Base’s Strong Start in Ethereum’s Layer-2 Space Faces Market Challenges in 2024

Ethereum’s new Layer-2 network Base debuted in 2024 and rapidly established itself as a go-to platform for retail traders whose ideal it is that transactions “be fast and cheap,” according to co-founder and CEO David Lim.

Although Ethereum founder Vitalik Buterin has urged developers not to build their Layer-2 solutions “for the sake of advertising,” Base’s launch was widely viewed and narrowly celebrated as an Ethereum success story. Lately, though, Base has been finding life pretty tough. The cryptocurrency “market has faced a downturn not seen since early 2023,” and so far, our Layer-2 darling has no apparent way to remedy that.

The recent drop in market sentiment has notably impacted the performance of many projects, including Base, which is now seeing a sharp slowdown in not only trading volumes but also user engagement. This shift in market conditions has led many to wonder if this current dip is just a minor setback or if it’s a more serious turning point for the platform.

Decline in Retail Interest and Transaction Volumes

Base is facing several challenges, and one of the clearest indicators of this is the plummeting transaction volume. Since December 2022, on-chain activity for a selected group of eight key assets on the Base network has dropped by a jaw-dropping 78%. This descent in transaction volume underscores the apparent struggle Base is having in keeping up the early momentum it gained from its launch. Retail traders, who were a big part of helping Base achieve notoriety, seem to be losing interest and…

Let’s analyze the larger market context to understand this drop better. The downturn in the cryptocurrency market has, of course, affected the Ethereum Layer-2 ecosystem. The DeFiLlama data site has taken note of the situation there, pointing out that “when much of the market is going down, it’s hard to not follow.” And Base, along with some other struggling Layer-2s, has seen a downturn in its DeFi activities. Meanwhile, retail traders — whom Base and its cousins in the Layer-2 space are trying to serve — have seen their enthusiasm for crypto dim considerably of late.

The market’s cooling has produced a clear change: just a few tokens on Base have a large enough number of holders in profit that it would be reasonable to say those holders are in profit. Meanwhile, traders who are holding tokens that aren’t profiting are understandably not too excited about going out and trading some more. They’re trading less, and they’re being more careful when they do. This unwinding narrative is bad for Base’s TVL but is also just a simple price narrative that’s happening in a not-very-exciting, unfriendly-to-traders market.

The Struggle for Profitability

At first, Base was successful because it offered a way for users to boost profits. They did this by taking advantage of the lower transaction fees and the faster confirmation times available on Base compared to Ethereum’s Layer-1 network. So, in the beginning, it was the retail traders who rushed to the platform, promising day in and day out to be the platform’s lifeblood. Yet, after a few months with the price of Ethereum and Bitcoin trading below $2,000 and several other supposedly high-flying assets trading, at best, sideways, the story of how Base offers a way for users to “maximize profits” looked a little less…profitable.

Retail traders are less ready to transact in the same volume as before, when prices were increasing, and profits seemed more certain. With fewer assets paying off for holders, traders’ reduced activity has across-the-board effects on Base’s ecosystem. If a user is not profiting from the activities that inspired them to use Base, why keep using Base? Without a profitability base for a lot of its users, Base looks shaky at best and seems more likely to be just another L2 also-ran at worst.

Will Base Overcome This Setback?

The decline in activity that Base is experiencing might be a temporary setback, but it could also signal a more severe, long-term decline. Base and other layer-2 solutions, including those developed by the Ethereum Foundation, are still in their infancy; their long-term success depends on two main factors: 1) they need to prove that they are resilient enough to ride out an otherwise unfavorable market, and 2) they need to show that they can adapt to user demands—both of which are likely to be tested in the current crypto winter.

Base’s early success shows that there is significant demand for Layer-2 networks that provide speedy and inexpensive transactions. Its current turbulence underscores how precarious new platforms are in a bear market. For Base to be a consistent player in the ecosystem, it will need to engage its users, even when the market is down. That means attracting developers to build on the platform, offering more features that cannot be ignored, and making sure that users have opportunities to “get off zero” in a market that seems to be going nowhere—a task that is, to state the obvious, easier when things are going up.

Moreover, Base could benefit from building out its community and working to increase the number of use cases and applications being built on the platform. In particular, DeFi protocols, NFTs, and gaming applications could play a key role in driving activity back to the network. Overall, Base’s continued success will likely depend on being flexible, resilient, and responsive to the changing needs of its users.

Conclusion: A Crucial Time for Base

To sum up, Base’s rapid ascent within the cryptocurrency Layer-2 ecosystem has met its first real challenge with the market’s potential downturn. However, the platform’s early successes were nothing but undeniable. Transaction growth happened at a blistering pace. Even retail interest was on the uptick—until recently. Now, with volume growth apparently stalled, it’s possible to wonder whether Base is experiencing just a brief pause between growth spurts or has hit the wall of the plateau we sometimes hear about with Layer-2 solutions.

The next few months will be a critical time for Base. The platform’s team must discover new methods to keep current users engaged, bring in new users, and give everyone a reason to stick around during what promises to be a tough few months. If they can do all that and still manage to keep the platform moving in sync with the rest of the crypto ecosystem, Base has a decent chance of being one of the Layer-2 networks that are still front of mind in a year or two. If they fail to do any of that, it’s hard to see Base being much more than a Lame-2 network in the near future.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

Follow us on Twitter @themerklehash to stay updated with the latest Crypto, NFT, AI, Cybersecurity, and Metaverse news!

Image Source: artemisdian/123RF // Image Effects by Colorcinch