Coinbase's next stop: becoming the AWS of the crypto industry

Author: Steven Ehrlich

Compiled by: James

Once upon a time, Amazon was just a "simple" e-commerce company. Who would have thought that years later, one of the core businesses of this Seattle-based e-commerce giant would be cloud services AWS?
Time flies, and now, with AWS having been established for twenty years, it has long become Amazon's main profit engine. In 2020, AWS's annual operating profit reached $13.5 billion, accounting for 63% of its parent company Amazon's total profit. Now, cryptocurrency company Coinbase has sensed a whiff of opportunity and is set to launch its own cloud infrastructure product—Coinbase Cloud.
No longer relying on a single source of transaction fee revenue
Coinbase's Chief Product Officer Surojit Chatterjee stated in an exclusive interview with Forbes: "We want to be the AWS of the crypto space, and we are currently building the entire Coinbase Cloud product suite, which you might think of as a crypto computing service to help developers build their applications faster."
Clearly, Surojit Chatterjee succinctly conveyed what Coinbase aims to do. In the crypto industry, almost everyone knows the name Coinbase; they were not only the first publicly traded crypto company but also the largest direct listing company (without going through an IPO). However, as a relatively "special" public company, Coinbase's revenue base seems overly singular, with over 90% of its revenue coming from transaction fees. At the time of Coinbase's listing, this figure was as high as 97%.
Coinbase's revenue structure is very similar to that of Facebook and Google, which rely almost entirely on advertising revenue to drive profits. But the problem is that traditional companies like Facebook and Google have diverse products, whereas for crypto companies or similar trading platforms, the lack of diverse products and revenue sources can become their "fatal weakness." This is especially true since cryptocurrency trading is highly correlated with market volatility, which can easily bring significant uncertainty to Coinbase. For example, in the third quarter of this year, due to a stagnation in the crypto market, Coinbase's trading volume and revenue fell by 29% and 39%, respectively. Although the company still made a profit of $406 million, this was nearly a 75% drop compared to the impressive $1.6 billion profit in the second quarter.
Moreover, as a public company, this "uncertainty" can also affect investors, many of whom bought Coinbase stock hoping to gain a more diversified exposure to cryptocurrencies than just purchasing Bitcoin. It has been shown that since its listing in April, Coinbase's stock price fluctuations have been closely related to Bitcoin price fluctuations.
To reduce the impact of crypto market volatility and make its revenue streams smoother, while also protecting itself from the fee compression challenges faced by traditional brokers like Charles Schwab and TD Ameritrade, it makes sense for Coinbase to seek cloud services. Coinbase Cloud users can subscribe to cloud services (similar to AWS), which provides a new revenue source that can better address Coinbase's current over-reliance on transaction fee revenue.
More importantly, Coinbase Cloud's cloud services will not be affected by crypto market volatility. Its business scope mainly includes: providing institutional custody services, staking opportunities, a learning portal that rewards users with crypto, e-commerce checkout processes, and issuing Visa debit cards to customers. Additionally, Coinbase is trialing subscription services, which means Coinbase will have a fixed monthly revenue stream that can effectively supplement its current transaction fee income.
Thanks to this transformation and product upgrade, Coinbase's subscription and service revenue grew by 41% quarter-over-quarter in the third quarter, reaching $145 million, accounting for 11.7% of the company's total revenue. However, Coinbase executives believe they are just getting started, and this is precisely where Bison Trails comes into play.
Acquiring Bison Trails is a key step for Coinbase's cloud business
Earlier this year, Coinbase acquired the New York-based crypto market infrastructure provider Bison Trails for an undisclosed amount (the company did not share any financial information when asked about the terms of the deal). After the transaction was completed, Bison Trails' two co-founders, Joe Lallouz and Aaron Henshaw, became the new heads of Coinbase Cloud.
Coinbase's Chief Product Officer Surojit Chatterjee believes that acquiring Bison Trails is a crucial step for Coinbase in transitioning to support a more mature financial ecosystem. He explained:
"Crypto is not just about buying and selling digital currencies; it’s about building an entire financial system on top of the blockchain. We believe we can now guide customers into the next phase of crypto, which is the practical use phase, and cloud services can play an important role in this, driving more investment or speculation… Our goal is to become the primary financial account for the crypto economy."
Today, Coinbase Cloud primarily supports cryptocurrency custodians, funds, decentralized applications, and token holders, with major clients including renowned venture capital firm Andreessen Horowitz (a16z), New York-based fintech company Current, and Turner Sports.
In an upcoming press release, Current's Chief Technology Officer Trevor Marshall stated: "The secure and reliable infrastructure and network expertise provided by Bison Trails (Coinbase Cloud) helped Current become an early active participant in Polkadot, Karura, and Acala, and also supported the development of hybrid financial products that could improve financial returns for more people."
Nevertheless, for Coinbase Cloud to achieve long-term growth, it still requires substantial backend engineering and technical support. After all, becoming the AWS of the crypto space requires more than just cloud storage services; it must also have enhanced features, such as providing stable and low-latency connections for networks, blockchains, and various crypto computing services, all aimed at helping developers build applications faster in the growing Coinbase ecosystem to serve their customer base.
Moreover, Coinbase Cloud needs extensive protocol knowledge. Bison Trails co-founder Aaron Henshaw explained: "If Coinbase Cloud is to support running 30 blockchains, it needs highly resilient, reliable, and secure infrastructure, which will power this new financial platform. At the same time, you need deep protocol expertise, and that is one of the things we take pride in. I believe the reason our clients truly like Coinbase is that we are experts in the field of crypto protocols."
Although Coinbase has not specifically listed information about Coinbase Cloud's revenue or number of employees in its financial statements, they have provided the following three metrics to demonstrate the significant market appeal of Coinbase Cloud:

1. Over 25 protocols, with staked assets valued at over $30 billion;
2. 60,000 nodes supporting various services on the network;
3. Since acquiring Bison Trails, the Coinbase Cloud team has doubled in size, focusing on developing security personnel.
   Competitors should not be underestimated
   With the soaring prices of crypto assets this year, the use cases for blockchain have also increased, from the DeFi and NFT craze to the current metaverse, but market competition has also become increasingly fierce. Today, the crypto industry has issued billions of dollars in grants, venture funds, and incentive programs to attract developers to "BUILD" on blockchains like Celo, Avalanche, Algorand, Cardano, and Solana.
   In this context, the development of Coinbase Cloud is clearly not going to be smooth sailing, and one notable "competitor" is Alchemy, which currently provides the same type of backend infrastructure that Bison Trails developed for Coinbase, helping developers build directly on the blockchain, thus achieving a valuation of billions of dollars. In fact, in late October of this year, Alchemy successfully raised $250 million in Series C funding at a valuation of up to $3.5 billion. In comments made regarding this round of funding, a16z general partner Ali Yahya directly compared Alchemy's product to AWS (a16z is also an early investor in Coinbase).
   Although Alchemy has been tight-lipped about its business metrics, various information indicates that they have established a market leadership position in decentralized applications (dApps). For example, Alchemy's major clients include the current largest NFT marketplace OpenSea and the popular multiplayer online game Axie Infinity. Alchemy's services cover almost the entire NFT industry, with claims that 70% of top crypto applications are its clients, processing $45 billion in transactions annually.
   However, for Coinbase, they do not seem overly concerned about Alchemy's leading position and market share, as Coinbase possesses something that few other crypto companies have—73 million verified users who are still eager to explore the crypto industry further.
   Last month, when Coinbase announced the launch of its NFT platform and opened the waitlist for registration, the crypto community witnessed the immense power of Coinbase's internal customer base, with over 1 million registrations on the first day alone. Bison Trails co-founder Aaron Henshaw expects that Coinbase can establish direct connections with customers. All along, the trading platform has been simple and intuitive to operate, with a good user experience (despite slightly lacking customer service), which are key advantages that can help the development of Coinbase Cloud's business.
   Alchemy is essentially just a "read/write infrastructure," while Coinbase can offer all the other products and services that developers bring, such as trading, fiat on-ramps, etc., which other crypto companies cannot provide. Coinbase can provide users with a complete end-to-end experience, and Aaron Henshaw refers to this scenario as "1+1=3."
   As 2021 comes to a close and a new year approaches, whether Coinbase Cloud can successfully become the AWS of the crypto industry remains to be seen.