Is this Coinbase’s world, and are we just living in it? After rising to the top of the cryptocurrency exchange business, Coinbase has gone on to dominate almost all other valuable pockets within the digital asset industry. Coinbase is the fourth-largest exchange in the world, with $1.5 billion in 24-hour volume, 34 million monthly users, 73 million verified customers, and a market capitalization of $38 billion. The company also custodies more than 11% of Bitcoin’s total supply, which translates to 2.275 million BTC or a whopping $129 billion. It holds coins in its coffers for massive corporations like BlackRock, Michael Saylor’s Microstrategy, Tesla, Grayscale, and dozens of others. And it doesn’t end there. Coinbase holds more than 11% of staked ETH, placing it second among all known stakers (an 18% market share goes to unidentified stakers). First belongs to Lido Finance with a seemingly insurmountable 28%. In Ethereum’s Layer 2 ecosystem, Coinbase’s Base network lands in second place by total value locked (TVL) with $6 billion, according to L2Beat. The firm co-founded by Brian Armstrong in 2012 is also active on the political front. According to Finance Magnates, Coinbase is the largest donor among crypto companies, allocating more than $50 million to the Fairshake SuperPAC, a crypto-leaning lobbying political action committee. Satoshi and the builders they inspired built out entire ecosystems based on removing middlemen, custodians, single points of failure, and single points of censorship. But now, the crypto industry seems to be coalescing around a handful of large players. When so much power and assets concentrate around one entity, it creates systemic risk, according to Jameson Lopp, CTO of multi-sig custodian Casa. “It’s not optimal,” he told The Defiant. Coinbase’s position as the main caretaker of institutional BTC and its central role in Ethereum and other crypto projects draws a searing line of concern into the center of the industry’s mission. But that’s not all; if the exchange gets hacked, not only will the public’s perception of crypto falter – more than 73 million Americans have an account – but market prices would plummet, plunging sentiment into another potentially devastating bear market. Alternatively, the company’s influence on key technical decisions such as forks or chain rollbacks in extreme circumstances could also prove menacing to some of the largest and most robust protocols. While Coinbase “isn’t a fly-by-night operation like most exchanges that have been hacked,” the company is still vulnerable to nation-state pressure, Lopp said. This could potentially take the shape of a 6102-style action – when the U.S. government seized its citizens’ gold in the early 1930s as a response to the cataclysmic market crash the country was suffering since 1929. The Bitcoin OG and longtime cypherpunk added that Coinbase going down, much like Mt. Gox. (one of the earliest exchanges which had more than 800,000 BTC stolen) or FTX, would “cause massive loss of confidence and a lengthy bear market affecting all holders.” Steven Lubka, head of Swan Private, a Bitcoin-only financial services company, agrees that a Coinbase hack resulting in a total or near total loss is highly unlikely. “Custodian centralization is not ideal, and yet it is worth understanding these custodians use highly advanced practices,” he told The Defiant. “All of these coins are not held in a single address or manner that makes a total loss possible. It is unlikely that a scenario where Coinbase holds 1m BTC is materially more insecure than one where Coinbase holds 300k, Fidelity 300k, and BitGo 300k.” Coinbase said in an emailed statement, “The world’s largest financial institutions rely on Coinbase for a reason—we have a proven track record, state-of-the-art technology, and deep expertise in crypto custody.” Coinbase Disaster Scenario In the unlikely event that Coinbase suffers a hack and loses any percentage of funds that belong to BlackRock or Microstrategy, something similar to Ethereum’s DAO Hack in 2016 isn’t off the cards, wrote Frances Pouilout, CEO and founder of Canadian Bitcoin exchange, Bull Bitcoin. “In a Coinbase disaster scenario (coins stolen or lost), we might see a massive consortium of powerful interests clamoring for a Bitcoin fork to somehow ‘recover’ their loss,” Pouilout said. “This would effectively create a new altcoin which they would claim is ‘the real Bitcoin.’” Pouliot hits the brakes on the threat, however. He explained that Bitcoin nodes, which run the Bitcoin software, would reject a proposed hard fork, and “the vast majority of users would rather keep their value in a cryptocurrency whose blockchain hasn't been rolled back.” Miners would also need convincing in the aforementioned disaster scenario. Bitcoiners, or Coinbase and some of the companies it holds BTC for, would have to persuade Bitcoin miners who hold BTC on the custody service to mine their chain instead of the original Satoshi-era blockchain. Sani, the founder of Timechain Index, agrees that large institutions that are BTC holders could add pressure for a BTC fork to happen. “In the case of a hack regarding coins with someone with influence, like BlackRock, they will try to force a rollback of the chain,” he told The Defiant. “Since they will agree, they might force U.S. miners to do so since they are in their jurisdiction, which will cause a chain split and a new Bitcoin fork.” However, a new chain would be short-lived, he said. “It will have an effect on the price but nothing long term,” he said, and the other fork “will die” like Bitcoin Cash and Bitcoin Satoshi’s Vision (BSV). Could this happen with Ethereum? Lisa Neigut, founder of the Bitcoin coding educational course Base58 and the person behind the Bitcoin++ conference, pointed out the main differences in how Ethereum and Bitcoin’s ledger entries are registered and how the former is more privy to a potential hard fork. In Ethereum, the contracts are written directly on-chain, “so if the contract is buggy, you need to fork,” she said. That said, this has only happened once, back in 2016, when Ethereum suffered the DAO Hack. It could potentially happen again, but it’s been eight years and unlikely to happen again. Forks aren’t necessarily a bad thing and sometimes are much needed to adapt to market conditions, consensus rules, or ever-evolving regulatory frameworks, but they can be contentious. If a hard fork is pushed forward by Coinbase’s commercial interest to save its stake in Ethereum, for example, and it gets enough resources funneled in that direction, then the protocol’s decentralization could be called into question. On the other hand, Neigut said, “In Bitcoin, the ‘contracts’ get written into individually owned UTXOs, which get destroyed every time you spend Bitcoin.” That’s because it operates under a UTXO model, which stands for Unspent Transaction Output. Essentially, a UTXO is the amount of cryptocurrency that is left after a Bitcoin transaction. Think of it like the change you receive when you pay with physical cash. This model provides fundamental protection for the protocol in case of a company like Coinbase going down somehow. Neigut told The Defiant that if there’s a bug in the code, for example, in a UTXO that an entity holds, only that specific entity loses its funds. “So if there’s a bug in Coinbase’s key implementation, that’s a ‘them’ problem,” she said It becomes, in her words, “a nice separation of concerns” in Bitcoin land, which shouldn’t threaten the overall health of the protocol. Evolve or Die A protocol’s ability to change is quintessential to its long-term health. And that ability might be threatened by the concentration of Bitcoin, or Ethereum, with centralized custodians like Coinbase. That’s what Armin Sabouri, CTO of Bitcoin Layer 2 Botanix Labs and OP_CAT BIP author, reckons. His perspective contradicts that of Pouliot, who previously claimed that it all comes down to nodes who would likely reject any changes to Bitcoin if pushed by a so-called Coinbase disaster scenario. “If a large holder, or a group of them, disagrees with upcoming software updates, they could coerce the community by initiating a fork and threatening to dump their Bitcoin on the original change, thereby crashing its market price,” Sabouri told The Defiant. “In such a scenario, users would have no choice but to ossify the network. Armin reckons that “in general,” large economic actors prefer Bitcoin as a store of value. But in his view, the network has the potential to become a revolutionary monetary system, and in order to scale and enhance privacy or self-sovereign tools, certain changes might be needed. These would have to happen through soft forks, he said. Bitcoin has a contentious history with forks, especially after the Blocksize War that took place between 2015-2017. In the aftermath of that conflict, nodes had the last word, so even if Coinbase were to coordinate with miners, for example, it would still require a large consensus majority by node runners which are scattered around the world If a fork were to get floated as a real possibility, “the level of coordination you’d need to pull it off is daunting,” said Neigut. Only time will tell if the threat is overstated. For now, however, crypto is rolling back its main mission and allowing it to fall captive to powerful self-interests. Exactly what it was trying to defeat.