The Future of Institutional DeFi with Base Chain & BSX
It’s almost impossible to mention crypto without thinking about one of crypto’s biggest players, Coinbase. Brian Armstrong founded Coinbase in 2012, and to date they have become a pillar of strength and good standing in the world of crypto where dozens of major players have born and died in the same span. Coinbase is one of crypto’s largest centralized exchanges (CEX). They offer the ability to easily move between crypto and fiat rails, and a trading engine where you can effortlessly trade your favourite coins. For Brian Armstrong and the rest of the Coinbase executive body, building a robust CEX was just the first part of their major plan. Embodying the decentralized essence of crypto and contributing to this vision was always in the cards. Thus, Base chain was born, a speedy and cheap Ethereum Layer 2.
What is Base?
“Base” is an Ethereum Layer 2 (L2) blockchain developed in collaboration with Optimism and incubated by Coinbase. It offers a secure, cost-effective, and developer-friendly platform for building decentralized applications (dApps).
Key features of Base include:
1. Secured by Ethereum: Base leverages Ethereum’s security and scalability while implementing Coinbase’s best practices. This ensures a high level of security, making it a trustworthy platform for dApps. Users can confidently transition to Base from Coinbase, Ethereum L1, or other interoperable chains.
2. Empowered by Coinbase: Developers on Base have access to Coinbase’s products, users, and tools. This includes easy integration with Coinbase’s products, straightforward fiat onramps, and robust user acquisition tools. This allows developers to tap into Coinbase’s vast user base and significant assets.
3. Cost-Efficient: Base offers full Ethereum Virtual Machine (EVM) compatibility at a fraction of the cost. It is committed to enhancing the developer platform, allowing gasless transactions for dApps with developer-friendly APIs for account abstraction. Developers can also build secure, multichain applications using user-friendly bridges.
4. Open Source: Base’s goal is to be a decentralized, permissionless, and open platform. It aims to be accessible to anyone interested in creating a standard, modular, and rollup-agnostic superchain powered by Optimism. Coinbase is actively participating as a Core Dev on the open-source OP Stack and is working to foster a thriving community of developers.
Institutions & DeFi
“Tokenize everything” is a term that gets thrown around a lot in crypto circles. The idea is that crypto rails offer a much easier, and decentralized way to move assets from people or institutions to other counter parties, so why not give every real world asset (RWA) a token that can easily be traded between parties. As grandiose as this idea sounds, there is a lot of truth to it. Big institutions are adopting crypto and blockchain. Something that came from “shadowy super coders” is now being discussed as a useful technological advancement by some of the biggest institutions in the world.
Over the last couple of months, huge firms such as Blackrock, VanEck, and Fidelity have all applied for a BTC ETF that many think could slingshot the crypto industry into hyperdrive. But what do all of these applications have in common? Coinbase. Every institution that puts forward an ETF application must mention a regulated custodian. And ALL of them have choosen Coinbase. Regardless of the current litigation against Coinbase coming from the SEC, it is clear to everyone paying attention that Coinbase puts compliance as its number 1 priority, and one could properly assume that they will likely win their court case against the SEC and all of the BTC ETFs will be approved in short order. Why this is important? Because as of right now, every major institution in the US looks to Coinbase when it comes to custody, trading, and insight on the crypto markets.
The next logical step for institutions? DeFi.
Crypto’s first use case, and a place where it has definitely found product-market-fit is DeFi. Trading, borrowing & lending all happen on chain with the majority of the volume occurring on dApps like Uniswap, Dydx, Aave and Maker. And most of the volume to date has happened on the Ethereum L1. Unfortunately Ethereum has proven to need scaling solutions in order to bridge the gaps between centralized finance and DeFi. That’s why Base was born. Cheap to use, and fast! With Coinbase being the on-ramp from fiat to crypto, the next logical step for institutions, is to go from Coinbase (CEX), to Base (decentralized network). If this starts to happen, there is potentially trillions of dollars that could enter this ecosystem.
Enter BSX: Building with Institutions in Mind
Base chain has only been live for 2 months, and yet it has attracted developer talent like no other chain has seen. There are already hundreds of teams building on Base, as they race to scoop up users and TVL. One of those teams is BSX. BSX is a non-custodial CLOB DEX built on the Base blockchain where users are able to buy and sell spot and perpetual products. Traders get a CEX like feeling with all the benefits of a DEX.
The team at BSX is building a product they know will have PMF from inception. Perpetual volume for crypto is consistently about 5 times the spot volume. And for some institutions the ability to trade futures contracts without having to take custody of the underlying asset can be a much needed sweetener when having to deal with a new kind of asset that can vanish in the blink of an eye if somehow your seed phrase were to get out.
Furthermore, it is important to note one of the key decisions the team at BSX came to. The trading engine they have decided on is a central limit order book (CLOB). There is much debate amongst DeFi builders as to what trading engine is superior; the automated market maker (AMM) or the central limit order book (CLOB).
In an AMM-based DEX, liquidity is provided to the platform through liquidity pools. Users add funds to these pools, which are used to facilitate trades. They don’t place traditional limit orders. AMMs use a mathematical formula (e.g., Uniswap’s x * y = k) to determine the price and exchange rate between assets. The price adjusts as the pool’s liquidity changes, and traders interact with the pool rather than with each other. AMMs can provide more liquidity for less popular or less liquid assets because they don’t rely on order matching. However, they may suffer from higher slippage when trading larger volumes. Liquidity providers in AMMs are subject to the concept of “impermanent loss,” where the value of their assets can change compared to holding them outside the liquidity pool.
In a CLOB-based DEX, trading is facilitated through an order book. Traders can place limit orders to specify the price at which they want to buy or sell an asset. Orders are matched based on their price and time priority. The exchange matches buy and sell orders that meet at a specific price, and these trades are executed immediately. The order book constantly updates with new orders. Liquidity in a CLOB DEX comes from users who place limit orders. The more liquidity there is, the tighter the bid-ask spread can be, and the more efficient the market. CLOB-based DEXs typically offer better price discovery and price accuracy because they rely on the market forces of supply and demand. Operating a CLOB DEX can be more complex for users due to the need to understand order types, order books, and managing open orders.
Because BSX is targeting institutional traders, the CLOB is the superior solution. No slippage, and a familiar trading engine are paramount to onboarding large institutions. The team at BSX clearly made the right decision here.
BSX will be launching in just a few weeks, and with a recent strategic investment from Coinbase Ventures and their Base ecosystem fund, they are poised to take a large piece of the institutional DeFi order flow!
Disclaimer: I am an investor in the BSX seed round, and this article should not be taken as financial advice.
