The 6th-largest cryptocurrency exchange in the world by daily volume has joined the likes of other top trading platforms, Coinbase (COIN +1.65%) and Binance (BNB), by announcing its very own blockchain.
Much like how Coinbase has its Layer-2 network called Base, which utilizes the technology from Optimism, Kraken is also borrowing the tech for its L2 from Optimism to launch Ink on top of the Ethereum blockchain.
Ink is Kraken’s new network, built on the Op stack, a customizable toolkit that allows developers to create their own blockchains using Optimism’s technology.
The Ink testnet will be rolled out in November, where developers will be able to try apps for Ink, and will finally go live early next year. The launch in Q1 will see the blockchain open to both retail and institutional users.
Developers, however, can get started right away by minting a commemorative limited-edition NFT and RSVPing for Ink DevJam in Bangkok at DevCon7 to learn, network, and get exclusive Ink merch.
This official announcement from Kraken, one of the biggest and longest-standing centralized crypto exchanges (CEXs), comes about a year after the platform first started considering its own L2, following the success of its rival Coinbase’s L2 Base, which was launched in mid-2023.
Kraken’s blockchain will host decentralized applications (dApp) that enable trading, lending, and borrowing tokens and access to other blockchain-based services without intermediaries. Ink will offer on-chain wealth management tools for professional crypto traders and crypto-curious clients.
Ink will also support SuperchainERC20 right from launch, which will allow for seamless movement across Optimism’s Superchain ecosystem.
With Ink, Kraken will tap into the rising demand for DeFi services and will launch more than a dozen dApps with advanced lending platforms and real-world assets that will be introduced in the future. All these apps will be available through the Kraken Wallet app.
In an interview with Bloomberg, Andrew Koller, the founder of Ink, said that the upcoming blockchain would be a “very easy-to-use, Apple-esque experience.”
Ink will also be utilized by Kraken as a new revenue opportunity. Initially, Kraken will act as Ink’s sole sequencer and earn revenue from managing and organizing network transactions. However, over time, Kraken plans to decentralize its role.
This model works much like Coinbase and Binance, which have been shown to be really profitable. For instance, Coinbase generated $53 million in sequencer revenue in the second quarter.
Positioned as Kraken’s version of Binance’s BNB Chain and Coinbase’s Base, the primary goal of Ink is to make DeFi applications more accessible, cost-effective, and user-friendly. This way, the exchange will simplify the whole experience of using DeFi applications, which has been traditionally complex for the average user.
Leveraging the OP Stack: Ink’s Technological Backbone
Having one’s own L2 isn’t anything new at this point. In fact, the crypto space is running amok with L2s. This trend has intensified as L2 network networks like Arbitrum, Starknet, Polygon, and zkSync, besides Optimism, came out with their own stacks, using which firms can opt into its technology.
Among these, Arbitrum is the biggest layer-2 project, which boasts $13.44 billion in total collateral value locked (TVL), according to the data provider by L2Beat. These numbers far exceed Optimism’s $5.89 billion.
In terms of monthly revenue, Arbitrum had its best month this year in June at $4.01 million, while Sep. was the worst month at just under $440K, according to DeFi Llama. In comparison, Optimism’s best month was March at $2.34 million, and ever since, its monthly revenue has been on a decline, while its worst month was February at 26.74.
However, when it comes to L2s utilizing their technology, OP Stack is a clear winner. There are more than 50 projects that have a combined TVL of over $18 billion compared to Arbitrum’s around 30 projects that use its technology, which have a TVL of $14 billion.
Kraken’s Ink is yet another feather in Optimism’s cap, which has seen a lot of success recently as not just major crypto companies but even non-crypto firms are using its blockchain to build their own networks.
It already counts as the largest US exchange, Coinbase, among its users. Then there’s Zora, World Chain from Sam Altman’s World (aka Worldcoin), electronics giant Sony, and most recently, decentralized exchange (DEX) Uniswap also joined in.
Uniswap announced its new blockchain called Unichain earlier this month to significantly speed up the time it takes to carry out transactions on its DEX. The speed, which will initially have one-second block times, will later be optimized to meet 200-250 milliseconds for a near-instant transaction experience for the users. This new L2 was built with the help of Flashbots and OP Labs.
All these chains using MIT-licensed OP Stack codebase come under the brand Superchain, which is a scalable network of chains sharing a communication layer and security.
This way, Superchain aims to prevent the problem of fragmentation in the crypto sector, allowing users and liquidity on Ethereum to move easily from one chain to another. All these chains together also accelerate the adoption and development of the OP stack.
“As part of the Superchain, Ink is laying the groundwork for an interoperable and pluralistic on-chain ecosystem that will attract developers and make Ink the ideal platform for the next generation of DeFi applications and protocols.”
– Koller
Being built on Optimism’s Superchain, Ink will inherit the security of the largest L1 Ethereum and become a part of the Superchain’s extensive network of solutions. Optimism’s Superchain records over 7 million in daily transactions, accounting for almost half of all layer-2 transactions on Ethereum, according to the Optimism Collective.
By joining the Superchain, Kraken’s Ink will be able to not just communicate more easily with other such networks but also share resources with them. This will allow it to access a larger potential user base.
In exchange for using Optimism’s tech, L2 Ink will share revenue with the Optimism Collective and will also participate in Optimism’s governance.
Welcoming Kraken’s Ink to the ecosystem, Ryan Wyatt, Chief Growth Officer at Optimism Unlimited, said Ink will “play a key role in helping scale Ethereum.”
Click here to learn all about investing in Optimism (OP).
Coinbase’s Head Start in Layer 2: A Benchmark for Kraken
Kraken’s L2 move follows that of Coinbase with Base, which in a short-period has rapidly become one of the most prominent Ethereum layer-2 networks and a major player in the decentralized finance ecosystem since its launch in August 2023.
Coinbase launched Base to enhance the Ethereum network by providing a scalable, efficient, and cost-effective environment for dApps. The EVM-compatible blockchain supports DeFi, NFTs, gaming, socialFi, meme coins, and supply chain solutions.
The backing of a trusted and publicly-listed exchange helped gain Base’s credibility and attention. The extensive infrastructure and user base of Coinbase also helped Base with resources to take the project forward and reach the masses.
As per L2 Beat, Base has $7.73 billion in TVL, which puts it in 2nd spot among all L2s. Data from DeFi Llama reveals that Base saw record revenue in March at 22.23 million. However, it has been sliding every month since then. In September, it registered $1.74 million in monthly revenue, which was the lowest since March. The chain is now seeing a recovery, with $357 million already recorded in monthly revenue in October.
Coinbase-incubated Base recently surpassed all other blockchain networks in one-day stablecoin volume. This month, it also became the biggest L2 with over $2.4 billion in DeFi deposits. Meanwhile, data from the Block shows that Base has consistently been leading when it comes to 7DMA of the daily transaction count on optimistic rollup solutions since June.
Transaction volumes on Base actually increased by 300% in Q2, in part driven by the rise of meme coins and new applications.
CoinGecko’s Q3 2024 crypto report revealed that total transactions across the top ten Ethereum L2s have been on a steady climb this quarter. While daily transactions nearly breached the 10 million mark by the end of September, the Ethereum mainnet processed about 1 million daily transactions.
Base, as per the report, has seen a large jump in network activity since the start of the year. It has actually been the most active L2, accounting for 42.5% of all transactions in Q3. Base was followed by Arbitrum, accounting for 18.9% of transactions, which was succeeded by Blast with 8.1% during the same period.
Moreover, while Ethereum dominates DEX trading, activity is rising on Solana and Base. Volume on Base jumped by 31.4%, which helped it gain a 13% share and $12.3 billion in volume. Solana, on the other hand, ended Sept. with a 22% market share.
This Q3 success followed Solana and Base being the most popular ecosystems, capturing a 22.9% share of market attention in Q2 of 2024.
The unique advantage that Base has over other L2s is its integration with Coinbase’s extensive ecosystem, which allows developers to access a vast user base readily.
With that, it makes sense that Solana co-founder Anatoly Yakovenko sees Base as its biggest competitor. In an interview with Unchained, Yakovenko said that Base is the “closest competitor now” when it comes to network activity. He explained:
“Your killer components of PMF (product-market fit) is price, features or content. Ethereum’s weakness was price, and Solana had a killer price that Ethereum could never get to, just fees to users…What is unique about Ethereum is the assets issued there. And I think now that’s shifting over somewhat to Solana.”
As AI mania takes over crypto, Coinbase is ready to capture this narrative, too. Last week, it launched “Based Agent,” which lets users create their own AI-powered crypto agents with a wallet on the Base blockchain in a matter of a few minutes.
Click here to learn all about investing in Ethereum.
Layer 2’s Ripple Effect on the Ethereum’s Network
Layer 2 is an attempt to help Ethereum with its scalability issues. The L1 faces challenges in terms of slow transaction times, high fees, and congestion during times of high network usage.
To help with these issues, L2s have emerged with fast transaction times and cheap fees. However, while it reduces the burden of Ethereum, it has resulted in low activity on the L1, which has negatively impacted its price.
ETH’s disappointing price action has become a meme at this point. Despite getting a Spot Ethereum ETF this year, the crypto asset has yet to make a new ATH and remains 48.2% off its 2021 peak of $4,878. Meanwhile, ETHBTC remains around 0.03676.
The reason for these “terrible” sentiments could be due to the revenue drop and facing fierce competition from L2s.
It has been speculated that L2 chains may be cannibalizing Ethereum’s traffic, with the likes of Base, Optimism, Arbitrum, and Polygon having established their own expansive and thriving ecosystems.
A recent report from Binance on the crypto market noted that ETH’s issuance rate reached an annualized 0.74% in Sept. Issuance of new coins leads to inflationary pressures and is putting Ethereum’s ‘Ultrasound Money’ narrative into question. This may also be putting pressure on Ethereum’s gains.
A lot of Ethereum’s traffic moving to L2s is affecting ETH’s inflation rate, as after the Merge upgrade two years ago, the network introduced a base burn rate for every transaction. During periods of high usage, the burn rate becomes higher than the inflation rate, making ETH deflationary.
However, as L2s became more prominent and became more popular, the traffic on the Ethereum network decreased by 15%. This translates to a higher inflation rate for ETH, which is not positive for its price.
Having said that, L2s still are essential for Ethereum to be scalable and competitive in terms of fees in order to help it grow. So, these concerns that L2s are eating into Ethereum’s revenue and could impact price may be a bit premature.
“It is much too early to tell whether Ethereum(‘s) strategy of scaling through layer 2s is cannibalistic or will lead to net growth.”
– Katalin Tischhauser, Head of Research, crypto bank Sygnum Bank
According to Tischhauser, Ethereum losing revenue share to L2s was bound to happen, but optimizing scalability could also help bring revenue to the base layer in ways previously not possible. She added:
“L2s still need to settle the final state on the L1, so if the L2 growth is substantial, the net effect should be Ethereum growth.”
For now, data from Crypto Fees show that daily fees on Ethereum are currently between $1 million-$5 million, which is far below the $30 million mark recorded throughout 2021 and 2022.
The launch of Unichain has been the prime reason for these concerns as it is estimated Uniswap’s full pivot to its new L2 can result in Ethereum validators losing between $400 million-$500 million in annual revenue.
Continued scaling to layer 2s, as per VanEck’s Head of Digital Asset Research, Matthew Sigel could inhibit Ether’s price appreciation.
As a result, asset manager VanEck has reduced its ETH price target from $22,200 by the end of this decade to $7,300. This has been influenced by the ratio of transaction revenue between Ethereum and L2s, which has been 10:90 over the last few months.
Charting a Path Toward a Fully On-Chain Future
While Kraken is following in the footsteps of its competitors by launching Ink, unlike them, it has no plans to launch a stablecoin like USDC by Coinbase or a native token like BNB by Binance. Ink simply would not have its own token, which prevents Kraken from dealing with any complexity and risks associated with tokenomics and price action.
The focus at Kraken is on developing Ink, which has a dedicated team of 40 people, and the exchange has also scheduled several events for developers to get familiar with this blockchain ahead of its release next month.
Before Ink, the other big development from Kraken came in the form of kBTC, which brought Bitcoin to the Ethereum blockchain and OP Mainnet.
This fully backed, cross-network-compatible ERC-20 token can be used in dApps such as ParaSwap, Yearn, deBridge, Definitive, and Gauntlet. kBTC is backed 1:1 by Bitcoin, with its reserves held at Kraken Financial, a Wyoming-chartered SPDI.
“We believe in an onchain future and DeFi represents a key part of that opportunity.”
– Mark Greenberg, Kraken’s global head of asset growth and management, said at the time
The crypto trading platform has also partnered with UK football club Tottenham Hotspur as its crypto and Web3 partner. Back in July, Kraken expanded its Custody services for institutional clients in the UK and Australia and is looking to capture the EU markets as well in the near future.
The crypto exchange is also eyeing a potential initial public offering (IPO) despite facing regulatory challenges. Kraken is currently engaged in a legal battle with the US Securities and Exchange Commission (SEC) for allegedly violating federal securities laws.
The exchange argued that given that the Securities Act and the Exchange Act do not regulate crypto, Kraken has no legal obligation to register with the SEC. The case against Kraken will be tried alongside Binance and Coinbase.
Amidst all this, with Ink, Kraken is pursuing its DeFi ambitions and contributing to Ethereum’s scalability with the aim of replicating Coinbase’s success with Base while offering its millions of users exciting new opportunities.
