Layer 2 Protocols Are Outperforming All Other Major Crypto Sectors, Optimism Leads the Way

Layer two networks have been leading the cryptocurrency market in making a steady recovery this year. Optimism has been on a major bull run since the year started, and four days ago, it reached an all-time high of $3.22, according to data from CoinGecko. Coinbase’s launch of a new layer two known as Base, could ignite another major bull run.

Layer two protocols outperform the crypto market

Coinbase has renewed interest in layer two networks. The exchange shared a cryptic tweet before announcing that it would launch a new layer two network known as Base. According to Coinbase, this layer two network would be created on the OP Stack, which is the same one used by Optimism.

The exchange said that the goal behind creating this layer two network was to allow its users to access the Ethereum network and share a percentage of the fees charged on Base to the Optimism Collective, the governing protocol for Optimism.

The exchange said,

We’re excited to collaborate with OP Labs and the Optimism Collective to build on our shared vision for scaling Ethereum via a robust, interoperable Web3 ecosystem that can onboard the next billion users into Web3.

Coinbase released this layer two platform when the hype around layer two scaling solutions has risen. Layer two tokens have been outperforming the broader cryptocurrency market since November.

A report by Kaiko noted that out of five simulated portfolios tracking the returns of the top five tokens in every sector classified by market capitalization, the layer two market had gained by more than 90%, with the majority of tokens gaining by more than 50% since late November last year.

The announcement of Base’s launch by Coinbase triggered additional gains for OP, which is currently up by 8% over the last seven days. These gains could continue if interest in the token continues to increase.

Coinbase is looking to diversify revenue streams with Base

The launch of Base could create a major revenue stream for Coinbase. Coinbase, like most exchanges, relies heavily on trading fees. However, the declining trading volumes across the crypto market have largely affected the collected fees as volatility for top tokens has dropped significantly.

Coinbase had an earnings call last week addressing changes in revenue stream. At this time last year, retail trading accounted for 32% of the total volumes on the exchange, which has since dropped to the current 13%. These numbers show a major ground shift as retail trading generates more revenue for the exchange than institutional trading.

To make up for the drop in money flowing into the exchange, Coinbase has started to rely on interest earned from USDC. This interest has increased from $8 million to $182 million year-over-year.

The increase in interest earned on this stablecoin comes amid a rise in interest rates across the financial sector. Coinbase and Circle can now generate more than 4% interest on the collateral used to back USDC.


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