Analysis

Coinbase Moving Forward with New Business Segments

0 Comments

We often talk about which cryptocurrencies are revolutionizing the industry, but this ignores the fact that there are companies providing services to the industry that are pushing things forward just as much. Coinbase has recently done a bunch of things to highlight this reality.

Every year, LinkedIn published a list of the 50 most popular companies, and Coinbase was the only one to make it this year. Ranking at #35, the company is strong in terms of employee engagement, demand for jobs, and general interest in the company. These types of qualitative rankings don’t make a difference in profitability, but is an undeniably good sign for future recruitment efforts.

Creating Coinbase Custody

Trading has been seen as the main driver of success for exchanges, but they would like to find some ways to smooth out their income. In the wealth management world, this would be done by getting more assets under management. Crypto has a rather unique way of earning interest in the form of “staking” coins. This is when coins are used to validate the transactions on a blockchain and a profit rate is paid out as a result.

Tezos will be the first coin that Coinbase accepts tokens for as part of their Coinbase Custody program. The XTZ token works on a proof-of-stake algorithm, rather than Bitcoin’s more computationally intensive proof-of-work algorithm. The coins are used to demonstrate that the person validating transactions has capital at risk, which aligns the incentives better. If those staking coins act maliciously, they are penalized. At the same time, it is far more efficient than POW algorithms.

Complex New Business Model

The arrangement is rather complex, and will only really be a fit for institutional clients. In order to limit the amount of risk to investors, Coinbase will keep all of their coins in cold storage and stake its own coins. By assuming the risk, Coinbase truly does have skin in the game in order to earn the fee they take off of the overall return. In the end, users should receive approximately 6.6% returns on their deposits.

The reason for this arrangement is that validators require a certain amount of funds to remain online, or hot, and so approximately 10% needs to be posted as a bond. These coins would be vulnerable, and so Coinbase has gone and “guaranteed” their safety with both insurance and cold storage. The coins held by users will automatically be delegated to the Coinbase “baker” (validators on proof-of-stake nodes), which will also create a healthy profit potential for Coinbase.

Where Is This Leading?

Many view this as a strong strategic move for Coinbase, as Ethereum (the second largest cryptocurrency by market capitalization) will be moving to a POS algorithm in the near future. Now Coinbase gets a chance to validate the business model, win trust, and get prepared for the eventual Ethereum staking opportunity. Returns can range between 5 and 25% depending on the network and whether users are validators or just delegating coins to others.

With more and more services being launched every quarter, Coinbase has hit a good clip in its growth. Just last week, it was revealed that insurance on its hot wallet cryptocurrency valued the holdings at $225 million. This is definitely a company heading towards the mainstream.

Add Comment

Investing is speculative. When investing your capital is at risk. This site is not intended for use in jurisdictions in which the trading or investments described are prohibited and should only be used by such persons and in such ways as are legally permitted. Your investment may not qualify for investor protection in your country or state of residence, so please conduct your own due diligence. This website is free for you to use but we may receive commission from the companies we feature on this site. Click here for more information.