Base Faces New Controversy: Heated Debate Over Whether L2s Count as Exchanges and Sequencer Centralization

The "publicization" of L2 is already imminent.

Written by: Eric, Foresight News

Hester Peirce, a commissioner of the U.S. Securities and Exchange Commission (SEC) known as "Crypto Mom," stated on The Gwart Show that L2s relying on centralized sequencers may meet the SEC's definition of an exchange, and therefore, operators must register with the SEC and comply with relevant regulations.

Hester Peirce emphasized that the key to making such a determination is not the technology itself but the actual function. If a single operator controls the matching engine, it is similar to an exchange. To some extent, this means that as long as there is a centralized organization with trading control over an L2, that organization needs to be regulated by the SEC.

Initially, this viewpoint did not spark widespread discussion, but as it continued to ferment, many began to worry that if even a "crypto-friendly" SEC would reach such a conclusion, the development of L2s might be hindered. Base, which combines elements of both an exchange and an L2, became the primary target of criticism.

As FUD grew louder, Coinbase Chief Legal Officer Paul Grewal was the first to speak out. He stated that the SEC defines an exchange as a marketplace connecting buyers and sellers of securities, but L2s operate as general-purpose blockchains providing infrastructure for on-chain exchanges, just as AWS provides infrastructure for exchanges but is not itself an exchange. Paul Grewal believes that mislabeling sequencers could cause the scalability role of L2s to be overlooked.

Subsequently, Base lead Jesse Pollak also explained sequencers on X, stating that sequencers collect user transactions, order them on a first-in, first-out basis, compute resulting state changes, and finally batch transactions to L1 for settlement, much like a traffic controller ensuring smooth roads. Jesse Pollak argued that sequencers do not match orders; matching occurs at the smart contract layer, and sequencers merely ensure that transactions are processed in a consistent and orderly manner.

Ethereum co-founder Vitalik Buterin joined the discussion after Jesse Pollak, stating that Base is simply an L2 running on Ethereum, providing a stronger user experience through centralized functionality while remaining closely integrated with Ethereum's decentralized base layer to ensure security. Vitalik emphasized that funds on Base are "non-custodial," meaning that L1 ultimately controls the funds on L2, and L2 operators cannot steal them.

Max Resnick, Chief Economist at Solana-focused development company Anza, questioned Jesse Pollak's statement, saying that Base's sequencer sorts transactions by priority fee in 200-millisecond intervals, not strictly on a first-in, first-out basis. Although Jesse Pollak later clarified, it is clear that Max Resnick's key point is that sequencers can reorder transactions according to certain rules, directly pointing to the centralization issue of sequencers.

There is actually little disagreement on whether L2s like Base count as exchanges. The SEC commissioner's view that "L2 is an exchange" may stem from a lack of understanding of L2 architecture. Industry discussions are more about regulatory concerns than right or wrong. However, the perspectives of Base stakeholders and Vitalik have sparked another layer of debate: Should the centralization of Base's sequencer be changed?

From Regulatory Issues to the Debate on Sequencer Centralization

Vitalik's view that Base's centralized sequencer is for scalability and user experience has also sparked much controversy. Taproot Wizards co-founder Eric Wall stated that in terms of fund security, Base is a custodial system, pointing out that Base's contracts can still be upgraded through governance, meaning the operator and its related entities (via the security council) retain considerable discretionary power. In his view, this makes Base functionally closer to a custodial system rather than a fully trust-minimized Ethereum extension. Eric Wall also commented that the wording of Vitalik's statement could lead readers to believe that even if keys are leaked, there would be no loss of funds, which he considers highly irresponsible.

Former Ethereum core developer Lane Rettig stated that although Coinbase itself would not maliciously steal user funds, this does not mean Coinbase would not act against users' interests under government pressure.

Galaxy Head of Research Alex Thorn believes Vitalik's view misses the point, stating that the focus of the discussion should be on securities on L2, not the security of L2 itself. Although Alex Thorn did not state it explicitly, his view points to a critical issue: L2s themselves are not exchanges, but if trading platforms on L2 are built on a highly centralized chain, can these platforms still be called DEXs, and should they be regulated?

In response to increasing criticism of Base's centralization, Vitalik reiterated that Base is indeed in a centralized stage, where a supermajority vote of the security council can upgrade contracts. However, he pointed out that the quorum rule prevents Coinbase from unilaterally censoring or stealing funds. In addition, a second phase is planned in which even a 100% security council vote cannot change the running on-chain code.

The founder of Anastasia Labs, which is developing Cardano L2 Midgard, sharply "interpreted" Vitalik's supplementary comments: interpret "security council" as "multi-signature"; interpret "75% vote" as "7 private keys"; interpret "requiring individuals with more than 26% voting power to be independent of the organization managing the L2" as "requiring the organization to use shell companies, friends' companies, obfuscated subsidiaries, or partner companies to hold the 3 private keys required for the multi-signature."

Many users in the comments supported the Anastasia Labs founder's view, believing that although the rules are set as such, bypassing them to achieve complete control over Base is very simple, and the lack of transparency in governance makes these transparent rules seem highly untrustworthy.

The Regulatory Dilemma of Web3 Infrastructure

Base's over-centralization as an L2 has sparked discussion many times. Although the SEC commissioner's view may seem "absurd," it directly points to the core issue: if transaction ordering on L2 can be arbitrarily manipulated, then that L2 should be regulated. Of course, regulating L2s as exchanges appears to lack basis on the surface, but if the L2 operator controls the sequencer to pocket MEV profits and affect transaction execution prices, then the L2 does, to some extent, play a role similar to a broker.

For regulators, determining the "decentralization" of infrastructure is a challenge. Even if sequencers are decentralized, it is difficult to quickly clarify whether there are vested interests among the entities maintaining the sequencer network. The SEC, worried about a repeat of the FTX tragedy due to lack of regulation, has somewhat relaxed oversight under the new U.S. president, but still cannot hide concerns about major risks arising from regulatory loosening. Recently, U.S. regulators have introduced some exemptions for DeFi, but how to define and review infrastructure remains an issue that needs further study.