Inside Coinbase’s Budding Plan To Become The AWS Of Crypto

There was a time when Amazon Web Services (AWS) was just an afterthought for the Seattle-based company, overshadowed by Amazon's mammoth e-commerce business.

Fast forward to this day, and the Amazon subsidiary, which launched nearly 20 years ago, is now the main profit engine for the $ 1.8 trillion company. In 2020, AWS generated $ 13.5 billion in annual operating profit, representing 63% of the parent company's total, with a revenue base of $ 45.3 billion.

Coinbase, the US cryptocurrency exchange, hopes to follow these steps with its own infrastructure product, Coinbase Cloud.

"We want to be the AWS of cryptocurrencies," said Coinbase Chief Product Officer Surojit Chatterjee in an exclusive interview with Forbes. "We are building this whole suite of Coinbase Cloud products that you can think of as crypto computing services, to help developers build their applications faster."

Coinbase executives will be the first to tell you that you need to get there sooner rather than later. Despite all the praise Coinbase has received for not only being the first major crypto company to go public, but also for going public through the largest direct listing in history, its income base is too reliant on trading fees. transaction (+ 90%). When the company went public, the figure was around 97%. This level of concentration of income in a single line item is generally reserved for major technology platforms such as Facebook or Google, which almost solely rely on advertising to generate profit.

But for the cryptocurrency giant, or any other exchange, such dependence can be a major vulnerability because trading volumes are highly correlated with market volatility. When the cryptocurrency market came to a hiatus in the third quarter of this year, Coinbase's trading volume and revenue fell 29% and 39%, respectively. The company still made a profit of $ 406 million, but that was a nearly 75% drop from its second-quarter result of $ 1.6 billion.

It has also affected investors, many of whom bought shares in Coinbase with the expectation that the shares would offer a more diversified exposure to cryptocurrencies than just buying bitcoins. The reality has proven to be different, as Coinbase's price has closely followed Bitcoin since it went public in April.

To mitigate this liability, smooth out revenue, and protect itself from fee compressions that have plagued traditional brokers like Charles Schwab and TD Ameritrade, Coinbase seeks to supplement trading revenue with underwriting services that will be more immune to market changes. For example, it offers an institutional escrow service, engagement opportunities, a learning portal that rewards users with crypto, an e-commerce payment program, and issues Visa debit cards to customers. You are also testing a subscription service that will provide a monthly business allowance for a fixed fee.

As a result of this evolution and product development, subscription and service revenues grew 41% sequentially to $ 145 million in the third quarter, representing 11.7% of total revenues. But according to Coinbase executives, they are just getting started. This is where Bison Trails comes in.

Lost amid all the market euphoria earlier this year was Coinbase's January acquisition of the Brooklyn, NY-based market infrastructure provider for an undisclosed sum (the company did not share any financial information regarding the terms of the agreed when asked recently). After the deal was consummated, Bison Trails co-founders Joe Lallouz and Aaron Henshaw became the new heads of Coinbase Cloud.

For Chatterjee, incorporating Bison Trails was a key part of Coinbase's transition to support a more mature financial ecosystem. “Crypto is not just buying and selling tokens, it is building this entire financial system on top of the blockchain. We believe that we can play an important role in bringing our clients into the utility phase of crypto from this early phase, which is more driven by investment or speculation ... we aim to be the primary financial account of the crypto economy for our customers. "

Today, the platform supports crypto custodians, funds, decentralized applications, and token holders. Some of his key clients include prominent venture firm Andreessen Horowitz (a16z), New York-based fintech firm Current, and Turner Sports.

In an upcoming press release, Trevor Marshall, CTO of Current, says that “the secure and reliable infrastructure and networking expertise provided by Bison Trails (Coinbase Cloud) has been invaluable in making it possible for Current to be an early and active participant in Polkadot, Karura and Acala and create hybrid financial products that have the potential to improve the financial results of even more people. "

Still, achieving long-term growth will require significant backend engineering and technical support. After all, becoming the AWS of cryptocurrencies requires much more than just cloud storage. There should be improvements such as stable and low-latency connectivity to networks and blockchains, as well as various crypto-computing services. All of this is to help developers build applications faster within the ever-growing Coinbase ecosystem to serve their customer base.

It also requires extensive knowledge of the protocol. “To run 30 blockchains, you need a secure, reliable and highly resilient infrastructure. These things are driving this new financial platform, ”says Henshaw. “But you also need a lot of protocol expertise. One of the things that we pride ourselves on and I think our clients like it very much is that we are experts in the protocols that we support. "

Although the company does not specifically break down Coinbase Cloud revenue or employee counts in its financial statements, it did provide the following metrics to demonstrate market traction.

• $ 30 + billion of assets staked on 25+ protocols

• 60,000 nodes used to support your various services on these networks
• Doubling the size of the team since acquisition, with a focus on building security personnel.

That said, as asset prices have skyrocketed this year and use cases continue to grow from decentralized finance apps and NFT to the metaverse now, competition is fierce. Billions of dollars in grants, venture funds, and incentive programs have been issued to entice developers to work directly on certain blockchains such as Celo, Avalanche, Algorand, Cardano, and Solana.

Additionally, specialist companies, such as Alchemy, have garnered multi-billion dollar valuations by providing the same type of backend infrastructure that Bison Trails is developing for Coinbase, to help developers build directly on top of blockchains. In fact, in late October, Alchemy raised a $ 250 million Series C funding round with a valuation of $ 3.5 billion. In comments issued on the funding round, a16z general partner Ali Yahya drew direct parallels between Alchemy's offering and AWS (a16z was also one of the first investors in Coinbase.)

Although Alchemy doesn't talk about his metrics, he has set a leadership position in supporting dapps. For example, some of its main clients include the world's largest NFT marketplace, OpenSea, and the popular online multiplayer game Axie Infinity. In fact, it currently supports virtually the entire NFT industry and claims to have 70% of the top applications as clients (regardless of crypto use case). It also claims to handle $ 45 billion in transactions on an annualized basis.

That being said, Coinbase isn't overly concerned about Alchemy's head start or market share, because it has something that virtually no other crypto company currently has, a verified user base of 73 million customers looking to dig deeper into the assets. cryptocurrencies.

The community saw the power of this internal customer base first hand last month when the company published a waiting list for its next NFT project. More than 1 million people signed up on the first day. Henshaw hopes that this direct access to customers, plus Coinbase's reputation for simple and intuitive platforms and user experiences, if not customer service, will be a key advantage going forward.

Calling it a 1 + 1 = 3 scenario, it compares Coinbase's full set of offerings to "Read / write infrastructure only, which is what Alchemy does ... All other products and services Coinbase can uniquely provide to developers. like commerce, fiduciary access ramps, we provide a unique place for people to develop the complete end-to-end experience that doesn't really exist today. "