Coinbase hopes AI will reduce frequency of exchange’s outages

Coinbase (NASDAQ: COIN) is turning to artificial intelligence (AI) in a bid to fix the digital asset exchange’s habit of going offline whenever the ‘crypto’ market wobbles.

On August 26, Coinbase announced that it has “developed and deployed a machine learning model that predicts spikes in user traffic and automatically scales databases, preventing downtime and increasing platform efficiency.” This model will allegedly allow the exchange to “optimize infrastructure costs by avoiding over-provisioning while ensuring their [our, surely] platforms remain reliable during unpredictable crypto market movements.”

Coinbase is notorious for going offline for extended periods whenever the volatile ‘crypto’ market experiences sudden surges or equally abrupt nosedives in the fiat value of major tokens. Making matters worse, Coinbase sometimes issues announcements of “planned maintenance” even as it simultaneously acknowledges that it’s investigating why its systems are offline.

Like how Coinbase announced on March 11, 2023, that it was “temporarily pausing” conversion of the USDC stablecoin to dollars “over the weekend while banks are closed.” In reality, the California-based Silicon Valley Bank—where USDC issuer Circle (a Coinbase partner) kept $3.3 billion of its fiat reserves—failed that day following a bank run, leaving Circle with no dollars to convert (until the Federal Reserve—the entity that ‘crypto’ was meant to destroy—bailed it out).

These exchange outages leave Coinbase customers unable to buy or sell their tokens or close out derivative positions, often leading to customers suffering significant financial losses. Even when Coinbase claims its systems have fully recovered, many customers still find themselves unable to withdraw.

Some of the exchange’s more cynical customers—as well as those who merely lob critical comments from the sidelines—have accused the exchange of purposefully pulling the plug to either act as a brake on downward trajectories or allow the exchange to internally cover its butt before customers can do likewise.

It’s worth remembering that Coinbase cut its ‘Website Hosting & Infrastructure’ spending from $440 million in 2022 to $192 million in 2023. Yet it continues to dole out nearly $1 billion annually in stock-based compensation to its execs, who can’t dump these hot potatoes fast enough (766 insider sales worth nearly half a billion dollars and zero buys over the past six months).

Not the best look for a team that allegedly believes its best days are ahead of it, and calls into question Coinbase’s historic tendency to penny-pinch on the infrastructure that’s supposed to preserve its customers’ access to their assets on the exchange.

It’s got electrolytes!

Getting back to the mechanics of the new AI plan, Coinbase claims the traditional method of dealing with traffic surges isn’t “an instant process, starting to scale when traffic is already high is often too late.”

The new AI model is intended to anticipate traffic spikes and scale up resources “before the traffic arrives.” Coinbase claims this new system “served us well” during a recent uptick in activity levels, ratcheting up resources “a few hours before peak traffic.”

The goal was to have at least an hour’s lead time before traffic spikes, but Coinbase found that “by the time our systems begin to notice the start of a spike, it was too late to react.” So, Coinbase designed a longer-term model that considered a number of “external signals,” including fluctuations in the fiat price of BTC, ETH, and other prominent tokens, and tried to predict whether traffic would exceed a particular threshold.

Coinbase cautioned that its new system could still miss a traffic spike, which could result in more downtime. The system could also scale up based on anticipation of a spike that never arrives, which would cost Coinbase money. Splitting the difference, Coinbase designed its system to scale 2x its current level at the sign of a spike, but “de-escalate” if the predicted level fails to exceed the scale target for six hours.

There is a potential flaw in Coinbase’s new model, mainly, the tendency of AI models to ‘hallucinate‘ and make decisions based on erroneous information. What if Coinbase’s system confuses rising traffic with falling traffic? And what if it assumes nothing is amiss, possibly due to management’s previous public assertions that all is well when it’s most definitely not?

Base hit

Perhaps Coinbase let its exchange infrastructure lag due to the distraction of building up Base, its Ethereum’ Layer 2′ network. Base launched a little over a year ago but has quickly taken up a good deal of Coinbase’s time, attention, and (apparently) resources.

Base’s daily active user count topped one million for the first time on August 24, according to figures from GrowThePie. Base’s weekly active user count is over 4.6 million, dwarfing runner-up Arbitrum at around 1.2 million.

Much of this activity revolves around the nearly 1.4 million different memecoins launched on Base since March 1. Few of these tokens have done anything other than rug those foolish enough to purchase them. However, the popularity of these utility-free digital Beanie Babies has helped give Base the highest number of transactions among Ethereum Layer 2 since July.

Base users are currently paying transaction fees of around $100,000 per day, of which Base kicks up only a couple hundred bucks to the Ethereum main layer. Coinbase serves as Base’s sole ‘sequencer’ aka transaction processor, meaning these fees all go toward Coinbase’s bottom line.

In announcing Base in February 2023, Coinbase promised to “progressively decentralize the chain over time.”, CEO Brian Armstrong said “Coinbase can run one of [Base’s] sequencers, as others can over time.”

More than a year after Base’s launch, the phrase ‘over time’ starts sounding like the dismissive ‘we’ll see’ that parents say when their kids ask if they can have Froot Loops for dinner.

Wrap it up

Coinbase has been styling Base as a one-stop shop for all your ‘crypto’ needs, including promoting USDC (in which Coinbase has a stake) as the network’s primary method of payment and onboarding users via Coinbase Wallet. Basically, it’s like Armstrong is trying to recreate an even more proprietary version of BTC’s wonky Lightning Network on Ethereum.

On August 13, Coinbase’s official X account tweeted the cryptic notice “cbBTC” followed by the phrase “Coming Soon.” This was immediately followed by a reply tweet from the official Base account that simply said “Based” while Base’s lead developer Jesse Pollak tweeted that “we’re going to build a massive [BTC] economy on [Base].”

Coinbase appeared to be teasing a plan to introduce its own ‘wrapped’ BTC on Base, aka a proxy version of one’s BTC tokens that you can use on Ethereum (and its Layer 2’s) to access Ethereum’s native support for smart contracts, which don’t exist natively on BTC since the BTC core devs disabled the op codes that would have enabled smart contracts.

Wrapped BTC (WBTC) is an Ethereum token pegged 1:1 to the value of BTC. A digital asset custodian holds your BTC, issues you the equivalent amount of WBTC, and off you go to play in Ethereum’s decentralized finance (DeFi) playland. The current market cap of WBTC—which was launched in 2019 by custodian BitGo—is over $9 billion. WBTC is already available on Base, but it’s not under Armstrong’s direct control, so…

Interestingly, Coinbase’s cbBTC plans were announced just days after BitGo announced a “strategic partnership” with BiT Global, a Hong Kong-based company backed by Tron founder Justin Sun. The partnership promised “multi-jurisdictional and multi-institutional custody” of the BTC backing WBTC.

Given Sun’s ‘colorful’ history and his questionable handling of reserve assets backing other projects—including the recent removal of 12,000 BTC backing the USDD stablecoin without the approval of USDD’s decentralized autonomous organization–alarm bells began ringing following BitGo’s announcement, leading MakerDAO to disable future WBTC borrows.

So, kids, get ready to move your utility-free BTC to Base and enter the utility-rich Ethereum environment! Stake your cbBTC and earn a high yield (via some opaque mechanism)! Lend your cbBTC to other users who might do something with it (and you might even get it back)! Or use your cbBTC to buy some memecoins. Please buy my memecoins. For God’s sake, won’t someone buy my memecoins?

In order for artificial intelligence (AI) to work right within the law and thrive in the face of growing challenges, it needs to integrate an enterprise blockchain system that ensures data input quality and ownership—allowing it to keep data safe while also guaranteeing the immutability of data. Check out CoinGeek’s coverage on this emerging tech to learn more why Enterprise blockchain will be the backbone of AI.

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