Coinbase, which relies on US debt to survive, is still on the road to survival.

What changes is Coinbase making when transaction revenue is no longer its main source of income?

Original Author: LeftOfCenter

Under the shadow of the crypto winter, exchanges are having a tough time. As trading volume decreases significantly, revenue continues to decline.

For listed companies like Coinbase, they have to be accountable to their shareholders.

Recently released Coinbase Q2 financial report shows that Coinbase’s trading volume in the second quarter of 2023 decreased by 37% compared to the previous quarter, and transaction revenue also declined, being surpassed by “subscriptions and services” for the first time. This means that the revenue structure of cryptocurrency exchanges is undergoing a transformation, which may redefine the current cryptocurrency landscape.

Further analysis reveals that in the category of “subscriptions and services,” the largest proportion of interest income comes from its holdings of USDC, amounting to $151 million, accounting for 75% of total revenue. Analyst John Todaro from Needham & ComLianGuainy believes that Coinbase’s USDC interest income benefits largely from the revenue sharing agreement reached with Circle and Center regarding USDC stablecoin reserves. Although the decline in USDC market value has led to a decrease in Coinbase’s interest income, the income generated by the Fed’s interest rate hike can offset some of the losses.

Although Coinbase’s Q2 revenue has declined, it exceeded expectations. In addition, the net loss has narrowed and exceeded analysts’ expectations. After the Q2 financial report was released, the stock briefly reached $97 in after-hours trading on August 6th, after closing at $90.75 (Thursday trading session closing price). It has now fallen back to $81. Since mid-June, when BlackRock submitted its application for a spot Bitcoin ETF to the U.S. SEC and Coinbase was named as its custodian, Coinbase’s stock price has soared by over 60%.

Q2 revenue performance and pressure have been temporarily relieved. However, with the continued crypto winter and tightening regulations, Coinbase will face greater challenges next, forcing it to actively adjust its business direction and explore new sources of revenue.

No longer the main source of revenue

Coinbase (COIN) released its second-quarter financial report on Thursday, August 4th, which showed a decrease in both trading volume and revenue compared to Q1. In Q2, Coinbase’s total trading volume decreased from $145 billion in Q1 to $92 billion, and the decline in cryptocurrency trading volume contributed to the decrease in Coinbase’s trading revenue from approximately $375 million to $327 million.

As the largest cryptocurrency exchange in the United States, Coinbase’s business model heavily relies on trading revenue. As early as April 2021, when Coinbase went public on Nasdaq, the documents submitted to the U.S. Securities and Exchange Commission (SEC) showed that in the first quarter of 2021, Coinbase earned $1.5 billion in revenue from trading, accounting for 86% of the total revenue of $1.8 billion at that time.

As the price of digital assets continues to decline, Coinbase’s trading revenue has also decreased. In the first quarter of this year, Coinbase’s trading revenue dropped to $375 million, accounting for only 46% of its total revenue of $773 million.

The proportion of Coinbase’s Q2 trading revenue further decreased and was surpassed for the first time by the “subscription and services” revenue category. The Q2 financial report shows that Q2 “subscription and services” revenue was approximately $335 million, including USDC interest income, staking and custody fees, accounting for 51% of net revenue, surpassing the 49% from trading fees.

This marks an important shift for Coinbase, where trading fees may no longer be the main source of revenue and will be replaced by another revenue source, “subscription and services” revenue.

The decline in trading volume has put immense revenue pressure on Coinbase, which means that Coinbase needs to actively seek other sources of revenue, not just rely on the rise and fall of the cryptocurrency market, such as subscription and services, and staking services.

US Treasury yields are prominent

The financial report shows that in the “subscription and services” revenue category, Coinbase received a total of $335 million in revenue in the second quarter, surpassing the trading revenue of $327 million for the first time. This figure has increased 1.3 times compared to the same period a year ago, when it was $147 million.

Within the “subscription and services” revenue category in Coinbase’s Q2, the largest proportion is interest income, which is $201 million, while the income from blockchain rewards is only $87.6 million (although there is still a slight increase compared to the previous quarter, from $74 million in Q1 to approximately $87.6 million this quarter).

Although the proportion has increased, the interest income is still declining compared to the previous quarter, from $240.8 million in Q1 to $201.4 million in Q2, mainly due to the continuous decline in the market value of USDC, which is the main asset source for interest income. It is worth noting that $151 million of the interest income in the second quarter came from Coinbase’s holdings of USDC.

John Todaro, an analyst at Needham & Company, stated that Coinbase’s interest income is largely attributed to Coinbase’s relationship with Circle and the Center, the issuers and managers of USD Coin. As a founding member of this alliance, Coinbase reached some sort of revenue sharing agreement with Circle when USDC stablecoin was launched in 2018.

Stablecoins are tokens pegged to the value of sovereign currencies such as the US dollar, usually backed by cash and government-issued treasury securities (such as bonds). As the Federal Reserve tries to combat high inflation by significantly raising interest rates, the yield on US Treasury bonds will continue to rise.

When the yield rate of government bonds continues to rise, Coinbase can generate a large amount of interest income from it. According to data from CoinGecko, the market value of USDC is $26.1 billion, ranking as the sixth largest cryptocurrency by market capitalization. However, the market value of USDC has still fallen by 19% from $32.5 billion at the beginning of the second quarter, mainly due to the collapse of Silicon Valley Bank in March, which caused USDC to “break its anchor” and plummet.

Since then, the Federal Reserve has raised interest rates to the highest level in 22 years, theoretically increasing Coinbase’s income from USDC reserves. However, considering the decline in the market value of USDC, this may offset some of the earnings.

The Federal Reserve’s interest rate hike is beneficial to Coinbase’s business and can offset most of the decline caused by the drop in the market value of USDC. However, since the revenue-sharing agreement reached by Coinbase and Circle on USDC has not been made public, the exact income details are unknown.

Redemption! The new direction Coinbase is exploring

Although the trading volume of Coinbase in the second quarter has dropped significantly, the overall revenue performance has exceeded market expectations. This is largely due to interest income and staking income.

However, these two business lines are also facing risks in the future. On the one hand, the continuous decline in the market value of USDC, the main source of interest income, has led to a 25% month-on-month decrease in USDC interest income. On the other hand, Coinbase’s staking business line is also facing regulatory challenges.

Faced with declining trading volume in the bear market and increasing regulatory pressure, Coinbase needs to actively seek other ways out.

This may be why Coinbase has been actively seeking diversified businesses and sources of income, including actively promoting the development of decentralized infrastructure proto-dank shard (EIP 4844), launching the Ethereum Layer 2 superchain Base and new wallet products, and the ongoing Onchain Summer.

Ethereum Layer 2 superchain Base and Onchain Summer

On August 10th, Coinbase announced that the Layer 2 network Base is open to all users, officially starting the Onchain Summer event to attract more users.

Base is Coinbase’s investment in blockchain infrastructure. As an Ethereum Layer 2 solution, Base can reduce transaction costs and improve transaction speed. Coinbase hopes that Base will expand beyond transactions and bring more consumer users onto the chain.

Under the name of Onchain Summer, Base has invited more than 50 crypto and non-crypto brands, including Coca-Cola and Atari, to join the Layer 2 network. During the event, users can mint various NFT designs and artworks and explore other rewards in the DeFi ecosystem in the network to celebrate the event, redefining the narrative of cryptocurrencies as “fun and engaging things” through actual use to make users accustomed to the native experience of crypto consumption.

With the launch of the Base mainnet, the number of applications deployed on the Base network continues to grow. The first non-typical native encrypted application,, has been created. It is called non-typical because this application is neither DeFi nor Meme, but a native encrypted application with social attributes. In less than a week after its launch, this popular application has contributed 6,599 ETH in trading volume to Base, with over 210,000 transactions. As of now, the total value of bridged assets on Base has exceeded 200 million US dollars, with over 8 million transactions in the past 30 days.

It can be seen that under regulatory pressure and facing continuous uncertainty in the cryptocurrency market, Coinbase urgently needs to seek other ways out and transition from a single revenue structure to more diversified sources of income, especially new sources of income that do not rely on the market’s ups and downs. Building a second-layer Ethereum chain like Base could potentially add a new source of income for Coinbase.

The remaining ambition: Becoming a decentralized super app

Coinbase’s ambition goes far beyond simply “easing temporary revenue pressure.” In fact, Coinbase CEO Brian Armstrong envisions Coinbase as a super app comparable to WeChat or Alipay.

Apps like WeChat have penetrated every aspect of people’s lives, providing services including “instant messaging, shopping, payment, loans, banking, ordering food,” covering all aspects of clothing, food, housing, transportation, and entertainment. They can rightfully be called super apps.

Coinbase also hopes to create a super app, but unlike WeChat, Coinbase’s goal is a decentralized super app. This means that not only assets are decentralized, but also decentralized social interactions, decentralized communication, merchants accepting NFTs, and simple DeFi interfaces, which are not limited by borders and are universally applicable worldwide.

Coinbase has not officially released any related plans yet, but the recent addition of encrypted communication features to its wallet, Coinbase Wallet, indicates that the prelude to developing a decentralized super app has begun.

The built-in chat function in this native encrypted wallet, Coinbase Wallet, is not only borderless and globally applicable, but also not limited to the app itself. This means that Coinbase Wallet users can have real-time cross-app conversations with friends. In addition to registered users of the wallet, they can also chat, trade, and send assets with users outside of the app.

This kind of chat/payment equivalent to linking WeChat and Alipay accounts is also a new native function provided by changes in blockchain underlying technology and architecture, which will inevitably bring about the evolution of new business logics.

This is a completely new field that has not been explored before and has no reference samples. This exploratory process may not be easy, even “very difficult.” Brian Armstrong has set a deadline for this: to achieve it within the next five to seven years.

However, it is obvious that both the long-term narrative of “bringing the next batch of millions of builders and billions of users onto the chain” and the actual actions of cutting expenses by 50%, exploring new sources of revenue, and diversifying business strategies, are enough to see Coinbase’s sincerity – striving to prove to regulators that “there are more use cases for cryptocurrencies beyond trading and speculation, and Coinbase is working hard to achieve them.” The benefits of doing so are not only to loosen regulatory restrictions but also to win the favor of shareholders. After all, in the capital winter, the market needs such a good story.

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