“First they ignore you, then they laugh at you, then they fight you, and then you win.”
This is one of my favorite quotes. I don’t know exactly who said it, but it has been wrongly attributed to Mahatma Gandhi.
To me, this describes the disruptive force of technology: incumbents ignore newcomers, mock them, try to push them out, and eventually lose to more effective methods.
This is exactly what is happening in the world of traditional finance, as blockchains take aim at the $33.5 trillion financial sector.
You only have to look at Jamie Dimon, CEO of JPMorgan, to understand how this happened.
In 2017, he called bitcoin a “fraud” and compared it to the infamous 17th-century Dutch tulip bubble. He believed governments would shut it down if it threatened traditional financial systems.
A year later, Dimon changed his mind, but he differentiated bitcoin from the rest of the cryptocurrencies. He recognized the potential for a transformative technology for the financial sector. JPMorgan even launched its own digital currency, JPM Coin, for cross-border payments and settlements.
While we haven’t heard much about JPM Coin lately, Dimon’s bank began offering crypto-related investment options to its wealth management clients in 2021.
He’s even changed his mind about bitcoin in recent times, saying that while the cryptocurrency may not be a reliable store of value, it’s here to stay in some form, especially if it’s well regulated.
The battle is far from over.
Despite all its promise, decentralized finance has yet to conquer the financial system. Most blockchains are still slow and expensive, making them useless for millions of daily financial transactions.
However, most of these problems are a thing of the past. And the future of DeFi couldn’t be brighter…
The dark horse of DeFi
DeFi requires blockchains to operate at scale. This means the ability to process tens of thousands of transactions at once.
To put this into perspective, take a look at some of the traditional financial systems that DeFi seeks to disrupt:
- The New York Stock Exchange can handle a trading volume of more than a billion shares per day.
- Visa can handle 65,000 transactions per second.
- Mastercard can handle 5,000 transactions per second.
This is the kind of scale that DeFi applications need to reach before they can become truly useful to the entire global population.
The problem is that Layer 1s are quite slow and inefficient.
Layer 1s are basically blockchains on which you can build projects like DeFi applications.
While upgrading Layer 1 is part of the solution, the other part is Layer 2 protocols.
Layer 2s, as the name suggests, are blockchains built on top of Layer 1 and ultimately connect to Layer 1 but improve on the speed and efficiency issue.
So, by building a DeFi application on Layer 2, you can take advantage of the speed and efficiency of Layer 2 while still benefiting from the security of the Layer 1 it connects to.
In the crypto world, the most famous layer 1 protocol is Ethereum. And a good example of a layer 2 protocol is Referee (ARB).
Arbitrum, with about 38% market share of Layer 2s built on Ethereum, has a maximum capacity of 40,000 transactions per second.
Layer 2 projects are a growing segment in the crypto market and are expected to continue growing at a rapid pace throughout the remainder of the decade.
The market capitalization of Layer 2s over all Layer 1s is now worth just over $20 billion.
Investment firm VanEck predicts that Ethereum layer 2s alone will account for 60% of the market and be worth over $1 trillion in market capitalization by 2030.
But in the search for the right Layer 2 to invest in, Arbitrum, with its first place in terms of market share, is not the most interesting.
This title goes to Layer 2 in second place — Base Protocol (BASE).
The On-Ramp to DeFi
It’s remarkable that Base is in second place, with $6.67 billion worth of digital assets locked or staked on its platform, given its unremarkable beginnings.
Layer 2s have been in the works since around 2016, just a year after Ethereum’s public debut.
But Base is not one of them. It was just launched last summer.
And it doesn’t have an impressive, new technology stack that it’s pioneering. Instead, it’s simply building on existing technology provided by the third-placed Layer 2 – Optimism (OP).
But there’s a reason why it’s gained the second-largest market share in just one year since its launch: it was built by popular cryptocurrency exchange, Coinbase.
With 120 million users and over $226 billion in trading volume in the last quarter, Coinbase is one of the easiest ways for the average person to get into the world of crypto.
It provides an easy on-ramp for someone to take their fiat currencies and purchase crypto tokens on their centralized exchange.
Now, Coinbase is going one step further and creating an on-ramp for users to take their crypto tokens from their centralized exchange and interact with decentralized applications.
This is exactly what Base was created for.
It is also much easier to access for the average person compared to other Layer 2s.
There is no website to go to or list of specific instructions to follow, instead all you need is your Coinbase account to get started and it can guide you to Base.
The excitement around this ease of access is what has made Base so valuable in just one year.
Base launched for public access in August 2023, with only $134.54 million in assets locked on the platform.
But as the number and popularity of DeFi applications on Base has grown, the total value of digital assets locked (TVL) on Base has exploded.
These types of DeFi projects on Base have increased their TVL by almost 50X to $6.67 billion today.
However, there is no direct way to invest in Base to take advantage of this trend since there is no Base token and no plans to introduce one.
But one thing you can do is invest in promising DeFi projects in the Base ecosystem because, ultimately, these are the projects that users will interact with once they are on Base.
Moreover, these are the projects that are likely to benefit most from Base’s growth.
If you still have questions about our top picks for DeFi on Base, check out The Next Wave of Cryptocurrency Fortunes.
Until next time,
Ian King
Editor, Strategic fortunes
