Coinbase's walled garden

2025-12-23 13:19:21

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Author: Thejaswini M A

Compiled by: Block unicorn

There is a pattern that repeatedly appears across various industries, eras, and markets. First comes explosive growth. Countless products spring up like mushrooms after rain, each claiming to be better in some way than any other product. Specialized tools emerge continuously, as do niche tools. Consumers are told that choice is freedom, customization is power, and the future belongs to those who break traditional monopolies.

Then, silently yet inevitably, the pendulum began to swing back.

It's not because the experts are wrong, nor is it because the overall system is good, but because the costs brought about by fragmentation accumulate quietly. With each additional tool, it means remembering one more password, learning one more interface, and adding a failure point to the system that you were originally responsible for maintaining. Autonomy begins to turn into a burden, and freedom starts to become an extra expense.

In the integration phase, the ultimate winners are not those who do everything perfectly, but those who do enough things well enough that the friction of leaving (to rebuild the entire system elsewhere) becomes insurmountable. They do not bind you with contracts or lock-in clauses, but capture you with convenience. This convenience comes from countless subtle integrations and the accumulation of efficiencies, which may not be worth giving up when viewed individually, but together can form a moat.

We have seen this situation occur in the fields of e-commerce, cloud computing, and streaming. Now, we are witnessing this situation happening in the financial sector.

Coinbase has just made a bet on which side of the cycle we are about to enter.

Let me start with a flashback.

Throughout most of its development, Coinbase has been clear and straightforward. It is the preferred platform for Americans to purchase Bitcoin, allowing them to feel like they aren't doing anything suspicious. It has regulatory licenses, a clean and simple interface, and while customer service often performs poorly, it at least theoretically exists. The company went public in 2021 with a valuation of up to $65 billion, and its core idea is to serve as an entry point into cryptocurrency, which indeed held true for a period of time.

But by 2025, the positioning of “crypto gateway” began to seem less favorable. Spot trading fees continued to compress. Retail trading volume exhibited severe cyclical fluctuations, soaring during bull markets and plummeting during bear markets. Bitcoin whales increasingly preferred to use self-custody wallets. Regulators were still suing the company. Meanwhile, Robinhood, which initially started as a stock trading app and later ventured into the cryptocurrency space, saw its market value suddenly soar to $105 billion, nearly double that of Coinbase's market value. In 2021, over 90% of Coinbase's revenue came from trading. By the second quarter of 2025, this ratio had dropped to below 55%.

So, when the core product is under pressure, Coinbase adopts the strategy you would take: it tries to become everything else.

They call it the theory of “exchange of all things” which believes that aggregation will triumph over specialization.

Stock trading means that users can now react to Apple's earnings report at midnight using USDC without leaving the app. Prediction markets mean they will check the price trend of “Will the Federal Reserve cut interest rates?” during lunch. Perpetual futures mean they can leverage their Tesla position 50 times on Sunday. Every emerging market is a reason to open the app, an opportunity to capture spreads, fees, or earn interest on idle balance stablecoins.

Is this strategy “Let's become Robinhood” or “Let's ensure users never need Robinhood?”

There has always been a viewpoint in the field of financial technology that users need specialized applications. For example, one app for investing, one for banking, one for payments, and one for cryptocurrency trading. However, Coinbase takes the opposite approach: they believe that once users complete a KYC verification and link a bank account, they shouldn't have to repeat it nine more times elsewhere.

This is the argument that “aggregation is greater than specialization.” In a world where underlying assets are increasingly just tokens on the blockchain, this argument makes sense. If stocks are tokens, prediction market contracts are tokens, and meme coins are also tokens, why can't they all be traded on the same exchange?

Its operating mechanism is: you deposit USD (or USDC), trade all assets in the exchange, and then withdraw USD (or USDC). There is no need to transfer funds between different platforms. There are no minimum deposit requirements for multiple accounts. There is only one fund pool flowing between all asset classes.

The more Coinbase resembles a traditional brokerage, the more it needs to compete under the rules of traditional brokerages. Robinhood has 27 million funded accounts, while Coinbase has about 9 million monthly active users. Therefore, Coinbase's differentiated advantage cannot simply be reflected in “we now also offer stock trading,” but must be evident in the trading platform itself.

Commit to providing round-the-clock 24-hour uninterrupted liquidity, covering all types of transactions. No trading time limits, no settlement delays, and no need to wait for brokers to approve your margin application when trading against you.

Is this important for most users? It may not be important at the moment. Most people do not need to trade Apple stocks at 3 AM on a Saturday. But some do. If the platform you provide allows them to trade, you can gain their trading volume. Once you gain their trading volume, you can acquire their data. Once you have their data, you can create better products. Once you have better products, you can attract more trading volume.

This is a flywheel, provided that the flywheel can start to turn.

Prediction Market Gaming

Prediction markets are the most unusual part of this set of combinations, and perhaps the most important part. They are not “trading” in the traditional sense, but rather structured bets on binary outcomes. For example: Will Trump win? Will the Federal Reserve raise interest rates? Will the Lakers make it to the playoffs?

These contracts will disappear after settlement, so there is no long-term holder community. Liquidity is event-driven, which means liquidity fluctuates sharply and is difficult to predict. However, platforms like Kalshi and Polymarket saw trading volumes soar to over $7 billion in November.

Why? Because prediction markets are a social tool. They allow people to express their opinions and take on corresponding risks. They make people unable to resist checking their phones during the fourth quarter of a game or on election night.

For Coinbase, prediction markets solve a specific problem: user engagement. When cryptocurrency prices are stagnant, users may feel bored. Trading stocks also becomes tedious when your portfolio is not moving. However, there are always events happening that capture people's attention. Integrating Kalshi allows users to have reasons to stay in the app even when Bitcoin prices are not fluctuating.

The bet is that users coming from the election market will continue to participate in stock trading, and vice versa. The bet is that the broader the coverage, the higher the user stickiness.

This business model is centered around profit margins.

Setting aside innovative narratives, you will find that this is actually a company trying to profit from the same user in more ways. Stock trading commissions, decentralized exchange (DEX) swap spreads, interest on stablecoin balances, fees for cryptocurrency collateral loans, Coinbase One subscription income, and infrastructure fees for developers using the Base blockchain.

I am not criticizing. This is how exchanges operate. The best exchanges are not those with the lowest fees, but those that users are reluctant to leave, because leaving means having to rebuild the entire system elsewhere.

Coinbase is building a closed ecosystem, but these walls are not meant to lock users in, but to provide convenience. You can still withdraw your cryptocurrencies and transfer your stocks to Fidelity. It's just that you might not want to do so, because why would you?

Coinbase's advantages lie in its on-chain technology, which can provide tokenized stocks, instant settlements, and programmable currency. However, at present, its stock trading is very similar to Robinhood's stock trading, except that the trading hours are longer. Its prediction market is also very similar to Kalshi's, but embedded in different applications.

The real differentiated advantage lies in the Layer 2 blockchain Base built and controlled by Coinbase. If stock trading really takes place on-chain, payments are truly made using stablecoins, and AI agents genuinely start to trade autonomously using the x402 protocol, then Coinbase has created a product that is difficult for Robinhood to replicate.

But this is a long-term consideration. In the short term, the key to competition lies in whose application has the highest user stickiness. Adding more features does not automatically increase the user stickiness of the application. On the contrary, it may make the application interface more cluttered and complicated, leaving new users who just want to buy Bitcoin feeling overwhelmed.

Some cryptocurrency users will be dissatisfied with this. They are true believers. They want Coinbase to be the gateway to decentralized finance, rather than a centralized super app with just a few DeFi features hidden in submenus.

Coinbase has clearly chosen scale over purity. It wants a billion users, not a million purists. It aims to be the default financial platform for the masses, rather than the preferred exchange for those running self-hosted nodes.

This may be the correct business decision. The mass market does not care about decentralization. They value convenience, speed, and avoiding economic losses more. If Coinbase can meet these needs, then the underlying philosophy becomes irrelevant.

But this does create a peculiar contradiction. Coinbase is trying to be both the infrastructure of the on-chain world and a centralized exchange competing with Charles Schwab. It is trying to be a proponent of cryptocurrency while also making cryptocurrency invisible. It aims to maintain a rebellious spirit while accepting regulation.

Maybe it really can be like this. Perhaps the future will be a regulated on-chain exchange, as convenient to use as Venmo. Or maybe, trying to please everyone will ultimately make you irrelevant to anyone.

This is Amazon's strategy. Amazon is not the best at anything. It is not the best bookstore, nor the best grocery store, and certainly not the best streaming service. But it does well enough in all areas that most people are too lazy to go elsewhere.

However, many companies have tried to create a comprehensive application, but most of them ended up creating a disorganized application.

If Coinbase can control the complete cycle from making money, trading, hedging, lending to payments, then it doesn’t matter if certain specific functions are slightly inferior to competitors in specialized fields. The switching costs and the hassle of managing multiple accounts will keep users within its ecosystem.

That's all about the Coinbase universal exchange.