Coinbase 2.0
DeFi is eating Coinbase. How will they reinvent themselves?
We launched uAssets (opens in a new tab) at Universal. On the surface, they are just wrapped tokens. In the immediate term, they'll allow exposure to tokens to chains via wrapped tokens. In the long term, I think these are the building blocks of financial products of the future. They offer reduced cost and increased productivity for developers, while being safer, more transparent, and more resilient. For one, this is how the next Coinbase will be built.
Today, Coinbase's interfaces allow you to deposit and withdraw money, trade assets with other users on their orderbook, and securely store your holdings with programmatic custody. This verticalization helped onboard over 100 million people for Coinbase. After all, strong verticalization is how companies in the Silicon Valley won in the past 15 years.
However, the tides are now turning. DeFi is eating Coinbase.
First, it was Uniswap and its forks, taking the lion's share in long-tail assets. Then, lending markets were developed onchain before Coinbase could offer themselves. Next, uAssets will close the gap of asset diversity and liquidity to DEXs. While DeFi and Coinbase may look very different today, they are progressively morphing into each other.
Coinbase is not new to this concept. In fact, they are the furthest ahead out of everyone else. Brian Armstrong and Jesse Pollak of Coinbase have been strong proponents of technologies powering DeFi being the pathway for Coinbase in the "next 10 years". They've launched Base after realizing that to operate at Coinbase scale onchain, the infrastructure just wasn't there, so they've created their own. They've also launched Coinbase Wallet, which is the gateway to DeFi for their customers. These may seem like toys to TradFi analysts, but to me as a developer, this is what the future will look like.
Developer Empowerment
It's the easiest for me to think about the inevitability of this not when I debate the superiority of blockchains, but when I look at it from the perspective of a developer. The more you empower developers, the more useful products you can build. Fast and cheap global consensus, powered by thousands of computers distributed around the world and organized by blockchains, is providing tools for developers to build financial products of the future at a rate previously impossible.
What previously required 1,000 employees can now be done by a team of 3 engineers (dev docs here (opens in a new tab)). A team starting out today can create a functional copy of Coinbase onchain with features impossible in Coinbase, all in a month or two. They'll use wrapped tokens to tap into institutional custody and CEX orderbook efficiencies, integrate with lending markets to offer yield and borrowing, on an interface accessible by any wallet, of which there are hundreds of different ways to on/offramp. Sure there are painful inefficiencies of onchain today, but that will soon be in the past.
The simple insight I have is this: financial products are built on trust, and blockchains and the smart contracts built on top of them provide trust. The level of trust previously only giants could provide to users can now be offered by developers like you or me. No one should trust an exchange run out of The Bahamas with opaque reserves and matching engine controlled by a boy genius. However, everyone can verify the ledger themselves. This is a superpower to the next generation of developers, and the customers who will use their products.
The Next Coinbase
What people know as "Coinbase" will be powered by the same distributed technologies powering DeFi today. What was highly verticalized inside Coinbase will be split up into components powered by global consensus, and Coinbase will again bundle them to provide a great experience for the end user. More specifically, I think the architecture of it will be split into three distinct components:
- Wrapped assets: wBTC, wETH, wSPY, wXYZ, etc.
- Protocols: DEX, lending market, etc.
- Interfaces: Desktop, mobile app with a smart wallet underneath.
Coinbase 2.0 looks to me like the current version of Coinbase, just with more features, like staking, lending, borrowing, joint accounts, social recovery, direct indexing, etc. Its architecture, however, will be completely different under the hood. I imagine that at some point, Coinbase will "upgrade" their infrastructure to include onchain custody and settlements in the main app to dramatically reduce internal costs, improve productivity, and ultimately increase usefulness of the app. At the end of the day users rarely care about how it's built. They care about what it can actually do for them.
An obvious problem however arises: it's now become much easier to build a Coinbase competitor. The same efficiencies, due to their decentralized nature, are now available to other developers, and there will be a thousand new Coinbases all around the world. I think this can be a good thing for Coinbase, if they continue to focus on empowering developers. Much of what we're talking about here would have been mere ideals if it weren't for their work on Base, Prime, Wallet, and Smart Wallet pushing them closer to reality. If I'm Brian Armstrong, I'm putting all of my eggs in making sure that Coinbase will power the next 1000 Coinbase competitors.
Beyond The Frontier
What's particularly interesting to me is that if the above is true, Coinbase 2.0 becomes the blueprint for how builders across all financial markets can use blockchains to gain the same efficiencies. It will become cheaper and faster to build safer markets. Then, it's only a matter of time before the vast majority of all financial transactions by value will settle on blockchains as Capitalism ensures the adoption and acceleration.
Instead of just taking Larry Fink's word that tokenization will be "the next generation for markets"1, try to imagine how that actually happens. The same way Coinbase will upgrade to 2.0, Blackrock will upgrade itself in the next decade. Tokenization is a fancy word for wrapped assets, of which the underlying can be anything. Combine that with protocols, and you've given incredible tools for developers to challenge the status quo of markets.