What is this? Some new Ethereum? It’s Coinbase’s liquid staking cToken of course!
What in tarnation is a liquid staking cToken? Let’s break it down quickly:
Liquid staking - A way for people to get a spendable version of their Ether (ETH) that would normally be locked away via staking.
What is staking? A way to use your funds (ETH) to secure the integrity of the Ethereum network obviously! The Ethereum Foundation explains it better.
cToken - I ain’t gonna lie, Coinbase didn’t do a great job of explaining this one. This just means ‘not 1:1’ for every ETH you stake on Coinbase. Normally you’d expect that if you stake 5 ETH, you would receive 5 cbETH in exchange for wrapping it. In this case, a cToken is worth more than the thing it’s redeemable for. So you will usually have slightly less of it because it is more valuable than ETH.
Got it?
Ok so what are you supposed to do with cbETH. Why would you use this? These are the big reasons:
💰You could get significantly more ETH in the future by buying cbETH at a discount.
🪙 You can get additional rewards by just holding cbETH.
🚜 You don’t have to freeze up your liquidity when staking on Coinbase. You can sell cbETH anytime and do all of your normal yield-farming DeFi degeneracy the way you normally would with ETH.
Yield what? Explain.
💰#1: You could get significantly more ETH in the future by buying cbETH at a discount.
cbETH is an ERC-20 token like most others, so there is no special superpower keeping it bound to the price of Ethereum. Only market forces. Why does that matter?
It is redeemable for an amount of staked ETH plus rewards. Staked ETH accrues rewards over time from the Ethereum network. Rewards are an incentive for staking in the first place, which helps secure Ethereum and make it more difficult to break or defraud the network. The rewards pile up slowly over time, and are divided evenly among people staking on Coinbase.
1 cbETH = 1 ETH plus any rewards from the Ethereum protocol generated from staking.
That means if the price of cbETH falls below the current conversion rate, you can take advantage of the discount and redeem it for more ETH in the future without much work!
At the time of writing, 1 cbETH is worth ~0.93 ETH. So it is still trading at a nice discount. (Source: Uniswap)
Important: Redemption is not activated on Coinbase yet NOR can stakers un-stake on Ethereum. More on that later.
TLDR: It means the price of cbETH can nose-dive and you’ll be able to redeem it for actual ETH worth a lot more.
🪙#2: You can get additional rewards by just holding cbETH.
Yes, by doing nothing you can increase the value of your cbETH over time. Amazing!
We mentioned above how cbETH represents a share of an ever growing pie of staked ETH on Coinbase. As long as Coinbase’s validators do not get slashed they will continue to accrue rewards and increase the value of their giant pile of staked ETH. This means that your precious cbETH will represent more and more ETH over time. It literally earns interest and you don’t have to do anything. Just don’t paperhand it.
🚜#3: You don’t have to freeze up your liquidity when staking on Coinbase.
“Help I’ve staked all my ETH and now I have no money”
Well luckily for you, that rent money you staked last year is now accessible! You can dump your cbETH anytime on Coinbase’s exchange or any available DEx for actual money. Hooray!
For the DeFi enthusiasts out there, you can go borrow and lend and provide liquidity for your cbETH the way you would with any other token. Now you’re earning double yield on a yield bearing token. Pretty good deal!
Alternatively, if you speculate that the price of cbETH will continue to go down, you could
Borrow a bunch of cbETH on a lending protocol
Buy ETH to hedge against positive ETH price action
Wait for cbETH to de-peg significantly
Sell the ETH for cbETH and re-pay the loan, pocketing the difference
¯\_(ツ)_/¯ I’m not saying you should do that. But you could.
Wow Mister! I’m ready to go spend all my hard earned money on cbETH because of what you said!
Hold it right there son.
There are risks to using, trading, or even thinking about cbETH.
Had to put that one in big letters. Yes with every opportunity there is risk involved, so let me spell it out for you:
Slashing risk - Part of staking involves penalties for bad behavior as a validator on the Ethereum network. This means anybody who tries to defraud, double spend, or otherwise engage in bad behavior on Ethereum can be penalized by having their stake slashed. Which means part of that big Coinbase staked ETH pie can be reduced. It’s unlikely, but possible.
Price risk - As mentioned above, cbETH’s price is not obligated to go up or down outside of normal market conditions. There is downside price risk in the immediate term. And until withdrawing your stake on the Ethereum network becomes available, you will not be able to redeem your cbETH for anything. Anything, you hear me!
Smart Contract Risk - Oh yeah, Coinbase retains the right to freeze, blacklist, or otherwise disable all transfers of cbETH anywhere anytime on the Ethereum network. This is in their Whitepaper for cbETH which is definitely worth a read: https://www.coinbase.com/cbeth/whitepaper
Don’t forget, Coinbase’s ability to enable withdrawing staked ETH from validators is dependent on the Ethereum developers releasing this feature. The current timeframe for this functionality is at 6-12 months from the time of writing.
Well kids, I hope you learned something from today’s rant. If you enjoyed this read or just want to stalk me online, you can reach me on Twitter: 0xLacrosse I’m also a founder over at RightClickSave Ventures! Come say hi!
Original release tweet from Coinbase Assets:
Great read, and very helpful!