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1. Developer experience is the moat

2. Base's Better than Free Strategy

3. Play a different game than Base

Let's dive in.

Let's start today's post with some good old Warren Buffet wisdom:

"In days of old, a castle was protected by the moat that circled it. The wider the moat, the more easily a castle could be defended, as a wide moat made it very difficult for enemies to approach. A narrow moat did not offer much protection and allowed enemies easy access to the castle.

To Buffett, the castle is the business and the moat is the competitive advantage the company has. He wants his managers to continually increase the size of the moats around their castles."

- SignalVNoise

The core point Buffet is getting at is the importance of identifying the economics of a vertical and how companies are positioning themselves around that core business to capture majority market share.

In the onchain economy, the battle is for blockchain activity. Each chain can be measured by metrics such as # of transactions, total volume, # of wallets transacting, and the total value of assets held on that chain.

In the Ethereum world, the L2 wars will shed light on which castles are still standing and how vast their territories have become.

Since layer two solutions first came to life in 2019, the initial goal for scaling teams has been to develop their core infrastructure and bring the average cost of transaction fees down. And it's clear that we've seen incredible progress on this front with the implementation of proto-danksharding (EIP-4844). I mean...imagine telling crypto enthusiasts that the industry would have sub-cent transactions even just three years ago.

Although there is always room for more improvement, the incremental drop in transaction fees will start to be less and less of a competing factor.

So, what's the next fight in the L2 wars? In other words, how do layer 2 teams grow and strengthen their moats?

When first thinking about this question, my mind went straight to incentive systems. The straightforward analogy here was credit card points. To the average joe, the difference between using Amex or Chase is trivial for the core purpose of transactions. But the ability to earn perks by being a loyal member of their ecosystems is what's actually attractive.

And that got me thinking...L2s should be putting in a lot more effort to "lock in" users on their chains by aggressive BD and gamification strategies. The teams that can spin up the best partnerships (i.e. Chase <> United) would win the hearts of users.

Simple enough? Wrong.

After sending this train of thought to the TOC chat, I got pushback that teams such as Blast are already doing this by offering "gold" to ecosystem developers who then pass on those rewards to end users. The issue is that these incentive systems bring short-term players looking for a way to make a quick buck and get access to what I like to think of as "unofficial grants". The minute those rewards are overdone or run out, the castle walls suddenly don't seem that strong anymore.

Now, to be clear, this isn't some revolutionary insight. Developer experience is also the crucial competing point for L1s and has been discussed religiously in the space for many years.

But in today's post, I'd like to add an interesting flavor to the discussion that was inspired by a 2011 post from Bill Gurley on Google's better than free business strategy.

The focus is not just the core developer experience each of these L2 teams are improving on, but also the unbreachable moats that forms around L2 castles.

First, let's take a look at what the current L2 numbers look like. Two things have become clear to me after religiously tacking L2 beat this past year:

1. Arbitrum continues to be a dominant force in the Ethereum ecosystem and still has the largest market share by far. Although it's worth noting that since January, the dominance has dropped from 50% to 40%.

2. Base is eating up market share faster than most of us probably expected. It just crossed it's 1 year anniversary and you simply can't ignore the rapid growth.

I'll get to Arbitrum in a bit. First, let's talk about Base. I don't want to make it seem like I'm just shilling Base kumbaya - most of us are already aware of Jesse Pollak's relentlessness on growing the L2.

The point to callout here is that unlike any of the other L2s in the ecosystem, the key differentiator is that at the end of the day Base is a Coinbase incubation. Sure, you can advertise it as a "separate company" within Coinbase, but it has the war chest and distribution of one of the largest and most established companies in the space.

And that makes all the difference for how Base will compete in the coming years.

To better understand this, let's take a look at Google's strategy from 15 years ago. Their "economic castle" was search. But obviously the company was working on a whole suite of products to position their ad words business strategically online and on mobile. The two most important being Chrome and Android.

Here's the thing though - Google doesn't make money off of those services. In fact, not only do they offer the tools for free, but they even push massive spending to get consumers to use the products.

Why do they do that? That's where Buffet's quote above makes sense...Android and Chrome aren't castles but rather the blocks that make the search castle moat stronger.

"So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive.

They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy." - Bill Gurley

Coinbase seems to be following a similar path here. If the goal is to win the onchain economy by having the highest number of transactions, then they are doing everything in their power to grow the number of users onboarding to Base.

Recently, I've noticed that Brian Armstrong has been tweeting away about the Coinbase Developer Platform (CDP). Session keys, CB smart wallet integrations, AI agent APIs, etc.

And just last week, he also boosted a job posting for a staff developer relations role at CDP (which btw looks like an amazing role for anyone on the job hunt!).

Lauren Dowling

@LoDowling

Coinbase is looking for a strong, crypto forward DevRel lead to help us bring the world onchain!!

You'll be the vital link between our teams and the onchain dev community, shaping our brand and building critical content to showcase our platform.

Apply here:…

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5:39 PM • Sep 10, 2024

Coinbase is going all in on enhancing the onchain developer experience. They have repeatedly stated their mission is to bring the next million developers onchain. And take a guess as to where that developer journey will start?

By making it as simple as possible for developers to build onchain apps, Coinbase is marching founders right into the Base castle.

Other L2s simply don't have the manpower and funding to spend time building adjacent developer tooling. For them, the game is growing their products in the traditional startup way. But Base has an advantage here by being a recipient of several top of funnel strategies from other Coinbase initiatives.

In fact, they also have the resources to provide the highest quality customer support for developers as well. Don't believe me? Just read some these testimonials from active devs in the TOC chat.

From Samuel:

Base consistently manages to

1) amplify great builds / projects which shows that they platform is being used and what great things can be done with it. it also makes devs want to be featured, longing for that status and reach so they build on Base and apply to be featured etc

2) shares guides constantly and improves docs and tooling to make it better with clear comms about thought process and timelines you don't get a degen style "oh we just changed the whole algo of tips and it's live NOW, please adjust your frames"

3) it just works and the path forward is clear. "We will increase the gas limit along this path and xyz ..." all constantly communicated and repeated over and over so even the guys in the back get it

And from Dan:

+1 wanted to echo this! Clear comms and expectations are severely underrated and under appreciated in this space. Base as a network has a level of professionalism that many/most of the others don't, especially if you're betting your project/business/venture on where the puck is going. And also +1, their amplification on the distribution front is another thing that sets that network apart. Feels more like a partner and less like an interchangeable building block. Jesse and team do a fantastic job of promoting cool projects.

And even larger partnerships that Coinbase facilitates drives the mainstream audience right to Base as well. For example, earlier in the summer, Coinbase partnered up with Stripe - here's how they presented it in the Q2 earnings report:

"Coinbase now includes Stripe's fiat-to-crypto onramp in Coinbase Wallet, allowing instant crypto purchases with credit cards and Apple Pay. This collaboration leverages Stripe's vast network and Base's efficient transaction infrastructure, significantly expanding USDC's global reach and utility, and reinforcing our commitment to improving the financial system."

Coinbase + Stripe + Circle --> all increasing USDC liquidity and usage on Base!

Another example to point out here is the launch of cbBTC just last week which is Coinbase's wrapped Bitcoin solution. Basically, they're trying to encourage Coinbase customers who have Bitcoin sitting in their accounts to make the most of Ethereum's robust defi solutions through Bitcoin based ERC-20.

See how it says "Base and Ethereum"?? Very important to understand the long term effects of how that shapes consumer behavior.

But wait, there's more! In the future, if Base decides to decentralize their sequencers then they'll have another set of builders to onboard as well: L2 developers looking to build niche chains but are looking to bootstrap liquidity and network effects through Base. Sure, the Base team will lose out on potential revenue from those chains but the bigger play is to capture as much of the ecosystem as possible with their infrastructure.

To sum this section up, I'll quote Packy from a recent piece covering vertical integrations:

"A true Vertical Integrator, however, General Electric adopted the winning AC technology and plugged it into its system. The company leveraged its brand, size, resources, and diverse product line to invest heavily into AC and used its large customer base to introduce new AC products to the market."

In this case, Coinbase is using it's leverage, brand, size, resources, and diverse product line to invest heavily into Base. And they're just getting started. If the above data was the results in just the first year, I can only imagine how strong the funnel becomes in the near future.

Okay so you might be thinking, YB why should anyone else be working on an L2 solution then? Won't they just be behind Base?

Not necessarily. In my opinion, it comes down to playing a different game. Other L2s will have to be strategic about offering a solution that is vastly different from Base's strengths.

Arbitrum is the goto example here. There's a reason they still have ~40% L2 market share and their developers aren't jumping ship to Base. In fact, based on current market shares, if I had to predict two winners they would be Base and Arbitrum. The former for consumer, mainstream type apps and the latter for specialized gaming and defi solutions.

And these are just the EVM (Ethereum Virtual Machine) L2 solutions.

There's a chance to build L2s that use completely different virtual machines allowing them to create a separate narrative of use cases. For example, since Coinbase is a public company and heavily regulated it's fair to say censorship resistance won't be a top priority. How do you create a solution for devs that is focused around that feature?

Another example here is Eclipse: Ethereum's first Solana based L2. Meaning the L2 runs on SVM (Solana Virtual Machine), not EVM!

And even more: Movement and Rise.

Additionally, let's say Base doesn't end up decentralizing their shared sequencers, then the long tail of EVM L2s in the ecosystem can "unionize" together and share resources and liquidity to effectively compete against the big dogs.

To wrap this post up, I wanted to emphasize one main thing mentioned at the beginning of the post:

The developer experience is the moat.

This has always been the case in the tech industry: Microsoft's Windows, Apple's app store, Amazon's AWS, etc.

Here's a sentence from another Bill Gurley post praising AWS from 2009:

"One may ask, 'how would a platform company differentiate with customer support?' The answer is that they would have the best developer relations attitude and execution in the business.  This also appears to be playing out in the marketplace.  No cloud platform vendor is more communicative and more of a “listener than Amazon.

I think back to the glory days of Microsoft, and the immense effort that Tod Nielsen put into wooing the developer community.  To me Amazon is executing right out of that playbook."

It'll be fun to see what the L2 market shares look like in 6 months. 1 year. 5 years.

Maybe it's time to set up some prediction markets 👀

If you have any thoughts on today's piece, I'd love to hear them in the TOC Farcaster channel. I'll gift 1 free month of TOC Pro ($15) to anyone who shares a meaningful take 🤝

That's all for today's post! Hopefully this format was helpful for you.

See you all on Friday, hope everyone has a great rest of the week :)

- YB