There was a time when Amazon Web Services (AWS) was just an afterthought for the Seattle-based company, overshadowed by Amazon’s gargantuan e-commerce business.
Fast forward to today, and the Amazon subsidiary, which launched almost 20 years ago, is now the $1.8 trillion company’s main profit engine. In 2020, AWS delivered $13.5 billion in annual operating profits, good for 63% of the parent company’s total, on a revenue base of $45.3 billion.
U.S. crypto exchange Coinbase is hoping to follow in these footsteps with its own infrastructure product, Coinbase Cloud.
“We want to be the AWS of crypto,” said Coinbase chief product officer Surojit Chatterjee in an exclusive interview with Forbes. “We are building this whole Coinbase Cloud suite of products that you can think of as crypto computing services, to help developers build their applications faster.”
Coinbase executives will be the first to tell you that it needs to get here sooner rather than later. For all of the accolades received by Coinbase for not only being the first major crypto firm to go public, but also for doing so via the largest direct listing in history, its revenue base is overly reliant on transaction fees (+90%). When the company went public, the figure was around 97%. This level of revenue concentration in a single line-item is typically reserved for major technology platforms such as Facebook or Google, which almost solely rely on advertising to drive profits.
But for the crypto giant, or any other exchange, such dependence can be a major vulnerability because trading volumes are highly correlated with market volatility. When the crypto market hit a lull in the third quarter this year, Coinbase’s trading volume and revenue fell 29% and 39% respectively. The company still turned in a profit of $406 million, but that was an almost 75% drop from its second quarter result of $1.6 billion.
It has also impacted investors, many of which bought shares in Coinbase with the expectation that the stock would offer more diversified exposure to crypto than just buying bitcoin. The reality has proved different, as Coinbase’s price has closely tracked bitcoin since it went public in April.
To mitigate this liability, smooth out revenues, and protect itself from fee compressions that have impacted traditional brokers such as Charles Schwab and TD Ameritrade, Coinbase is looking to supplement trading revenues with subscription services that will be more immune to market swings. For instance, it offers an institutional custody service, staking opportunities, a learning portal that rewards users with crypto, e-commerce checkout program, and issues Visa debit cards to customers. It is also trialing a subscription service that will provide a monthly trading allowance for a set fee.
As a result of this evolution and product development, subscription and services revenue grew 41% sequentially to $145 million in Q3, accounting for 11.7% of total revenue. But according to Coinbase executives, they are just getting started. This is where Bison Trails comes in.
Lost amidst all of the market euphoria earlier this year was Coinbase’s January acquisition of the Brooklyn, NY-based market infrastructure provider for an undisclosed sum (the company would not share any financials on the terms of the deal when asked recently). After the deal was consummated, Bison Trails co-founders Joe Lallouz and Aaron Henshaw became the new heads of Coinbase Cloud.
For Chatterjee, bringing on Bison Trails was a key part of Coinbase’s transition to supporting a more mature financial ecosystem. “Crypto is not just just buying and selling tokens, it’s building this whole financial system on top of blockchain. We think we can play a big part in leading our customers to the utility phase of crypto from this first phase, which is more investment or speculation driven…our goal is to be the primary financial account of the crypto economy for our customers.”
Today the platform supports crypto custodians, funds, decentralized applications, and token holders. Some of its key clients include prominent venture firm Andreessen Horowitz (a16z), New York-based fintech firm Current, and Turner Sports.
In a forthcoming press release, Trevor Marshall, CTO of Current, says “the secure, reliable infrastructure and network expertise Bison Trails (Coinbase Cloud) provides has been invaluable to making it possible for Current to be an early, active participant in Polkadot, Karura and Acala and build hybrid financial products that have the potential to improve the financial outcomes of even more people.”
Still, achieving long-term growth will require significant backend engineering and technical support. After all, becoming the AWS of crypto demands much more than just cloud storage. There must be enhancements such as stable and low-latency connectivity to networks and blockchains as well as various crypto computing services. All of this is to help developers build applications faster within the ever-growing Coinbase ecosystem to serve its client base.
It also requires extensive protocol knowledge. “In order to run 30 blockchains, you need highly resilient, reliable, secure infrastructure. These things are powering this new financial platform,” says Henshaw. “But you also need deep protocol expertise. One of the things we pride ourselves on and I think that our customers really like is that we’re experts in the protocols we support.”
Although the company does not specifically break out Coinbase Cloud revenues or employee counts in its financial statements, it did provide the following metrics to demonstrate market traction.
- $30+ billion assets staked across more than 25 protocols
- 60,000 nodes used to support its various services on these networks
- Doubling of the team size since the acquisition, with a focus on building out the security staff
That said, as asset prices have skyrocketed this year and use cases continue to grow from decentralized finance applications and NFTs to now the metaverse, competition is fierce. Billions of dollars in grants, venture funds, and incentive programs have been issued to entice developers to work directly on certain blockchains such as Celo, Avalanche, Algorand, Cardano, and Solana.
Additionally, specialized companies, such as Alchemy, have garnered billion dollar valuations by providing the same type of backend infrastructure that is being developed by Bison Trails for Coinbase—to help developers directly build on top of blockchains. In fact, in late October Alchemy raised a $250 million Series C round of funding at a $3.5 billion valuation. In issued comments surrounding the funding round, a16z General Partner Ali Yahya drew direct parallels between Alchemy’s offering and AWS (a16z was also an early investor in Coinbase).
Although Alchemy is tight-lipped about its metrics, it has staked out a leadership position in supporting dapps. For instance, some of its major clients include the world’s largest NFT marketplace OpenSea and the massively popular multiplayer online game Axie Infinity. In fact, it currently supports virtually the entire NFT industry and claims to have 70% of the top apps as customers (regardless of crypto use case). It also claims to handle $45 billion in transactions on an annualized basis.
That said, Coinbase is not overly concerned about Alchemy’s head start or market share, because it has something that virtually no other crypto firm has today, a verified user base of 73 million customers looking to go deeper into crypto.
The community saw the power of this in-house customer base first-hand last month when the company released a wait-list for its forthcoming NFT project. Over 1 million people signed up on the first day. Henshaw expects that this direct access to clients, plus Coinbase’s reputation for simple and intuitive platforms and user experiences, if not customer service, will be a key advantage moving forward.
Calling it a 1+1 = 3 scenario, he compares the full suite of Coinbase’s offerings to “Just read/write infrastructure, which is what Alchemy does…All of the other products and services that Coinbase uniquely can bring to developers such as trading, fiat on-ramps, we offer a single place for people to build the full end to end experience that really doesn’t exist today.”