What is cbETH?

What is Coinbase Wrapped Staked ETH (cbETH)?

Coinbase Wrapped Staked ETH, or cbETH is a utility liquid staking derivative token for ether staking on Coinbase. Launched in the summer of 2022, cbETH offers a liquid alternative to traditional staking by enabling holders to participate in decentralized finance without locking their assets or needing 32 ETHs (like in solo staking). The LSD mechanism also allows users to wrap their staked ETH at no cost and the option to trade it on Coinbase and DeFi platforms like Uniswap and Curve.

As an ERC-20 token, cbETH directly corresponds to the value of one staked ETH plus accumulated staking rewards. This design allows holders to trade or transfer their staked Ethereum prior to network upgrades, thus boosting their utility and flexibility within the DeFi ecosystem. Additionally, holders can unwrap their cbETH at any time to reclaim the original ETH, with the conversion rate improving over time as staking rewards accumulate.

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How Does cbETH Work?

cbETH converts staked Ethereum into a tradable token for DeFi ecosystem use (LSDs). Users receive their liquid tokens, representing their staked ETH plus accumulated rewards, allowing liquidity and flexibility in assets. It uses a floating conversion rate model that has several cool features:

• Minting and Burning: Users mint cbETH by staking ETH on Coinbase and can burn cbETH to unwrap it back into ETH2, following the Ethereum PoS withdrawal rules.
• Conversion Rate: The cbETH-to-ETH conversion rate changes over time based on staking rewards, penalties, and other factors, leading to potential price divergence from ETH.
• Trading and Liquidity: cbETH can be traded on Coinbase and decentralized exchanges, allowing users to access liquidity without unstaking their ETH.
• Security: Staking is conducted through partnerships with reputable validators, minimizing risks associated with validator performance.
• Ethereum Upgrades: cbETH allows users to trade or transfer staked ETH ahead of Ethereum network upgrades, ensuring flexibility.
• Staking Rewards: cbETH appreciates in value relative to ETH as staking rewards are earned, though users must consider the impact of potential slashing or other penalties.

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cbETH to ETH Ratio

The cbETH to ETH ratio determines the exchange rate between the two assets, factoring in the initial value of one staked ETH and the staking rewards accumulated since cbETH's introduction. This rate is structured to potentially increase over time as staking rewards are expected to outweigh any losses from infrequent slashing incidents. As a result, the value of cbETH may exceed that of ETH, reflecting the growing worth of staked assets.

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What are cbETH Yields (APY)?

Coinbase offers a 3% Annual Percentage Yield (APY) on cbETH directly on the exchange. We can use this as a benchmark when trying to find better alternatives inside the depths of DeFi. Let's use the top tool for the job, DefiLlama, to see what yields are currently available by looking at the Total Value Locked (TVL) and 30-day average APY metrics.

• Coinbase Wrapped Staked ETH (cbETH): With a TVL of $671 million, cbETH now provides a 30-day average APY of 3%, marking it as a primary option.
• Sommelier (WETH-STETH-CBETH): This DeFi pool features a TVL of $36.97 million and an APY of 5.05%. Not so bad, but there is multi-asset risk here.
• AAVE V3 (cbETH): With a TVL of $21.6 million, this platform offers a non-existing APY of 0.47%.
• Moonwell (cbETH): This platform reports a TVL of $13.82 million with an APY of 1.30%, which is once again below Coinbase's base.
• Morpho Blue (CBETH-USDC 86%): Two entries in the list both under Morpho Blue, show TVLs of $10.6 million and $7.17 million, with APYs of 4.73% and 4.51% respectively, highlighting a nice decentralized option to diversify some cbETH (PS they just closed a $50m funding round).
• Sommelier (WETH-WSTETH-CBET): Another Sommelier pool logs a TVL of $5.88 million and an APY of 4.29%. Of course, there are pools with higher APY but due to low TVL they are too risky.

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cbETH Risks

Investing in cbETH presents potential gains but carries several risks that investors must consider:

• Market Volatility: cbETH, like all cryptocurrencies, is susceptible to the crypto market's inherent volatility, leading to rapid and big price changes.
• Liquidity Risks: Market conditions or low trading volumes can impact cbETH's liquidity, complicating efforts to buy or sell without affecting its price.
• Smart Contract Risks: cbETH relies on smart contracts, which are vulnerable to bugs, vulnerabilities, or failures, posing security risks to staked assets.
• Regulatory Risks: The unpredictable regulatory atmosphere for cryptocurrencies and DeFi products could influence cbETH's operation, accessibility, or value.
• Staking and Unstaking Risks: The processes involved in wrapping and unwrapping ETH carry terms that may include penalties or losses, especially for early withdrawals or in unstable network conditions.
• Slashing Risks: Slashing events, though rare, can occur if validators act maliciously or underperform, potentially diminishing the value of staked ETH and cbETH.
• Interest Rate Fluctuations: The APY on cbETH can change with Ethereum staking rewards and market dynamics, affecting its return potential.
• Centralized Dependencies: cbETH is a mid-cap, fully collateralized asset but depends on a centralized entity, Coinbase, for custody services. It is exposed to the underlying risks of Coinbase Liquid Staking.

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Bottom Line

Coinbase Wrapped Staked ETH (cbETH) is a liquid staking derivative that wraps staked ethers into a tradable ERC-20 token so people can get more things to do with it. cbETH maintains a floating conversion rate that reflects the accumulated staking rewards and offers flexibility to trade or transfer staked ETH ahead of Ethereum upgrades.

Despite not having attractive yields right now, investing in cbETH still comes with risks such as market volatility, liquidity constraints, smart contract vulnerabilities, regulatory changes, and surprise slashing events. These factors must be carefully considered by investors before they apeing with all their ETH into some suspicious DeFi pools. You can also use our staking calculator to view potential returns.