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Cryptocurrency exchange Coinbase revealed last week that it’s launching its own Ethereum layer-2 network, and investors may be warming up to the announcement despite a regulatory crackdown across the digital assets industry.
Coinbase’s stock price rose nearly 10% Tuesday to $64.83 per share, the largest daily gain since shares rose over 13% on Feb. 15. Since the company revealed the new network named Base before markets opened on Feb. 23, shares of Coinbase have climbed roughly 6% compared to a closing price of $61.18 the day before.
Instead of processing transactions individually on a network like Ethereum, layer-2 networks often seek to improve upon their underlying blockchain by processing batches of transactions on a separate network and then relaying them back to their main network in a compressed form.
The solution can improve the time it takes for transactions to be processed and result in lower gas fees than interacting directly with the main, underlying network. Coinbase claims that Base makes transactions 10 times cheaper than when interacting directly with Ethereum.
Launching Base would make Coinbase the only publicly traded company to have its own layer-2 network, as the company looks to expand its revenue sources beyond primarily transaction fees that come from traders on its platform. The exchange has made clear the network will not coincide with a token launch, but it could make Coinbase’s existing products a more popular choice among developers.
Coinbase wrote in a blog post that Base will primarily serve as a place for developers to build decentralized applications, also referred to as dapps, which function the same as traditional applications but are built on blockchain networks.
Dozens of projects have signaled their commitment to using Base, including the Ethereum-based analytics platform Dune Analytics, the DeFi protocol Aave, and Animoca Brands, creators of the metaverse game The Sandbox.
“Base will serve as both a home for Coinbase’s onchain products and an open ecosystem,” the company stated. “We need to make it even easier for developers to build.”
Coinbase created Base on top of Optimism’s OP Stack, a set of open-source tools released by Optimism for creating layer-2 networks, and the exchange said it will have a developer relationship with the nonprofit organization moving forward.
Managing Partner at Cinneamhain Ventures Adam Cochran wrote on Twitter that Base will be a “game changer” for Coinbase, stating its “very clear that Wall Street has no idea how to price an L2.”
Very clear that Wall Street has no idea how to price an L2 with Coinbase still trading at prices of less than last week despite this announcement 🤣
Their loss, my gain.$COIN's earnings next cycle will be a game changer.
— Adam Cochran (adamscochran.eth) (@adamscochran) February 23, 2023
In response to one user who replied to his post, Cochran stated that Base could provide institutions rooted in traditional finance with a regulatory-compliant avenue for creating tokenized versions of real-world assets, an approach that Blackrock CEO Larry Fink has described as the “next generation for markets.”
But recent gains for Coinbase could reflective of the stock’s characteristic volatility. Shares of Coinbase have been turbulent since the exchange went public in April of 2021, showing signs of a tight correlation to digital assets like Bitcoin and Ethereum.
There may be some on Wall Street who view the exchange’s stock as a publicly traded proxy for crypto. Coinbase stock reached an all-time high of around $357 in November of 2021, the same month Bitcoin and Ethereum touched all-time highs of $69,000 and around $4,800, respectively.
Today, Bitcoin and Ethereum both sit roughly 66% down from their all-time highs, according to CoinGecko data. For Coinbase, the company’s stock price has plummeted nearly 82%, slipping further than the two largest cryptocurrencies by market capitalization so far.