Coinbase Listing Highlights DeFi Will Shape the Crypto Exchange’s Future

Coinbase listed its stock today on the Nasdaq exchange at $381 per share and an initial market cap of $99.6B, marking the historic first entry of a crypto exchange onto the US stock market. The Coinbase listing is expected to draw a major new wave of investor interest towards crypto markets.

Coinbase stock, ticker COIN, jumped to as high as 429.54 after listing, and was trading at just under $400 at the time of writing.

Coinbase was founded in 2012 as an exchange to buy Bitcoin, and a large part of its revenue still comes from trading of the largest cryptocurrency. But while BTC has shaped Coinbase’s past, it will most likely be decentralized finance that makes the biggest impact on the largest US exchange’s future.

DeFi Future

As DeFi protocols continue to grow, trading of their tokens will keep taking market share away from Bitcoin trading. In addition to just buying and selling tokens, DeFi provides the opportunity to do more with users’ assets — such as lend and borrow in a peer-to-peer, or peer-to-smart contract, way. Coinbase has recognized this and since last year has started to aggressively add new tokens and DeFi integrations.

“DeFi protocols are an important and rapidly growing component of the cryptoeconomy, and a substantial business opportunity for us,” the exchange wrote in its 2020 results, adding that it has invested in building relationships with DeFi developers, and piloted a “Day 1 Launch” program to support DeFi protocols’ tokens.

Failing to keep up with the rapidly growing DeFi ecosystem is a risk for Coinbase, the exchange said in the filing.

“If we cannot keep pace with rapid industry changes to provide new and innovative products and services, the use of our products and services, and consequently our net revenue, could decline,” the report said. “Our industry has been characterized by many rapid, significant, and disruptive products and services in recent years. These include decentralized applications, DeFi, yield farming, staking,” and others.

Transaction Revenue

Last year cryptocurrencies other than Bitcoin surpassed Bitcoin trading volume on Coinbase for the first time, a sign that going forward, these tokens will continue making larger contributions to the exchange’s bottom line.

“In 2020, other crypto assets contributed a greater share of Trading Volume,” Coinbase wrote. “This growth was driven by the addition of over 20 crypto assets, including multiple DeFi crypto assets, which diversified Trading Volume away from Bitcoin and Ethereum.”

Source: Coinbase S-1 Filing

Roughly $1.1B of Coinbase’s total $1.3B revenue in 2020, or 86%, came from transaction fees on $193B in trading volume. These fees ranged from under 0.50% per trade on Coinbase Pro up to 2% for certain transactions on standard Coinbase, averaging out to around 0.57%.

Coinbase didn’t provide as detailed data on trading volume for its annual results, so it’s hard to say whether the trend of growing non-BTC volume seen in last year is increasing. Still, 24-hour data provided by Coingecko shows that about 30% of Coinbase Pro trading volume came from BTC/fiat pairs, while the other 70% of its 24-hour trading volume is an assortment of crypto tokens, many of them DeFi. The data only encompasses Coinbase Pro, and not the larger Coinbase platform.

Top DeFi Tokens

ETH is the second most traded token on Coinbase Pro, factoring for around 19% of the overall 24-hour trading volume spread across all of its pairings. ETH/USD is the most popular pairing, accounting for 14.6% of the total, followed by 1.5% tied to ETH/BTC and another 1.4% tied to ETH/EUR.

The third most traded token on Coinbase Pro was Stellar’s token, XLM, which Coinbase has partnered with and allows users to earn for free by participating in a brief tutorial. XLM made up around 7% of the overall 24-hour trading volume.

Other major DeFi tokens on the list included LINK at 3.3%, UNI at 1.3%, AAVE at 0.8%, 0x at 0.8%, and Yearn at 0.5%. More DeFi tokens like MKR and SUSHI show up further down the list.

Gauging by a conservative estimate that only factors in DeFi tokens that accounted for 0.5% of the total trading volume, over 33% of the total trading volume on Coinbase is DeFi.

This means that on Tuesday, DeFi accounted for over $1.4B of Coinbase’s $4.4B 24-hour trading volume –more than Bitcoin’s $1.1B.

Owning the Keys

Coinbase also offers a non-custodial Web3 Coinbase Wallet geared towards DeFi users (not to be confused with the regular Coinbase consumer wallet built into their web platform).

The Web3 Coinbase Wallet is a separate product from their centralized exchange, and allows users to directly store and own their keys. Similar to other Web3 wallets like Metamask, there are no KYC requirements.

But the biggest selling point for Coinbase Wallet is its DeFi lending integrations. While users can still access lending apps like Compound and dYdX in the standard way through the dapp browser, Coinbase Wallet provides an integrated dashboard that compares lending rates across different providers. Moreover, users can loan and deploy their crypto into their protocol of choice directly from the dashboard.

Crypto Payments

Coinbase also builds technology to help businesses to utilize crypto. The Coinbase Commerce platform helps set merchants up to accept decentralized crypto payments, and their WalletLink API helps DeFi app developers to accept payments from mobile crypto wallets like Coinbase Wallet.

One of the biggest barriers to the DeFi space is ease of accessibility, so Coinbase Wallet’s user-friendly lending functionality is a helpful bridge for newcomers making the plunge into DeFi.

Centralized Gateway to DeFi

Coinbase is in a unique position to act as a gateway for newcomers into the space, as it’s one of the most popular centralized exchanges, and one of the trading outlets that’s been among the most proactive in integrating DeFi offerings.

Coinbase incentivizes crypto education through its Coinbase Earn program, which provides newcomers with brief crash courses on various protocols and rewards them with relevant tokens upon completion. While the Coinbase Earn courses encompass the wider crypto space, DeFi is represented with Stellar Lumens and Compound.

While Coinbase notes that they “may receive service fees from asset issuers, such as Compound, in connection with educational content made available on Coinbase Earn,” it’s unclear how much revenue these programs generate for Coinbase. Nevertheless, giving crypto newbies a monetary stake in specific DeFi protocols is a great way to encourage interested people to venture deeper into the space.

Compound Integration

Coinbase’s relationship with DeFi lending protocol Compound goes deeper than its Earn campaign.

Coinbase Ventures invested in Compound Labs, Inc., the company behind Compound protocol, in 2018. Coinbase supplied Compound with USDC liquidity in 2019, allowed Coinbase Wallet users to access Compound directly starting in early 2020, and facilitated Compound’s transition to decentralized governance in June 2020 through its Day 1 Launch program.

Alongside educating users on Compound through Coinbase Earn which introduced over one million unique Coinbase users to the protocol, it also included trading support for COMP through Coinbase Invest and custody support for COMP through Coinbase Store, which allowed holders to participate directly in Compound governance without actually moving their COMP off of Coinbase.

“The program highlights our ability to support new and innovative protocol developers while also driving key business metrics for Coinbase,” wrote Coinbase.

Compound’s symbiotic relationship with Coinbase is a sign of how the exchange may interact with other DeFi protocols in the future.

Coinbase’s massive market debut will lead to increased interest in crypto, and its centralized, user-friendly platform will provide an accessible environment for people to gain exposure to DeFi.

The effects of Coinbase’s listing on the larger crypto scene is sure to become clearer over the coming days, but for now, the future of DeFi is looking bright.