Coinbase plots ‘everything’ app/exchange as Base wobbles

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The Coinbase (NASDAQ: COIN) digital asset exchange wants to build ‘everything’ products, even as its Base network struggles to handle its existing load.

• Base network outage
• Everything app, everything exchange
• Raising $2 billion
• Getting around GENIUS
• UK charm offensive off to a bad start

On August 5, Coinbase’s Ethereum layer-2 network Base abruptly stopped producing new blocks. The outage lasted a little over half an hour, after which normal functionality—block production, transactions, etc.—resumed. The network’s maintenance page initially cited an “unsafe head delay” for the outage.

Hours after the fact, the official Base Build account tweeted that the “disruption” “was due to an automatic handoff to an unhealthy mainnet sequencer [responsible for confirming transactions] in the high-availability cluster. We quickly switched to a healthy mainnet sequencer and Base Chain resumed normal operation.”

The full postmortem claims the chain’s active sequencer “began to fall behind due to onchain activity.” Conductor, the software component that monitors this activity, attempted to hand off to a different sequencer that was “in the process of being provisioned and was unable to produce blocks.” The unhealthy sequencer was “unable to initiate another handoff,” leading to a complete halt in block production.

Base said Tuesday that it would be “updating our infrastructure to ensure that when a sequencer is added to the Conductor cluster, it is always able to transfer leadership if elected.” Base lead Jesse Pollak tweeted his appreciation of “everyone’s patience as we grow this economy.”

Base was once notorious for its downtime, rivaling its principal layer-2 competitor, Solana, for the number of ‘have you tried switching it off and on again’ jokes. But this is the first time since 2023 that Base has suffered this kind of embarrassing outage.

Coinbase itself has suffered similar outages during heavy traffic periods, to the frustration of many of its customers. The company later said it would start employing artificial intelligence (AI) to help identify such surges in advance.

Everything app, everything exchange

Launched in February 2023, Base has become an integral part of the Coinbase ecosystem, contributing $53.5 million in revenue to the company’s most recent quarterly report (although that figure was down 21% due to the company aggressively subsidizing transaction fees to boost network usage).

Base’s growing significance was on full display last month when Coinbase announced that its Coinbase Wallet product was rebranding as Base App. The new ‘everything app’ is touted as bringing together “social, apps, chat, payments, and trading” to create “a new kind of open social network.”

Not everyone thinks incorporating non-essential elements into a self-custodial wallet is a great idea, given the additional capacity for software flaws that could allow access to one’s financial information. Time will tell.

The Base App’s social feed is provided by Farcaster, a blockchain-based ‘sufficiently decentralized’ social network that uses smart contracts to process interactions between users. Farcaster offers users control over their data and allows monetization of interactions, allowing users to profit from the content they generate without having to strike deals with a centralized entity. (Wonder where we’ve heard that before.)

Farcaster and Zora (the latter “a social network where every post is a coin”) were integrated into the Base App last month, leading to a surge in new tokens being issued on Base. By the end of July, 50,000+ new tokens were being created on Zora and issued on Base on a daily basis.

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Buddy, can you spare 20 billion dimes?

To accomplish these lofty goals, Coinbase will need cash. So on August 5, the company announced plans to raise $2 billion, with a possible top-up of $300 million, via a private offering to qualified institutional buyers.

Coinbase says it will use a portion of the proceeds to cover the incentives it’s offering investors to buy its new debt. The rest of the cash will go toward general corporate expenses, as well as investments in and acquisitions of other companies, products, or technologies. Coinbase may also choose to buy back some of its Class A common shares and/or pay off some of its other debt obligations.

Markets didn’t react well to the announcement, with Coinbase closing Tuesday down 6.3% to just under $298. The downward trajectory followed a 17% decline on August 1, the day after Coinbase’s dismal Q2 report, which showed a significant fall in both retail and institutional trading activity.

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Stablecoins: ‘yield’ bad, ‘rewards’ good

While trading was in the toilet, Coinbase’s Q2 bacon was saved due to profits generated via its equity in Circle (NASDAQ: CRCL), issuer of the USDC stablecoin. Originally a USDC partner, Coinbase cashed out its stake in exchange for 8.4 million Circle shares, along with a sweetheart revenue-sharing deal that now earns Coinbase more revenue than Circle from USDC-based activities.

In addition to being Coinbase’s rainmaker, USDC is also the preferred currency on Base, making it integral to the company’s ‘everything app’ plans. President Trump’s recent signing of the stablecoin-focused GENIUS Act also signals major USDC growth potential, with Coinbase calling it “a turning point for anyone using Coinbase, the largest distributor of USDC.”

GENIUS prohibits stablecoin issuers from offering so-called ‘yield-bearing’ stablecoins that pay interest. But Coinbase offers its customers up to 4.1% interest (4.5% for Coinbase One subscribers) for holding USDC on the exchange. So, how do they get away with it?

First, having left the USDC joint venture, Coinbase is no longer the stablecoin issuer. Second, as CEO Brian Armstrong stressed on last week’s earnings call, “we don’t pay interest in yield, we pay rewards.” Orwell would be proud.

The no-yield language was viewed as throwing a bone to Wall Street, which wants to protect its money market funds (MMF) business. But with the Securities and Exchange Commission (SEC) now viewing tokenization of anything as no big deal, everyone will soon be offering tokenized MMFs, maybe even Coinbase.

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You catch more flies with honey

Across the pond, Coinbase’s United Kingdom ‘charm offensive’ continues to come off the rails. On August 3, Armstrong tweeted that the music video Coinbase released last week mocking the U.K. as a faded relic coasting on its former financial glories, had been “banned in the UK by the TV networks.”

Armstrong claimed that the lesson of this alleged censorship is “[i]f you can’t say it, then there must be a kernel of truth in it.” Others were quick to point out the logical flaws in this argument, prompting Armstrong to admit that “[p]erhaps I could have phrased it better.”

However, CNBC reported that it was unable to verify Armstrong’s censorship claim. Regardless, reaction to the video by many U.K. viewers was seriously negative. Even some crypto bros pointed out that Coinbase’s ad seemed far more likely to alienate Brits than convince them to lobby their government for change (particularly when said change would be of primary benefit to Coinbase and other exchanges).

On August 4, the Financial Times published an op-ed by George Osborne, former Tory chancellor and a member of Coinbase’s global advisory council. The gist of Osborne’s article was that the U.K. had “missed the first crypto wave” and risks being “left behind” if it doesn’t get with the program ASAP.

To start, Osborne bemoans the fact that U.K. financial authorities prohibit retail customers from buying crypto-based exchange-traded notes (ETNs, or as the Yanks call them, exchange-traded funds).

But three days before Osborne’s op-ed was published, the Financial Conduct Authority (FCA) announced that retail consumers would have access to crypto ETNs as of October 8. The FCA proposed lifting the retail ban in the first week of June, so this shouldn’t have come as a surprise.

Second, Osborne notes that U.K. residents looking to buy digital assets directly from an exchange “have to pass a test and wait for 24 hours to be onboarded.” He’s referring to (a) an ‘appropriateness assessment’ intended to ascertain a new customer’s understanding of digital assets, and (b) a 24-hour ‘cooling off’ period imposed on first-time exchange customers.

Honestly, asking noobs to sleep on it doesn’t seem that unreasonable a hurdle, particularly given the number of scammers preying on hype and FOMO. And with surveys showing more than half of Britons saying they don’t fully understand crypto, maybe a little ‘you must be this savvy to ride this crypto rollercoaster’ caution is warranted.

Third, Osborne notes that “the majority of U.K. retail banks have placed restrictions on transferring funds to cryptoasset exchanges.” Here, Osborne may have a point, as some banks do limit daily transfers to exchanges. The FCA has also proposed a ban on buying crypto with credit cards (Barclays isn’t waiting, having imposed such a ban in June, arguing that crypto’s inherent volatility could leave customers unable to pay their debt). However, stablecoin purchases on credit would still be allowed.

Armstrong’s ‘censorship’ tweet claimed that the musical ad was “not a political statement on either party in the UK” but the Financial Times published a follow-up to Osborne’s op-ed that called the article “a withering attack on the Labour government’s approach to cryptocurrency.”

In fairness, Osborne said that in the last 11 years, “we’ve had seven chancellors, both Conservative and Labour, all pledging to support [crypto]. Next to nothing has happened.” Osborne pressed the current government to advance policies favoring stablecoins and tokenization, warning that “hesitation risks irrelevance.”

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