Coinbase made a big splash last Wednesday as they officially announced the release of their liquid ETH staking token, cbETH.
Coinbase’s entry into this very lucrative sector carries potentially enormous implications for Coinbase, its staking competitors, and Ethereum.
What is Staking?
Staking is the process of locking tokens to secure the blockchain in exchange for a yield. Staked tokens are usually completely locked during the process, meaning that investors are unable to access them or trade them while they are staked. Although Investors generally accept this drawback because they are earning a yield, it is not ideal.
What Is Liquid Staking?
Liquid staking solves this by issuing stakers a, you guessed it, liquid version of the staked token. A liquid staked token is simply a tradeable representation of the staked token. This allows investors to maintain control of their assets while continuing to earn a staking yield.
Liquid staking is especially popular for ETH because staked ETH can’t be unlocked until 6-12 months after The Merge. Investors therefore often want to hold a liquid staking token to maintain flexibility until the unlock.
Coinbase Wrapped Staked ETH, better known as cbETH, is Coinbase’s ETH liquid staking token.
As explained in the whitepaper, cbETH is a tradeable version of staked ETH. This means that not only does cbETH earn staking rewards but it can also be bought, sold, and used in other DeFi protocols as collateral.
It’s an excellent idea for Coinbase, but is it beneficial for crypto?
There are three parties that cbETH affects: Coinbase, Lido and other liquid staking providers, and Ethereum.
- For Coinbase, cbETH is a stroke of genius. Staking is an important (and growing) source of revenue, and this move incentivizes more people to stake on Coinbase.
- For Lido and other competitors, cbETH is not what they want to see. Coinbase already controls the second highest amount of staked ETH (15%), and that’s without a liquid staking service. The release of cbETH should only increase that percentage.
cbETH’s impact on Ethereum is a bit more ambiguous. Ethereum is strongest when it is decentralized. Lido and their massive 33% share of staked ETH does not aid decentralization. Thus, in the short term, Coinbase entering the liquid staking game brings some much-needed competition.
However, in the long term, Coinbase amassing a massive share of staked ETH themselves could be catastrophic for Ethereum. We have seen with Tornado Cash that the government is willing to attack crypto. Who’s to say that they won’t put pressure on Coinbase to censor transactions?
CEO Brian Armstrong has said that Coinbase will shut down its staking program if the government pushes them to censor transactions. It’s anybody’s guess if he will hold true to that when push comes to shove with staking such a big part of Coinbase’s revenue. What is certain, however, is that the risk rises as Coinbase’s share of staked ETH rises.
cbETH is indisputably great news for Coinbase and $COIN investors, but we can’t ignore its potential dark consequences on Ethereum. Hopefully, we never have to see those consequences become a reality.