The theme of Coinbase’s Winter 2019 Hackathon was “Bring DeFi to the World” which is kind of crazy considering they are one of the most centralized entities in crypto. Coinbase is a centralized exchange that abides by tight regulation and operates a centrally backed stablecoin, USDC, with Circle.
DeFi vs. Coinbase
DeFi, or decentralized finance, aims to compete with Coinbase in all aspects other than onboarding. Ironically, Coinbase likely sells many Ether tokens that are part of the relatively large locked value of the DeFi ecosystem.
The most obvious sector where Coinbase and DeFi compete is in personal finance. They both allow users to earn interest on tokens, and DeFi gives much higher APR. In 2019, Coinbase started allowing USDC holders to earn interest on any tokens lying in their portfolio with an APR of 1.25%.
Dharma, an app that requires users to sign up with their Coinbase account, offers 3.6% APR on USDC with little difficulty. They are able to offer higher interest by using Compound, a decentralized lending pool. All it takes to earn more interest in this situation is to take the USDC you have on Coinbase and send it to your Dharma address.
Another way that Coinbase competes/cooperates with DeFi is that they, along with Circle, created a stablecoin. At the same time, they sell the Dai stablecoin on their platform. Dai uses an algorithm and incentives to keep the token pegged to the dollar while USDC is backed 1:1 by USD. USDC cremes Dai in total market cap, but Dai has been gaining notoriety in recent months. On top of that, DeFi lending pools often offer more interest for Dai holdings than USDC.
And finally, they compete because Coinbase is a centralized way to exchange tokens, where as DeFi offers a way to do that straight from one wallet to the other. Exchanges like Uniswap or even aggregated exchanges like DEX.AG act as a forum for users to match orders with each other. Coinbase and other centralized exchanges always win in terms of slippage, but someone who values privacy and decentralization will likely opt for a decentralized exchange.
Is Coinbase promoting DeFi for the culture?
“DeFi, or decentralized finance, is an essential part of an open financial system. DeFi tools are censorship-resistant, unbiased, programmable, and available to anyone with a smartphone. For this hackathon, we’re focusing on bringing DeFi to the world. (Costumes not required.)” - Coinbase
This quote from Coinbase is advertising the opposite of what Coinbase is. Maybe they have accepted the role they play in the space, but as enthusiasts of decentralization, they appreciate breaking boundaries in finance.
One thing that is forsure, is Coinbase has been keen on decentralized projects. ChainLink is a decentralized oracle service, 0x is a decentralized liquidity tool, Dai is a decentralized stablecoin, and ofcourse, Ethereum is the platform to build dApps. Also, the aforementioned projects are on the bottom half of the ranks on Coinbase in terms of market cap, which could imply that Coinbase is sort of sticking their neck out for the ideas.
My theory is that like many others, Coinbase finds DeFi to be one of the more interesting and tangible things coming out of Blockchain tech. I am a bit biased, but listing 0x and Dai doesn’t seem like a decision that was made to rake tons of money and new users in. It seems more like a long-term bet.