It’s an irony not lost on anyone: The biggest company in the Bitcoin business is … a trusted middleman.
The leading U.S. crypto exchange, Coinbase, is on the brink of a direct listing for shares in the company on Nasdaq, opening it up to scrutiny in the public equity market and demonstrating the extraordinary demand for cryptocurrency. Its staggering first-quarter results have all but guaranteed this stock market debut will be one for the history books, with analysts estimating the company’s value in the tens to hundreds of billions of dollars.
But how long can Coinbase thrive as more and more financial activity moves online natively? What happens to the original fiat-to-crypto on-ramp when people stop needing on- and off-ramps because all the money they earn, and all the places they spend it, are on the leaderless record-keeping systems known as blockchains?
Such scenarios may sound fanciful at the moment, even to believers in the technology. But they are not out of the question.
“That bridging process is going to take decades,” Joey Krug, Augur founder and co-investment lead at Pantera Capital, told CoinDesk in a phone call. And even when the process is complete, he still sees a role for intermediaries. “You can still do a lot and make a lot of money once everyone is in this new financial system.”
Opinions ranged widely about Coinbase’s long-term prospects as more internet users go native in a world of internet-native money. In what follows, we explore an array of views about how the company would fare in a far-off future of increasingly digitized value.
The current favorite example for a company the world passed by is Blockbuster Video. Once a great chain of VHS tape and then DVD rental stores, its fall came quickly as Netflix made watching movies on the internet easy (one store remains).
It’s not like video didn’t exist online before. BitTorrent was alive and well and widely used by young people and internet hardcores, but it made most normies nervous.
Meanwhile, Netflix already had a relationship with millions of movie fans via its mail-order DVD rentals. When its executives were confident it could make streaming video easy for anyone, it launched a service with one-click ease of play and without any piracy in 2007.
So which is Coinbase? Is it Blockbuster or has it been Netflix all along?
When Coinbase filed its prospectus to become a publicly traded company, it disclosed that it saw decentralized finance (DeFi) as a potential threat. Not everyone believes the company really meant it (“risk factors” disclosures are often kitchen-sink, cover-your-behind affairs). But imagine a future in which people get paid in crypto and can pay bills like rent and utilities on a peer-to-peer basis. If that day comes, why would anyone even need an app like Coinbase to get them back to fiat?
Coinbase is at its core an exchange. It’s a place to buy and trade different cryptocurrencies. So the question is, could blockchain-native exchanges, so-called decentralized exchanges (DEXs), eventually take away much if not all of its business?
It won’t happen soon enough to prevent this listing from being a blowout, that’s for sure.
“Decentralized exchanges will definitely grow massively, but I believe they will co-exist with centralized exchanges as each has their benefits,” Linda Xie, managing director of Scalar Capital and a Coinbase alum, told CoinDesk by email. “Not everyone can or wants to store their own private keys and many like that there is an entity that can be available and/or held legally accountable should any issues occur.”
Anderson Kill attorney Stephen Palley agreed. “It’s more likely that Coinbase will provide integrations that will use DeFi products, or things like DeFi,” he said.
But Do Kwon, one of the founders of the stablecoin protocol Terra, looks farther down the road. He told CoinDesk via email:
"Coinbase prevails today on [user experience] and easy on-ramps for U.S. retail. Both will be commoditized in DeFi over time – open systems inspire and mobilize developers to tackle both problems aggressively in a way that a closed monopoly like Coinbase never can."
Coinbase is, right now, very much a Web 2.0 approach to the decentralized internet of value. It’s mobile-first and centralizes custody of assets in a way its users trust.
Can it adapt as this evolution gets really far along?
Joseph Kelly, co-founder of crypto lender and custody company Unchained Capital, drew a different, even older comparison than Blockbuster and Netflx. “It’s a little like the Yahoo vs. Google dichotomy,” he told CoinDesk in a phone call.
This is ancient history to most, but the initial idea of Yahoo! in the far-gone days of the late 1990s, was to create a directory of the internet that looked much more like the yellow pages of a phone book, where every site would exist in some nested category.
Like: Entertainment/Movies/Action movies/’80s movies/Terminator FanFic.
It made sense at the time and it worked well enough that Yahoo became a big company, but it turned out that the internet was a much too fuzzy place. Google came along with a whole different framework to organize an expanding web, and Yahoo Search’s relevance was not long for the digital world. The company, Yahoo!, became a pile of cash that no one could figure out how to spend well.
It was sold for parts in 2017.
As more people become comfortable with storing the keys to their crypto wallets and establishing trust with code, can Coinbase adjust? “It doesn’t have that in its core DNA,” Kelly contended. He pointed out that Coinbase’s willingness to empower its users has been a longstanding question in the company.
“We’ve been helping customers on an almost weekly basis who have coin on Coinbase adopt a more self-custody approach,” Kelly said. “It’s a weird political environment these days and they worry about things like censorship.”
The example Kelly gave: What if the U.S. Internal Revenue Service starts holding people’s crypto hostage as a way to get back taxes paid? (Coinbase has resisted the agency’s subpoenas in the past, but there’s no guarantee it will always do so.)
Krug sees the same issue differently. “The DeFi protocols are going to remain decentralized but you’re going to have businesses build totally centralized services on top of them,” he said. “If Coinbase launches some portal to use certain DeFi apps, that instantly credentializes it.”
Just as any coin listed on Coinbase shoots up in value, any dapp Coinbase finds trustworthy is likely to spike in usage. RIP: transaction fees.
Avalanche founder and Cornell University computer science professor Emin Gün Sirer agreed. Coinbase makes crypto feel like investing the way people already understand it. “You cannot discount how important this function is to putting crypto into the wallets of the next hundred million users and beyond,” he wrote in an email. “That said, DeFi is maturing rapidly, and will continue to offer complementary solutions that give users maximum control.”
If Coinbase does become a big gateway to DeFi, it will be interesting to see how the teams behind these protocols react. We’ve already seen one wave of user regret from relying on custodied solutions in DeFi. People who used user-friendly DeFi app Dharma to access Uniswap missed out on the UNI airdrop (over $1,000 worth of free tokens), for example.
If crypto is money-native to the internet, using it with a nice user interface while borrowing a stranger’s identity (the exchange’s) will always be tourism. Anyone who visits blockchains often enough will want full citizenship eventually.
Another question is whether the online world of value and the analog world of fiat will remain distinct realms.
That hasn’t been true of the internet broadly. The distinction between “meatspace” and “cyberspace” has broken down very nearly completely. Except in extreme cases, online life is just life.
That said, most people spend most of their time on platforms (such as YouTube and Facebook) that present a unified structure atop the chaos of the world wide web.
Michael Egorov of Swiss Stake, the creator of the DEX for stablecoins, Curve, told CoinDesk in an email that he sees the centralized players shrinking merely to a place that people come in and out. “I actually subscribe to the view that centralized exchanges (especially when Ethereum scales) will slowly convert to the role of [mere] on/offramps,” he wrote.
Coming in and out of fiat is the right point, in Egorov’s opinion, for regulators to watch users, and Coinbase has done well with securities and commodities regulators.
“Coinbase is the most ubiquitous crypto on-ramp in the market today,” Eva Beylin, of the decentralized web analytics firm Graph Protocol and eGirl Capital, told CoinDesk via direct message. “I think it’s more likely that Coinbase will continue to dominate the on/off-ramp sector and begin competing with payment processors like Stripe or fiat clearinghouses, rather than Defi.”
But “being a fiat onramp is not an unfair advantage over time when regulation becomes clear and more friendly,” Primitive Ventures’ Dovey Wan told CoinDesk over email. And Kelley noted that there’s more competition for that business all the time, anyway.
That said, it could be enough that Coinbase just remains at the top of that particular game. Centralized finance (CeFi) still has the lead over DeFi in some areas. “CeFi is still generally better at capital efficiency, transaction speeds and guarantees, and typically, pricing,” said Andy Bromberg, CEO of Eco, a crypto startup aiming to marry saving and spending.
“My hot take is that Coinbase’s future depends on the outcome of the various ongoing regulatory battles,” said Joel Monegro, a VC at Placeholder. “More top-down regulatory controls will benefit Coinbase, fewer controls will benefit DeFi.”
Palley agreed that access to state-sanctioned payment rails is a powerful asset and will be for a long time.
“I would say the biggest threat to Coinbase is from banks not from DEXs, that’s my view,” Palley said. If banks start letting customers buy crypto from within their checking accounts, there won’t even be a need for users to connect Coinbase to their bank. “Banks and bank charters may be the biggest threats to Coinbase,” Palley said.
Yet he was also willing to admit that it may just be that DeFi hasn’t evolved quite far enough yet. All bets are off if something mind-bending emerges. “It could be that we’re waiting for a killer app, but I don’t think Sushi or Uniswap – as cool as they are – are going to be able to break into a broader financial market,” Palley said.
But to Krug’s way of thinking, Coinbase may or may not be a Blockbuster Video, but he’s sure the big banks are. “You can’t take an old school company and switch it to a Silicon Valley style company,” Krug said. “I don’t think that’s a real risk.”
As big as Coinbase has gotten, it’s still nimbler than a bank, Krug said.
“It’s clear to me that crypto eats the banking world entirely, but it’s not clear what portion of crypto will be decentralized versus custodial. I expect a healthy mix,” Erik Voorhees, the founder of another crypto exchange, Shapeshift, told CoinDesk over email.
In fact, one of the most vocal proponents of DeFi expects Coinbase will be here for a long time. “Coinbase has done a fantastic job of expanding their lines of business,” Variant Fund’s Spencer Noon told CoinDesk. “It’s a real testament to that team not resting on its laurels.”
In particular, he pointed to the crypto custody business, which hardly existed when Coinbase started working on it. Many people said that this is key. It’s the top and bottom of the market Coinbase will serve forever: the nervous newbies of retail and the financial giants who don’t want to worry about technical details of crypto custody.
Still, Wan sees even that business getting chipped away. She noted that there was a withdrawal movement from centralized exchanges in China last year that was little noted in the West. She expects more of that to come. “I highly doubt how much bitcoin will be left in [Coinbase’s] reserve in a few years timeframe (like in the next halving). So if that reserve is drained, people will notice the importance of having their own bitcoin in [their] control,” Wan wrote.
Nevertheless, Uncorrelated Ventures partner and Bain Capital Ventures alum Salil Deshpande sees in Coinbase a company that will continue to profit on the footprint it established in this industry, even if the way it profits changes.
“Coinbase won’t go the way of Blockbuster Video; they’ll go the way of Schwab. Schwab used to charge $44 per trade in the 1980s. Now trades are free, and Schwab has successfully made a living as an asset gatherer,” he wrote. “Many institutions will find it comforting to deal with an old-school middleman like Coinbase to take care of complicated details.”
Coinbase may remain but DeFi will almost certainly always be there and that means Coinbase customers will have a place to go. The fact they can may be a more important check on crypto’s publicly listed behemoth than regulators will ever be.