Base Team Member Denies Claims of ETH Liquidation by Coinbase Sequencer

What to Know

• Coinbase holds over $300 million in ETH, according to a Base team member, refuting rumors of ETH liquidations.
• Layer 2 networks may contribute to Ethereum inflation, according to Andre Cronje, sparking debate about sequencer operations.
• Base uses off-chain custody for security and auditing, leading to ETH movements to Coinbase, but insists it spends and earns primarily in ETH.
• The controversy arose after a claim that Base has been transferring all sequencer fees to Coinbase, with suggestions that the funds may have been sold.
• The discussion highlights broader concerns about the decentralization of Layer 2 solutions and their impact on Ethereum’s supply.

Coinbase Sequencer Under Scrutiny: Base Team Responds

A Base team member has firmly denied speculation that its sequencer, operated by Coinbase, has been liquidating ETH collected from transaction fees. The controversy arose after pseudonymous X user Santisa alleged that Base had been routing all its sequencer earnings to Coinbase since its launch, suggesting that the funds were being offloaded into the market.

Responding to these claims, Base contributor Kabir.base.eth stated that Coinbase has actually accumulated over $300 million in ETH, a sum that is more than double Base’s total earnings from sequencer fees.

“Coinbase has accumulated $300M+ in ETH, which is more than 2x all of Base’s ETH earnings over time,” Kabir stated on X. “Base and Coinbase have and continue to hold ETH and publicly disclose our long-term holdings (100K ETH+, $300M+).”

How Coinbase Functions as a Sequencer for Base

As the primary sequencer for Base, Coinbase is responsible for processing and ordering transactions before they are finalized on the Ethereum mainnet. This role allows Base to provide lower transaction costs and faster execution for users. Coinbase, in turn, collects sequencer fees in ETH, leading to concerns about how those funds are handled.

The controversy stems from a broader debate about the role of centralized entities in Layer 2 networks. While Layer 2 solutions are designed to improve Ethereum’s scalability, some argue that their reliance on centralized sequencers creates conflicts of interest.

Layer 2’s Impact on Ethereum Supply: Inflation Concerns

The concerns raised by Santisa echo broader criticisms from figures like Andre Cronje, founder of Sonic Labs, who has warned that Layer 2 networks are making Ethereum inflationary again.

Cronje has argued that while Layer 2 solutions generate significant revenue from transaction fees, only a small portion is sent to the Ethereum mainnet to cover data availability and security costs. This means that most of the collected ETH is either retained or sold rather than being burned, reducing Ethereum’s overall fee burn mechanism and potentially increasing its supply.

“L2s are why Ethereum is inflationary again. SCALE ETHEREUM. They can get the Sonic tech for free. 0 charge. Will 1000x their throughput,” Cronje posted on X.

Base’s Response to the Accusations

Kabir.base.eth sought to clarify the movement of funds between Base and Coinbase, explaining that Base uses off-chain custody for security and auditing purposes. This, he argued, is why funds appear to be transferred to Coinbase rather than being directly managed on Base itself.

“Base earns and spends in ETH as much as possible,” Kabir added. “We use ETH for Layer 1 costs, ecosystem grants, and other operational needs.”

Coinbase and Base have both emphasized transparency in their long-term holdings, which currently exceed 100,000 ETH ($300M+ in value). Despite these assurances, the debate over whether centralized sequencers align with Ethereum’s decentralized ethos continues.

What Happens Next?

The controversy surrounding Coinbase’s sequencer role in Base highlights a growing concern within the Ethereum community about the influence of centralized entities in Layer 2 networks. As more transactions move to Layer 2 solutions for efficiency, the impact on Ethereum’s supply and fee-burning mechanism could become a critical issue.

For now, Base and Coinbase maintain that they are holding rather than liquidating ETH, but calls for increased decentralization of sequencers may continue to gain traction. In the coming months, Ethereum’s broader community may push for alternative solutions, such as decentralized sequencing mechanisms or stricter transparency measures, to ensure Layer 2 solutions remain aligned with Ethereum’s core values.

Final Thoughts

The discussion around Coinbase’s sequencer and Base’s ETH holdings is more than just a one-time dispute—it underscores a fundamental issue in the evolving Ethereum ecosystem. As Layer 2 solutions scale, the question of whether their profit models align with Ethereum’s long-term sustainability remains a crucial debate. Whether or not Base’s reassurances quell concerns, the push for decentralized alternatives is likely to continue gaining momentum.