Will Coinbase’s Smart Wallets and ‘Magic Spend’ Bring A Billion Users to Base L2?

Coinbase is on a mission to open the world of crypto to the next billion users. In the first quarter of 2024, the crypto exchange announced that it is developing a suite of ‘smart wallet’ solutions that will onboard new users on-chain “without knowing they’re on-chain”.

Coinbase is also testing a smart contract called ‘Magic Spend’ that will allow Coinbase Exchange users to use their cryptocurrencies on-chain.

In this article, we talk about Coinbase’s smart wallet solutions, the Magic Spend smart contract, and their potential impact on the future of Base L2.

Key Takeaways

  • Poor on-chain user experience discourages users from venturing out of the familiar confines of centralized exchange apps.
  • Coinbase is developing smart wallets to improve on-chain onboarding experience.
  • The Magic Spend feature will allow Coinbase account holders to seamlessly use their crypto on-chain.
  • Creating a new Coinbase smart wallet takes seconds and does not require SRPs and passwords.
  • Osgur Murphy O Kane, senior research analyst at Nansen, said, “Base has high potential to be a top L2 due to its proximity to Coinbase.”

Coinbase to ‘Bring a Billion Users On-chain’

Over the years, user experience (UX) has emerged as a major friction point for the crypto industry. Poor UX brought on by complicated crypto wallet interfaces has discouraged users from venturing beyond the familiarity of centralized exchange (CEX) apps.

On-chain UX is expected to drastically improve with the introduction of smart contract wallets, also known as smart wallets. The technology has been quietly developing over the past year and now there is a notable player in the game, one with the reach and credibility to make smart wallets the norm – Coinbase.

The New Wallet Solutions from Coinbase

Coinbase is building two new wallet solutions to “help make on-chain onboarding easier and faster.” They are:

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1) Smart Wallets

Coinbase’s smart wallet is an on-chain wallet powered by smart contracts. Unlike traditional crypto wallets, users do not have to download mobile applications or browser extensions to use smart wallets.

Signing up and logging in to your crypto smart wallet will be a similar experience to website logins.

Furthermore, smart wallets will remove the need to store secret recovery phrases (SRP) and protect passwords. Instead, smart wallets will use passkeys for signing.

We tried the Coinbase smart wallet demo, and it took us seconds to set up a new crypto wallet. The passkeys can be saved to your cloud account, device, or browser. You can try it for yourself here.

2) Embedded Wallets

Embedded wallets is a wallet-as-a-service solution that will give developers more control over the UX — from onboarding to transactions. Using embedded wallets, developers can abstract away on-chain complexities like gas fee payments and provide familiar user experiences like email and social logins.

According to Coinbase, this feature will enable users to be on-chain without knowing that they are on-chain.

Osgur Murphy O Kane, senior research analyst at Nansen, told Techopedia:

“Smart wallets are essential to crypto moving beyond niche DeFi use cases … Abstracting away gas cost complexity is essential towards making this happen. With account abstraction, users should have no idea they are interacting with a blockchain under the hood.”

Magic Spend: Going On-chain From Your CEX Account

A Coinbase feature, currently under development, that looks to have largely gone unnoticed is a smart contract called Magic Spend.

According to Coinbase’s GitHub repository, the Magic Spend code is still under audit as of March 24, 2024.

Magic Spend is an ERC-4337 compliant paymaster smart contract that will enable Coinbase account holders to seamlessly use their cryptocurrencies on-chain. Paymasters are smart contracts that allow decentralized applications (dApps) to pay gas fees on behalf of their users.

Seth Bloomberg, a research analyst at Messari, wrote on X that the Magic Spend feature will be a “huge unlock” for Coinbase users and on-chain apps by allowing millions of existing Coinbase account holders on-chain access with minimal friction.

Bloomberg added that Coinbase is starting to take the role of a “traditional aggregator” that connects off-chain users with on-chain applications.

Will Base be the Top Ethereum L2 Chain?

When the idea of Base L2 was introduced in early 2023, Coinbase said:

“We see Base as a key step in bringing Coinbase’s products, users, and assets into the decentralized cryptoeconomy.”

Since its mainnet launch in August 2023, Base has grown at an incredible pace. In 2024 alone, the total value locked (TVL) on Base surged over 78% year-to-date, as of March 22, 2024, from $437.1 million to $779.7 million, DeFi Llama data showed.

The upcoming mainnet launch of Coinbase smart wallets and Magic Spend is expected to further accelerate the flow of capital into Base L2. Once these features are introduced, Base could be the first blockchain that the majority of Coinbase account holders interact with as they go on-chain for the first time.

Osgur Murphy O Kane, senior research analyst at Nansen told Techopedia:

“Base has high potential to be a top L2 due to its proximity to Coinbase, which can onboard its massive user base directly to that chain. Already, we are seeing some apps being built there with mass real-world adoption, such as [loyalty program] Blackbird.

 

“If mass consumer apps that actually address real-world problems can be built on Base, it has high potential to be the top L2 chain in crypto.”

The Bottom Line

In March 2024, Ethereum implemented the Dencun upgrade, which is expected to decrease gas fees on L2 chains to less than $0.01. The lower gas fees could accelerate the growth of paymaster smart contracts among decentralized applications and help further improve the on-chain user experience.

If Coinbase can make the case for people being on-chain — and make it simple and with as close to zero gas fees as possible — then, while a billion users may sound like a bullish number, hundreds of millions of users start to sound credible.

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Mensholong Lepcha
Crypto & Blockchain Writer

Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.