Coinbase, the market-leading U.S.-based cryptocurrency exchange, was founded in 2012 by Brian Armstrong and Fred Ehrsam. At the end of October 2018, the company was valued at $8 billion. Today, Coinbase has become a huge conglomerate and formed its own investment arm. By February 2019, the exchange acquired 14 companies and invested in more than 30 startups. In this article, we will explore the growth of the “Coinbase kingdom.”
People, Technology, and Compliance
By 2014, the exchange reached a million users and acquired the first two companies: the social bookmarking platform Kippt (saving and sharing content; the company shut down in 2015) and the blockchain explorer Blockr. The next wave of acquisitions began only in 2018. From January to the present, Coinbase acquired 12 more companies, with some deals involving only the hiring of developers without using their technology.
The first acquisition since January 2018 was the startup Memo.AI, which was engaged in the development of a system for the exchange of information between tech teams. Back then, the firm’s co-founder Mircea Pasoi announced that the project had ceased its previous operations. Last February, the founders of Bumpers, an application for recording podcasts via a mobile mic, moved on to Coinbase.
In April 2018, Coinbase acquired the decentralized browser and Ethereum wallet called Cipher. Browser creator Peter Jihoon Kim became head of engineering at Toshi—Coinbase’s own decentralized wallet (now known as the Coinbase Wallet). “We’ll be merging many features of Cipher into Toshi,” Cipher announced on Twitter.
The same month, Coinbase bought the startup Earn, which became the most expensive acquisition of the exchange (the price of the transaction amounted to more than $100 million). Earn allows users to earn Bitcoins by responding to e-mails or performing other tasks. On December 19, 2018, Coinbase partnered with Earn to launch a new educational project, Coinbase Earn: users will receive cryptocurrencies for completing tasks and gaining knowledge about cryptocurrencies (for example, watching video tutorials or answering questions in quizzes). So far, access to the product is limited: users can only participate by clicking on the invitation link received via e-mail, and the rewards are currently paid only in ZRX. Coinbase promises, however, to add “more educational content and the ability to earn other cryptocurrencies” in the future.
In May and June, the Coinbase conglomerate acquired Paradex, a decentralized exchange based on the 0x protocol, and Keystone Capital, a brokerage firm, to be able to provide brokerage services in full compliance with the SEC requirements. For the same purpose, the exchange bought the companies Venovate Marketplace and Digital Wealth. In August, Coinbase announced the acquisition of Distributed Systems, a project developing solutions for digital identity, including Clear Protocol and GraphQL. The exchange announced that the startup team would work on similar solutions for Coinbase.
In October 2018, Coinbase acquired CryptoFin, a startup developing Ethereum libraries and presenting its own index and smart contract Ethereum10, which tracks the top 10 native tokens based on Ethereum.
In November, Coinbase bought the government software development company Seneca Systems. Seneca Systems CEO Nick DeMonner became Coinbase engineering manager.
The latest acquisition was the Blockspring data management platform, which joined the Coinbase conglomerate in January 2019. In an official announcement, the Blockspring team announced that joining Coinbase, it would nevertheless continue to provide its basic services to users as before.
Coinbase Investor: When the Whole Company Is Not Needed
Coinbase announced the formation of Coinbase Ventures, its investment division, in April 2018. “As Vitalik said so well in December last year, the digital currency ecosystem has the opportunity to transform the lives of billions of people, but we have only just scratched the surface of what’s possible. That’s why today, we’re announcing the formation of Coinbase Ventures. We’ll be providing financing to promising early-stage companies that have the teams and ideas that can move the space forward in a positive, meaningful way,” wrote Emilie Choi, the Coinbase VP, on the company’s blog on April 6, 2018. Before that, Choi held the position of vice president and head of corporate development at LinkedIn, where she sealed more than 40 M&A deals.
Along with Choi, Max Branzburg—head of the company’s corporate development—is responsible for the selection of investment and mergers. In total, the Coinbase investment team has more than ten members.
The Coinbase Ventures motto is “Invest in companies that are building an open financial system.”
The most famous projects that Coinbase has a stake in are EtherScan, The Block, Token Daily, Nomics, OpenSea, and Coinmine.
Dharma Labs is the name of Coinbase’s latest investment target. The startup is developing a protocol for decentralized lending projects. The first product, Dharma Lever, is at the closed alpha release stage and provides loans to traders and major holders of cryptocurrency. “In the same way that Uber made it both easy and cheap to get a ride from anywhere in the world, we believe Dharma Lever will make accessing margin lending easy and cheap for anyone in the world,” says Dharma CEO Nadav Hollander. The service will be available directly through the user’s wallet, without the need to configure additional extensions. The loans will be carried out without trust, on the basis of smart contracts. Also, Dharma Lever promises more favorable loan rates than the exchanges offer.
Hollander previously worked as an engineering intern at Coinbase, and Choi noted, “We’re proud to support our alumni as they progress in their crypto careers and make new and novel contributions to crypto.” This is consistent with the path charted by Coinbase Ventures in the first blog post: “We also have a strong Coinbase alumni network, which we’re very proud of. People who have worked at Coinbase are encouraged to think entrepreneurially, and you can expect that we’ll enthusiastically invest in ideas from our own alumni network,” Choi wrote in April 2018.
Other well-known “graduates” of Coinbase, who continued their journey in the crypto industry, are Vaishali Mehta, senior compliance manager, who left Coinbase in November 2018 to join the TrustToken team, developer of stablecoin TrueUSD; Adam White, the fifth employee hired by the firm, who held the position of vice president and general manager for the last two years, left Coinbase in October 2018 and became chief operating officer at Bakkt. And, of course, Charlie Lee, who was one of the first Coinbase engineers. Although Lee launched Litecoin back in 2013, he stepped down from the position of director of engineering at Coinbase only in 2017 to entirely focus on the development of Litecoin.
Commenting on the investment in Dharma, Choi said that Coinbase Ventures views “companies like Dharma, and their Lever product, as a sign that the crypto ecosystem is maturing, and an important step on the path to a more open financial system.” This suggests that Coinbase will continue to support crypto lending solutions, especially considering that this is not the first Coinbase investment in this niche. New-York based crypto lending startup BlockFi has become another of the company’s recent investment targets. Last December, Coinbase Ventures participated in the company’s $4 million fundraising round. Currently, BlockFi provides fiat loans to individuals and businesses that hold cryptocurrencies. This year, the startup also intends to issue credit cards, secured by cryptocurrency, and cryptocurrency savings accounts with interest income.
Coinbase has invested in several startups that allow traditional companies to join the “next generation of non-government securities.” One such project is Abacus, which “allows companies, funds, and REITs [real estate investment trusts] to provide their employees, LPs, and investors [an additional] source of liquidity through secondary markets for tokenized securities.”
Among those who received financing from Coinbase is also RealtyBits, a blockchain solution specializing exclusively in real estate tokenization.
Coinbase has also invested in the Securitize platform, a compliance solution for tokenized securities.
Coinbase’s investment arm has invested in Rare Bits and Opensea, crypto collectibles marketplaces that sell unique (non-interchangeable) tokens: for example, crypto kittens.
Other marketplaces that Coinbase partially owns:
R.A.R.E marketplace for digital art objects;
The Public Market protocol for the e-commerce market that offers zero-fee transactions and token rewards.
Coinbase Ventures invested in The Block news outlet and the Token Daily content aggregator, as well as more specialized media services:
Relevant is a news application in which the content is “curated by communities, not clicks,” that is, users are rewarded for assessing the quality and non-fake nature of the content. “Our mission is to create a token-backed qualitative metric for the information economy—making the human values of veracity, expertise, and agency economically valuable,” the platform website says. The beta version of the app should be launched on March 5th.
Trustory is a social network in which experts determine what is true and what is fake. “earn tokens for identifying accurate information and refuting inaccurate information and lose tokens otherwise. The app is currently focused exclusively on cryptocurrency-related topics,” the project website says. Currently, the application is focused on crypto topics.
The last two services can be especially useful in the light of recent news around Facebook. One of Facebook’s fact checkers, the Snopes project, ended its partnership with the social network after being unable to cope with the influx of fake information. Former Snopes editor Brooke Binkowski even accused the corporation of interfering with the fact-checking process to “prioritize” and conceal information, but David Mikkelson, the founder of Snopes, denied this information (while confirming the fact that the agency had ceased cooperation with Facebook).
Coinbase Ventures invested in several data services:
Alchemy is an AI and blockchain system for analyzing data (in particular, for making investment decisions by hedge funds, managing blockchain data for financial institutions, improving profitability, sales, compliance, and listing on exchanges);
Etherscan is an Ethereum blockchain explorer;
Nomics is the creator of the application programming interface (API) for Bitcoin and other cryptocurrencies;
Flipside is a crypto assets valuation platform that developed its own standard called Flipside Crypto Asset Score (FCAS), which is based on three indicators: user activity, developer behavior, and market risks.
Ethereum, Scalability, Development
Coinbase Ventures invested in two companies that developed gaming dApps on the Ethereum platform: Fuel Games (creator of Gods Unchained and Etherbots games) and Horizon Games (Arcadeum and SkyWeaver game developer).
Other Ethereum services that are supported by Coinbase Ventures:
Compound is a protocol for working with digital assets based on Ethereum, including for receiving interest income and lending;
Elph is a wallet and browser for easy access to dApps on Ethereum (based on Plasma scalability solution).
Another object of investment by Coinbase Ventures in the field of scalability is the Starkware project, which develops solutions for enhancing privacy and scalability based on the STARK technology, which, in turn, is based on zero-knowledge proofs.
Bitski is a dApps wallet and development toolkit that has attracted investment from Coinbase Ventures. The product is in beta release and promises a cross-platform wallet with single sign-on technology (that is, re-authentication is not required when logging in via another browser or device), as well as cold storage and the possibility of full recovery of funds (using a username and resettable password).
At the junction of marketplaces and development is the UMA (Universal Market Access) project, which promises to develop a platform of smart contracts and oracles for creating derivatives and own tokens “using standards such as ERC 20.”
Other solutions for developers that Coinbase Ventures invested in:
Gauntlet blockchain simulator for testing networks and identifying vulnerabilities;
Terminal development platform for managing Web 3.0 and dApps protocols.
Celo is a project developing platforms for digital payments that can be sent directly to a mobile number. “Celo makes sending payments as easy as sending a text, to anyone anywhere,” says the project’s official website. Celo maps the phone number to the wallet address using a special decentralized encryption algorithm. To minimize volatility, Celo will use stablecoins pegged to fiat currencies and backed by cryptocurrency reserves.
Spacemesh is an operating system that offers chains of meshes instead of chains of blocks for running “general-purpose smart contracts at web-scale.” In the application sense, this is a payment solution, and in technical, a “free open source software that aims to become a core Internet protocol for blockchain computation” that is designed to create “a highly-decentralized p2p blockchain computer formed by individuals from around the globe running Spacemesh on their desktop PCs at home.”
Other Coinbase Investments
Staked is a representative of the new market of “staking-as-a-service”;
Cadence is a beta testing startup offering high passive income for short-term investments without charging a fee for its services. The service promises to give private investors access to opportunities that were previously the privilege of institutional investors. The minimum entry threshold is $500;
Coinmine is a mining equipment manufacturer;
The Unlock protocol, which allows content creators to control access to their content, monetize it, and reward users for sharing.