*obligatory not financial advice*

What is Coinbase offering with its cbETH token?

Coinbase is one of the biggest cryptocurrency exchanges worldwide that works as the gateway into the crypto world for many people due to being very beginner friendly. In September, when the Ethereum 2.0 merge finally happens, it will introduce a new feature that will allow the Coinbase users to stake their ETH without needing to lock their funds.

Normal ETH staking has many flaws. For example you would have to wait until a later update until you can actually unstake your ETH and even once you can unstake them it could take you multiple days to do that if many people are doing it at the same time. Furthermore, you cannot use staked ETH in DeFi applications like Aave.

This is why Coinbase will soon create the cbETH token. This token will be backed by ETH that is staked by Coinbase and the staking rewards will be constantly added to the stake. This tokenized staked ETH can still be traded and sold anytime to redeem the underlying value and you can also use it in DeFi for example as collateral in Compound or Aave to take out a DeFi loan.

Coinbase will use the cToken model that Compound is also using, this means that 1 cbETH and 1 ETH will initially have the same value but the rewards will be directly added to stake so the value of 1 cbETH will constantly grow relative to ETH. So if Alice deposited 10 ETH for 10 cbETH and earns 2 ETH as staking rewards, she will still only have 10 cbETH but she will be able to burn them to redeem 12 ETH in total. The great thing about this approach is that you are earning compounding interest but the amount of tokens that you hold is not constantly changing which could make it easier to do your taxes.

One disadvantage of the cbETH token is that it is centralized and obviously entirely depends on Coinbase. However, Coinbase is one of the most trustworthy crypto exchanges and as publicly traded company it is relatively transparent and regulated. There are no fees for staking ETH and minting cbETH or for burning cbETH to redeem ETH, but Coinbase does take a small percentage of the earned staking rewards as payment.

There are also other alternatives for liquid staking of ETH. Binance has been offering essentially the same service for almost 2 years now with its BETH token. And Lido is providing liquid staking in a much more decentralized way. Still since Coinbase is very easy to use and trustworthy, it could provide a very simple way to earn ETH staking rewards for new crypto investors.

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