Will layer-2s become table stakes for exchanges?

A continued shift to DeFi-focused offerings could be a boon for crypto exchanges looking to diversify revenue streams and attract new users, industry executives say.

With another exchange-launched layer-2 network reportedly in the works, such chains, and other decentralized products, look poised to become more prevalent for centralized crypto giants.

Coinbase launched Base — an Ethereum layer-2 network built with Optimism’s OP stack — in August. The publicly traded company’s third quarter subscription and services revenue, which is generated from stablecoins, custodial fees, blockchain rewards and interest income, exceeded its transaction revenue for the second straight quarter.

Bitwise crypto equities specialist Alyssa Choo previously told Blockworks that Coinbase is setting up its future as a “crypto super app,” adding that monetizing Base is on the company’s radar.

Crypto exchange Kraken is mulling a similar layer-2 launch, CoinDesk reported Tuesday.

“We’re always looking to identify and solve for new industry challenges and opportunities,” a Kraken spokesperson told Blockworks in an email. “We don’t have anything further to share at this time.”

Andy Bromberg, CEO of crypto wallet Beam, noted that layer-2 networks have the potential to generate substantial profits for exchanges via grants and transaction revenue.

“If they believe in their ability to leverage this user base for long-term adoption and usage, launching a network becomes a logical step for them,” he said.

Coinbase did not specify the fees garnered from on-chain transactions in its third quarter shareholder letter. But the company said layer-2s “can be likened to the transition from dial-up Internet to broadband.” Coinbase’s Onchain Summer event in August saw about 10 million NFTs minted across more than a million transacting wallets on Base, amounting to $500 million in assets on the platform.

Dan Reecer, head of operations at Wormhole Foundation, said looking to replicate such success would be appealing to Kraken.

“This additional revenue stream could further strengthen Kraken’s financial position and support its long-term growth plans especially as it likely eyes an [initial public offering] in the future,” Reecer said.

Kraken is among the crypto firms doubling down on “the full vision of crypto,” Bromberg said, noting that decentralized products expand a company’s reach beyond just custodial services, for example.

Kraken acquired staking platform Staked in 2021 to offer a non-custodial alternative to its staking service — but ended on-chain staking for US clients as part of a settlement with the US Securities and Exchange Commission. The exchange launched an NFT marketplace in June.

Binance CEO Changpeng Zhao said in 2022 that while centralized exchanges offer a gateway to people entering the crypto space, DeFi is set to become more prevalent in the coming years. The comments came less than two months before the collapse of FTX, which further shook confidence in centralized entities.

Binance offers BNB Chain, an ecosystem of layer-1 and layer-2 scaling solutions. It unveiled a Web3 wallet Wednesday built to simplify user interaction with DeFi applications by integrating multiple blockchains.

CoinScan vice president Evan Steinhilb said Kraken could benefit from funneling its clients into the DeFi and self-custody realms via its own products, rather than directing them to competing offerings.

“Furthermore, offering a proprietary layer-2 enables a plethora of marketing angles and will likely expose many DeFi fanatics to Kraken just as they explore a new [layer-2] — as has been the case with Coinbase’s Base chain,” he said.

Layer-2 network offerings are surely making their way to become “table stakes” for big exchanges, Steinhilb said.

“I’m sure once there’s more regulatory certainty around tokens we’ll see more exchanges take the route that Binance and Crypto.com have taken,” he explained. “But in the meantime it’s more likely to look like Coinbase’s Base network.”

Still, Reecer said some exchanges may not wish to launch and maintain their own layer-2 networks.

He added: “It will come down to their team size and resourcing, as well as their value alignment with decentralized technology.”

Get the news in your inbox. Explore Blockworks newsletters:

The Breakdown: Decoding crypto and the markets. Daily.
Empire: Crypto news and analysis to start your day.
Forward Guidance: The intersection of crypto, macro and policy.
0xResearch: Alpha directly in your inbox.
Lightspeed: All things Solana.
The Drop: Apps, games, memes and more.
Supply Shock: Bitcoin, bitcoin, bitcoin.