of introducing a new native token, Base uses $ETH for gas fees. This fits well into their playbook of being an extension of the Ethereum ecosystem, prevents liquidity fragmentation, and provides an unified integration experience. Especially for new onchain users, this prevents the confusion of having to navigate between different tokens and mechanisms.

Another major benefit of not having a native token is to be more protected from market, price, and sentiment volatility. This attribute encourages a utility-centric environment that is focused on building instead of price speculation and incentive farming.

From a legal standpoint, it’s also easier for Coinbase to navigate the regulatory waters in case their token is labeled a “security”, which may complicate their operations. It is an unnecessary risk to take on this early in their development.

Notable consumer dApps

Through Onchain Summers and other initiatives, many founders built onchain versions of major web2 apps, from social media to streaming services. Not only does this attract users and smoothen out the onboarding experience, this also gives creators the opportunity to own and monetize their IPs.

Some interesting dApps are:

Blackbird.xyz is a loyalty platform for restaurants. Exclusive perks, such as last-minute bookings and off-menu items, get unlocked as the user visits a restaurant more. The project’s rewards currency, $FLY, can also be spent across their network of restaurants.

Receipts.xyz tracks user workouts through wearables and reward points based on exercise length and intensity. Users can also join challenges and compete with others on the leaderboard, and redeem reward points for wellness perks and experiences.

Bountycaster.xyz allows Farcaster users to list and discover bounties, jobs, and services. Users are also able to build their track record and reputation onchain overtime.

BasePaint.xyz is a collaborative pixel art platform where artists contribute to/draw on the same pixel-art canvas. After the contribution time is up, the canvas becomes a 24-hour open edition NFT mint, where each contributing artist gets a share of the $ETH paid.

Momentify.xyz makes attending live music events more engaging. Users earn XP (points) by discovering and attending events. They can also chat to other fans via the app and collect digital memorabilia. On the other side, artists benefit by automatically building an organic fans list where they can share additional content, airdrop digital collectibles, and interact with specific fan groups.

Slice.so is an onchain commerce platform where users can set up onchain stores or purchase goods without a middlemen and paying fees. It also offers smart payment capabilities, such as revenue splitting, multi-currency pricing, advanced discounts, and other token-based customizations.

Base in numbers

Since launching mainnet on August 9th 2023, Base has seen tremendous activity growth across the number of wallets, transactions, TVL and dApps deployed.

More recently, we’ve seen daily transactions eclipse 1 million with more than 20 billion USDC in weekly transaction volume.

Part of the growth was due to Onchain Summer events and memecoin trading activity, but also due to Proto-Danksharding (EIP-4844) that made gas fees for L2 transactions much more affordable.

Chain activity

There were three main inflection points where activity spiked on Base: August 2023, March 2024, and June 2024.

1. August 2023 - Base opened its gates for the community to bridge $ETH across on July 29th 2023, which was shortly after the $PEPE-induced memecoin season on Ethereum - people that got rekt on Ethereum L1 were trying to make it this time on Base! And then $BALD happened… That said, friend.tech’s launch and growth captured much of CT’s mindshare and contributed substantially to Base’s traffic from early-August to mid-October. Without it, Base’s onchain metrics would’ve been more bleak.
2. March 2024 - the memecoin season and EIP-4844. Cheap gas fees and bullish market sentiment fueled the fire of Base’s memecoin season.
3. June 2024 - Base kicked off Onchain Summer II in June 2024 where countless interesting projects were introduced and brought on builders and users alike. Many of the activities, once completed, gave users reward points that had potential future airdrop qualifications (more on this later).

Airdrop farming contributed to onchain activity

While the Base team has denied claims of a future airdrop, many community members believe that to not be the case, and the team was only denying due to regulatory concerns.

Of all wallets on Base, less than 1% are active. This potentially means a large number of wallets were created by airdrop farmers targeting specific activities.

Looking at the chart below, we can evidently see sybil wallets (as defined by Artemis) as a percentage of all active wallets increase from 25% to 65% between June and August 2024, which also coincided with Onchain Summer II with increased point-farming activity.

That said, perhaps not all wallets were set up to farm airdrops, but instead for the Buildathon under Onchain Summer II and product testing.

How does this stack up against other ecosystems

Base is one of the later entrants, but they have substantially outperformed and even took users away from competing L2 ecosystems.

From another angle, not only is Base bringing on new users, these are also sticky loyal users. After 12 months, 27% of the same users are still active on Base, which is over 7x higher than Ethereum, and 36% higher than Arbitrum, arguably base’s biggest competitor.

I believe this is a result of its ever expanding dApps ecosystem where users naturally stay engaged. Plus, people like new and shiny things.

Total value locked

Base ranks second amongst Ethereum L2s in terms of TVL, behind Arbitrum’s $2.6bn.

Impressively, it did not experience much outflows during the chop over the last few months. I believe this was underpinned by new entrants coming to base for DeFi, trading memecoins, and using the wallets to store and transfer crypto.

It is very encouraging to see a large share of active wallets engaging in p2p activities, which likely resembles genuine onchain usage by retail. In comparison, mercenary capital and farmers typically fund wallets from CEXs and avoid sending tokens between wallets, in case they get linked and tagged as sybils.

The bulk of Base’s TVL is composed of its DeFi ecosystem projects, specifically DEXs and money markets. Of the top protocols, only Aerodrome is a Base native dApps, which also happens to have the highest TVL.

Aerodrome is a forked version of Velodrome, an OG DEX on Optimism. It was developed by the Velodrome team, and was also one of the first-movers on Base. It employs a similar strategy as Velodrome in offering DeFi incentives and utilizing vote-escrow token governance (veTOKEN).

Recent analysis suggests that these high transaction volumes could simply be due to the ease of onboarding/offboarding from Base using Coinbase. If Base becomes the place for ETH price discovery onchain because of this… then we’re just getting started.

Transaction cost

Ethereum Improvement Proposals (EIP) 4844, also known as Protocol-Danksharding, completed in March 2024, was one of the most highly anticipated Ethereum upgrades. It minimizes L1 data availability costs, which makes L2 transactions substantially cheaper, where savings are passed on to the end users.

This was an essential step in preparation for further scaling and onboarding the next billion users.

Gas fee on L2s is composed of two major parts:

Since Base doesn’t have to pay high L1 security fees anymore, the gas fees paid by consumers is all gravy. And since EIP-4844 has decreased L2 gas fees by over 95% (from $0.20−0.40 to $0.01-$0.02 per transaction) and lowered L1 security fees to less than 1% of overall L2 gas fees, consumers can enjoy a vastly improved UX.

Will Base have a native token?

The team has repeatedly denied the intention of launching a native token, but most of the largest comparable ecosystems have one.

While we may never know for sure and perhaps Brian Armstrong hasn’t decided 100% on this yet, to gauge the likelihood of Base launching a native token, we can look at the merits of having one, explore how executable the strategy is, and gain insights from previous case studies.

The case against a native token

1. The loss of sequencer fees for Coinbase, which currently generates around $50m a year. Controlling the sequencer themselves can be seen as a necessary step in their growth process.
2. Having a token may promote speculative trading and attract mercenary capital.
3. It also distracts the team from building out the core tech and community.
4. Newcomers may be confused by the introduction of a new token and its respective mechanisms
5. Liquidity providers will need to split up existing liquidity into more pools, which results in higher slippage for users and poorer UX.
6. If $ETH continues to be used as the gas token, the native token would have lower utility and a harder time maintaining high valuations. On the flip side, if the native token is used as the gas token, Base potentially becomes less “ETH-aligned” and the user experience becomes less consistent.
7. Most importantly in Coinbase’s case, current regulations around token launches are rather convoluted. Being a regulated company, launching a token may bring unwanted attention and scrutiny from the regulators, which could impact its operating status.

The case for a native token

1. Decentralized governance. Currently, Base is still governed through a multisig controlled by a handful of parties.
2. Marketing - Native tokens are also often used towards marketing, whether that be as ecosystem grants to attract new founders and existing projects from other chains, or as payment to marketing firms and other service providers.
3. For big ecosystems like Base, market makers also tend to voluntarily offer their services, which is seen as a stamp of approval. Not only do they help with promoting tighter spreads, they also help build market confidence in the project.

How did Arbitrum do it?

After weighing the benefits, downsides, risks, and considerations, how might Base do it?

Understanding it's not Apples-to-Apples, but I’d like to draw comparisons between Base and Arbitrum. Prior to the token launch, Arbitrum was the fastest growing L2 ecosystem, capturing CT mindshare, and in a similar manner to Base, denied allegations of ever launching a token. As time would tell, Arbitrum airdropped ~11% of total token supply to their genuine users.

Criteria

The airdrop was conducted via a points system. Arbitrum designed an 18 point “qualifying action” system, where users earn one point for each action completed across Arbitrum One and Arbitrum Nova.

Some of the actions include: transactions completed, smart contracts interacted, bridged amounts, and transacted value.

Why this design?

As users did not know the airdrop criteria before the snapshot was taken and because Offchain Labs (devs behind Arbitrum) always denied launching a token, a user can not “reasonably expect a profit to be derived from their actions (transacting on Arbitrum)” and others. Otherwise, as per The Howey Test, the Arbitrum airdrop could have been deemed sales of security as investment contracts (note that I am certainly not a lawyer).

From a business standpoint, this design also aims to only reward real users without the lure of profits, who likely would cause lesser sell pressure than mercenary farmers.

Base is different

Compared to Offchain Labs, Coinbase is much more tightly-watched by regulators. Base is also more centralized as it is fully incubated by Coinbase with no outside investment; Offchain Labs, on the other hand, raised over $100m from angels and VC funds.

According to a 2019 SEC Staff Guidance, if a blockchain project is sufficiently decentralized, the project token does not constitute an investment contract. However, this rule has turned out impractical for projects today, and is also not supported by existing judicial precedents.

And in any case, Base is more centralized than Arbitrum, which means there is a better case for Base’s token to be labeled a security, according to this guidance.

Do I think there will be an airdrop?

With all that said, I still think it is likely that Base eventually launches a token airdrop.

SEC filed a complaint against Coinbase claiming Coinbase has been operating as an unregistered broker since 2019, however, Coinbase still successfully listed on the NASDAQ in 2021. With unclear guidelines around whether an airdrop constitutes a security, Coinbase may still push ahead with it.

Furthermore, many comparable ecosystems such as Optimism and Arbitrum have also launched their own tokens, and while arguably still relatively centralized in their current state, they have not fallen at the peril of the SEC.

Lastly, Coinbase might take a slightly different approach and collaborate with regulators in designing token and launching mechanisms that “follows the rules”.

How would I farm it?

As analyzed above, in the event of an airdrop, Base is likely going to only target genuine users.

Sybil filtering techniques have improved substantially over the years, so I foresee a chunk of the airdrop to go directly to real users.

The best way to build up your onchain track record is to interact with as many dApps as possible, whether that be swapping on DEXs, minting NFTs, playing onchain games, or testing on its consumer dApps.

The key is to build a real “human” onchain footprint. If you are making a transaction every other day, swapping 1 USD worth of tokens, it’s likely not going to help.

It may be worthwhile to register a Base domain through Basenames, similar to ENS. ENS domains received airdrops from many projects across the Ethereum ecosystem last cycle. I’m not saying the same will play out, but it probably doesn’t hurt to register a Basenames given it’s very affordable.

An interesting way to quantify your onchain track record is to check with onchain score, which both Brian Armstrong and Jesse Pollak (creator of Base and head of protocols at Coinbase) posted about on CT.

In summary, test out different dApps from the Base ecosystem like you normally would use a web2 app to improve your chance of qualifying for the airdrop.

What if I don’t want the actual airdrop?

For those that prefer a more liquid strategy without needing to go through hours of trouble clicking through dApps, this is for you (myself included)!

The main steps of this strategy is 1) find Base native projects with deep ecosystem integrations, 2) track airdrop rumors from reliable sources, official announcements, and TGE date, and 3) trade the project token around these events/dates.

A good example for Base might be Aerodrome. Native DEXs are crucial to an ecosystem as they facilitate all swaps and new token launches. Because of their ecosystem integrations, they benefit directly from an airdrop.

Similarly, Camelot ($GRAIL) played a similar role for Arbitrum. Let’s take a look at how $GRAIL performed around the Arbitrum airdrop.

This is the classic playbook of buy the rumor (improving sentiment) and sell the news (peaked sentiment).

One of the most important considerations of this strategy is the entry point, aka buy the rumor. But how do we determine between an unfounded rumor and one with legs?

Arbitrum airdrop rumors, at the time, were nothing new, but what made this different and noteworthy was that the rumors came from industry OGs that have close relationships with Offchain Labs. For those without the industry network, you can also refer to Polymarket. They are normally quite accurate and have decent liquidity depth to trade on.

From the chart above (I know it’s not the easiest to read, soz), the probability of Arbitrum conducting an airdrop increased from 31% on March 14th 2023 to 34% on March 15th 2023, 47% on March 16th 2023, and 98% on March 17th 2023. When it broke above 50% resistance, it became clear that an airdrop was coming, and such an aggressive move is likely due to insiders moving the market.

As a note, the timing of which the data were collected is a little off due to time zone differences.

What have we learned?

Buy the rumor if it’s coming from reliable sources or is backed by Polymarket data.

Trim exposure and DCA out over the next few days after the official announcement (rumor confirmed).

If PA experienced a meaningful pump, one can consider taking a prudent short position just before token distribution.

That said, Camelot is not 100% comparable to Aerodrome, or whichever token you choose to trade. At the time, Camelot was much smaller and had only been around for 4 months. Its tokenomics was also different; for example, staking $GRAIL in specific modules granted stakers allocation to their inhouse Arbitrum launchpad.

Ecosystem projects

Where’s the activity coming from?

The table above shows the top dApps on Base over the last 3 months based on numbers of transactions completed, average daily active wallets, and total gas spent (by dApps).

Unsurprisingly, half of the dApps are classified under DeFi, whether that be DEXs, aggregators, or quasi-bridges. It is interesting to note that Banana Gun, an onchain trading bot often used for memecoins trading, also made the list. Even though it has the fewest daily active wallets and transactions, it pays one of the highest gas fees. Trading bot users pay crazy fees!

The rest of the dApps are spread over a diverse number of verticals, but seem to share a common theme, retail-focused and user-centric.

• ERC-4337 was first deployed in March 2023, introducing account abstraction. This allowed for enhanced functionality and new features, such as turning wallets into smart contracts.
• Layer3 is a gamified web3 education platform that helps projects obtain and retain users. They list easily-followable quests from ecosystem projects for users to explore, which helps newcomers navigate the onchain ecosystem. In return, ecosystem projects generate invaluable data they are looking for from targeted audiences.
• Fren Pet is an onchain game where users mint pets for free and nurture their growth. While I have a difficult time wrapping my head around the sustainability of GameFi, Fren Pet seems to have built a loyal user base where each user made 26 transactions per day on average. It is also plausible that this activity was due to airdrop farming.
• Dmail is an infrastructure provider that allows for encrypted multi-chain communication. It also aggregates multi-chain domain name services, facilitating communication between Digital IDs (DIDs).

Based on this user activity distribution, we can likely infer that Base is progressing well in pushing towards a user-centric ecosystem and laying the groundwork to onboarding the mass users.

Most dApps paid less than $0.03 per transaction over the last 3 months, which is already very low. With additional scaling upgrades on the way, we can expect the costs to go even lower.

However, there are two outliers from the dataset. MEV and Banana Gun both fall under the “memecoin trading” umbrella, which necessitates the use of specialized tools for sniping and outbidding your competition. These bots often need to pay higher gas fees to ensure the order of their transactions, such as for sandwich attacks.

Assuming newcomers aren’t degens aping memecoins and using exotic onchain tools, they should largely be insulated from paying “high” gas fees.

What happened to friend.tech

Since Base first launched mainnet in 2023, we’ve seen many mini-cycles, rise and falls of projects. The most famous one that fell from grace is friend.tech.

Friend.tech is a SocialFi project where users chat and interact with each other in private chat rooms. Users gain access to these private chats in hopes to speak directly with big CT accounts (room owners) or obtain private alpha. In return, the room owners get a share of the transaction fees when their keys are traded. This model effectively tokenizes and monetizes human interactions.

Friend.tech was once thought to have the potential of becoming the pinnacle and pioneer of web3 SocialFi, however, cracks started to show pretty much from day one.

The platform was plagued with glitches and problems from the start, ranging from log-in issues, high transaction fees to website crashing and transaction results not updating. Perhaps this was understandable and forgivable as they just launched, but as time went on, the team did little to improve the functionalities.

As friend.tech lost momentum, key prices started to nuke, leaving room owners to abandon their communities.

In all, friend.tech generated over $90m in fees over its lifetime and its devs walked away with $44m. Recently, the devs also irrevocably transferred the admin and ownership rights to a null address, rendering future development and changes impossible.

Still, I think the fervor created by friend.tech gives us a glimpse into what could be our future. What if we have another friend.tech moment, but with a clear vision and competent devs?

The most prominent DeFi project on Base, Aerodrome Finance

Aerodrome is Base’s largest native DEX, boasting a TVL of $560m, and is trading at a FDV of $700m. From a high-level, it is a crossover between Curve and Uniswap.

Users lock $AERO for $veAERO, which is used for governance voting and liquidity distribution. $veAERO voters are rewarded with the trading fees from the previous epoch, as well as voter incentives from the current epoch. On the other hand, staked LPs receive $AERO token emissions.

Not only is Aerodrome building to become the central onchain liquidity hub on Base, their integration with Moonwell also opens doors to money market service collaborations as well. In addition, the project received a foundational-level stamp of approval when Coinbase Ventures made an investment from the Base Ecosystem Fund.

If Base is to moon, so will Aerodrome. That said, to play the devil’s advocate, we’ve all seen how veTOKEN and this style of liquidity mining have played out.

For a more in-depth analysis, I encourage you to give this Token Brief by Fish a read.

The most prolific memecoin on Base, Brett

$BRETT, often dubbed Pepe’s best friend on Base, is the no.1 memecoin on the chain and has become an integral part of Base’s identity. It is based on the “Boy’s Club” comic series, and has unofficially been adopted as the ecosystem’s mascot by the community.

Brett is what Pepe is to Ethereum, Wolf is to Avalanche, and Wif/Bonk is to Solana.

It has a total supply of 10 billion tokens, of which 85% was allocated to liquidity pools, 10% to the team, and 5% for CEX listings. Brett was launched through a fair-launch model with no presales, and its contract has been renounced - it is in full CTO mode.

The token previously peaked at $2bn FDV, and currently trades at ~$800m FDV. The fact that it trades at a higher valuation than Aerodrome is truly astounding. This also shows how important Brett is to the Base ecosystem.

LSTs

cbETH

Coinbase Wrapped Staked ETH was first introduced in 2022 and currently has a market cap of just under $500m. Just like other ETH-LSTs, cbETH holders earn ETH native staking yield while retaining the liquidity to rehypothecate across DeFi protocols.

This was one of Coinbase’s first forays into building a holistic onchain ecosystem. cbETH currently has ~20 DeFi integrations.

cbBTC

Coinbase just launched their creation of a new Wrapped Bitcoin, cbBTC, with 18 dApps across DeFi, RWA, and oracles integrated.

This was first announced on the back of MakerDao abandoning WBTC due to potential control changes at BitGo, the custodian behind WBTC, where Justin Sun could have ended up with majority control of the private keys.

cbBTC is backed 1:1 by BTC that Coinbase holds, and is automatically created when users send BTC from their Coinbase account to an address on Base or Ethereum - these are the only two chains that support cbBTC currently, and soon to be on Solana.

Justin Sun critically called out this design for being centralized, which also lacks realtime audits and proof of reserves. The BTC held is also prone to being seized by the US government when shit hits the fan. It’s good to finally see Justin Sun come out with a based take, and while there are merits in his claim, the concerns here perhaps are overplayed, especially in the context of institutional adoption.

That said, I believe the creation of cbBTC could bring substantial TVL/liquidity to Base, BTC DeFI, and DeFi in general.

Base proxies

In crypto, proxies often refer to tokens that trade similarly to the target asset.

Trading and holding these proxies, while flawed due to tracking error and other factors, is often thought of as trading the native token “pre-market”.

The key is not to find projects with the closest product offerings, but rather the ones that the market considers most symbolic of the ecosystem and have been trading as such.

As Base does not have a token (yet), from a qualitative standpoint, Aerodrome and Brett are often seen and traded as Base proxies given the important roles they play in the ecosystem.

The section below will attempt to explore the merits of this assumption quantitatively and identify more suitable alternatives.

Numerical approach

To find out if Aerodrome and Brett are good proxies for Base, we can look at whether their “daily changes in token price” are correlated to “daily changes in Base’s performance metrics”. This is assuming Base’s native token would trade based on the chain’s performance.

Taking a step further, I have also included $BTC and $ETH as market indexes representing overall market sentiment. And to expand on the analysis, I applied the same methodology to nine other well-known Base (semi-)native projects across DeFi and memecoins.

Correlation coefficient (figures in the table) ranges between +1 and -1. A +1 represents a strong positive relationship between the two assets and a -1 represents a strong negative relationship. A 0 means there is no correlation between the two.

As the table clearly shows, across all projects, there is little to no correlation between token price changes and Base’s underlying performance. However, these tokens are moderately correlated with the market and TVL.

TVL is a semi-market-based metric as it is calculated by multiplying 1) P (pricing) and 2) Q (quantity). While P is largely driven by market forces that affect the entire crypto sphere, Q is more Base-specific, showing if assets are being bridged in or out.

Looking at the TVL column alone, we can see that Aerodrome has a higher correlation coefficient than other projects. Even though the difference is marginal, this potentially implies that Aerodrome is a slightly better Base proxy than the rest.

That said, all in all, quantitatively speaking, none of the projects individually trade in tandem with Base’s performance, and if Base’s native token trades according to chain performance, then none of the projects can be considered “proxies”.

Charting tells a different story

Other than looking at the correlation between daily returns, which may be distorted from time lags and other factors, another way of analyzing this is through “charting”.

As we all know, tokens don’t always trade in line with fundamentals but rather with hype and sentiment.

For this analysis, we assume Base’s native token to trade and over/underperform the market according to changes in the chain’s sentiment - when the sentiment is high, Base will outperform the market, and vice versa. And if the proxies trade as such, they may be considered true proxies.

The graph below is Base’s sentiment data produced by Kaito’s AI/LLM model that took inputs from various crypto communities, then is further distilled into sentiment, mindshare, and total mentions on different platforms.

The chart below shows the over or underperformance between a basket of Base proxies vs the market.

The basket of proxies is composed of $AERO, $BRETT, $TOSHI, $WELL, and $MIGGLES, all of which are either considered the most representative of Base or have the highest correlation to TVL changes from the section above. Returns calculation is based on the seven-day moving average of the weighted average daily price changes between the five tokens.

The market return is calculated as the weighted average daily price change between $BTC and $ETH.

While the two charts are not identical 1:1, they do share many similar characteristics.

At Point 1, sentiment, mindshare, and mentions were all making new highs. This signified a very positive environment where we’d expect the basket to massively outperform, which it did.

At Point 2, sentiment, mindshare, and mentions all made a moderate local-high. This signified a moderately positive environment where we’d expect the basket to moderately outperform, which it did.

At Point 3, sentiment and mindshare were at local-lows, and mentions were high. This signified a moderately bearish environment where we’d expect the basket to moderately underperform, which it did.

At Point 4, sentiment, mindshare, and mentions all made local double-tops. The pricing chart printed exactly that.

Based on this analysis, while imperfect, a basket of prominent Base projects may serve well as proxies for the ecosystem assuming chain sentiment is what Base’s token will trade based on when/if launched.

Bull or Bear

When envisioning the bull and bear case, while interconnected, there are three main categories to look at: 1) regulatory risks and constraints, 2) business/chain performance, and 3) macro capital markets sentiment across crypto and TradFi.

Bull case

In an ideal scenario, we get a more crypto-friendly government post election that encourages innovation where Base can freely push boundaries of their product offerings. At the same time, we get regulators that are open to collaborating with the crypto industry in designing clearer and more reasonable guidelines.

And as such, in an environment where users are both protected and encouraged to explore the onchain world, Base to successfully onboard Coinbase’s 100 million users, attract new ones via its user-friendly UI/UX and smart wallet, launch a native token, be chosen as the designated partner for TradFi integration, and extend offerings through partnerships.

Smart wallets could also integrate Base’s token to increase its utility, such as unlocking special features through a tiered staking mechanism. The token could also be used to pay for tailored services on the wallet, or used as discounted gas fees instead of $ETH.

On the macro front, it would be extremely bullish if the Federal Reserve cuts interest rates while the underlying economy remains strong - bullish rate cut. Historically, bullish rate cuts often sent capital markets to new highs.

Bull price target

Finger to the air, taking reference to BNB’s performance in the last bull cycle, I believe Base’s token could reach $450bn FDV.

While Base and BNB share many similarities, such as being backed and supported by a large CEX and having a large community, to look at it simply: Binance was the champion from the East, and I believe Base has a good chance to become the champion from the West.

In perspective, BNB peaked at a market cap of $110bn last cycle, implying a FDV of $137bn. Assuming total crypto market cap grows from its $3tn peak last cycle to $10tn this cycle, Base could reach a FDV of $450bn.

That said, there are some additional factors to consider when drawing this comparison.

BNB’s buy-back-and-burn mechanism actively extracts supply from the market and consistently adds buy-pressure to the token. BNB was launched in 2017, and it took 4 years before they reached the highs and token supply. BNB is also used as a gas token, differing from Base, which probably would still use $ETH for gas even if it had a native token, similar to Optimism and Arbitrum.

However, Base’s smart wallet feature may create new use cases for its native token. Base is also backed by a listed and regulated company (polar opposite of BNB, at least in the eyes of the SEC), which may position Base as the first choice for newcomers to the onchain world.

Bear case

Even though this may be unlikely, regulators could prohibit Coinbase from promoting security-related activities, such as onboarding its platform users to Base. Another step further, if regulators require KYC or more transparent (doxed) reporting of each user and their onchain activities on Base, it is likely to drive the community away, discourage devs, and stifle innovation.

In this scenario, Base will suffer from liquidity being pulled and lack of onchain activity. Best case scenario here is that Base is used as a permissioned utility chain, which means it will merely be a tool than a community based ecosystem supporting creative ideas.

On the business front, Base could also lose traffic to new ecosystems, get beaten in the L2 race, lag behind on tech improvements, fall out of narrative, suffer from hacks and exploits, and fail to meet its high expectations of attracting consumers and liquidity.

Closing thoughts

All in all, I am highly bullish on what Base could potentially become, and I truly believe they are one of the very few fundamentally-sound ecosystems.

Not only is it building a high-throughput tech infrastructure, it is also building towards interoperability. It has a clear plan to attract real users onchain with its full-fledged ecosystem, and is also uniquely positioned to become the go-to partner for TradFi giants. This creates real demand for their infrastructure, which is unrivaled by any other ecosystems on the market today.

On the flip side, its regulatory risk is unpredictable and is still a big question mark; though my bias tells me “it’s not that bad”.

For the degens, the downside risk is likely to be manageable; even if the crackdown is severe, dApps can still fork to other OP Stack chains and users can still pull their liquidity.

For the newcomers, exposure is likely to remain limited as their onchain activity may only revolve around using consumer dApps, and not juicing cross-staking looped-yields.

For those that are risk averse, I’m not sure why you’re in crypto. You should probably buy some US-treasuries and hide it under your mattress.

To do

If you want to get exposure now - keep it simple, test out consumer dApps you find interesting, slowly build your Base onchain footprint, and pray Gary Gensler gets removed from office; or if you’re a cuck, you might consider buying their stock (jk and NFA).

But in all seriousness, Coinbase’s stock gives holders exposure to the business as a whole, where Base sequencer revenues only make up a small part of total revenue. Trading at ~$40bn market cap likely also means the upside is more limited compared to that of holding tokens. For those that want purer exposure to Base, Coinbase’s stock likely isn’t the way to go, albeit they will be correlated to some degree.

To be clear, this is not financial advice and I do not hold any COIN positions.

What about me?

I am bullish on Base, but I will not be farming potential airdrops. I plan to ape the best Base proxies, shitters, and memes when market sentiment improves.

Activity-based airdrop farming typically doesn't yield high returns because qualification criteria are unknown, meaning transactions completed might not count towards eligibility. In addition, speaking from experience, locking liquidity for airdrops also often results in higher opportunity costs and losses than airdrop returns.

Instead, I believe a more prudent strategy is to buy tokens of leading Base proxies with strong fundamentals with product-market-fit, such as Aerodrome. Not only do they trade in tandem with Base’s change in sentiment and performance, they are also revenue generating, offering real yield to holders. Meaning, worst case scenario, I end up holding a solid project in my portfolio.

One can only guess how things will play out for Base on the regulatory front, but else, they are firing on all cylinders. They are my top ecosystem pick this cycle, and to my comrades that ape with me, let’s hope we don’t get rekt!