# cbETH bear vision

Coinbase [recently launched](https://twitter.com/CoinbaseAssets/status/1562476695357358080?s=20&t=e55Z_0-U1Q9khl_W9yGMig) it's own Liquid Staking Derivate(LSD): cbETH

Coinbase Wrapped Staked ETH (cbETH) is a utility token that represents ETH2, which is ETH staked through Coinbase. cbETH can be sold or sent off-platform, while ETH2 will remain locked-up until a future protocol upgrade (Shanghai).

cbETH is a cToken (earn rewards automatically so at the moment of the unlock probably 1 cbETH> 1 ETH), its audited by OpenZeppelin.

If we analyze LSDs, we can find 3 main variables which determine the success of the product:

- Market Cap : Trust and popularity among Ethereum & crypto community is vital. More confidence and hype on certain asset has direct impact on it's market cap.
Do you think that in an ecosystem where decentralization is the main value cbETH could gain mass adoption? And if it does, what will be the extra risks of it?
- Liquidity: LSD are mainly created to provide liquidity to ETH investors who need want to exit their position or use it for another purposes. Having enough liquidity at all moments is important to maintain a price close to ETH peg ( or in this case "ETH + rewards" peg). This liquidity relies on many factors such as the cycle of the market in which we are, the DeFi integrations available for the asset(covered later) and more...the fact of adding an extra layer of risk such as a centralize entity on top of all of it after [all the lessons](https://chaindebrief.com/the-fall-of-celsius-and-3-arrows-capital/) we had on the first semester of 2022, doesn't seems a good idea.
- DeFi integrations: Being present at many Dapps provide assets more liquidity and trust for users. Besides Coinbase being an enormous corporation, it might be seen as an enemy on Decentralized maxi users.
Users will look forward to use their cbETH to obtain an extra yield comparing multiple protocols. But if cbETH has no enough liquidity because people don't rely on this centralized entity, cbETH holders can get on a big trouble since in case of anting to exit their position they could find a big de-peg resulting on a big opportunity cost.

In addition,it's important to mention that your rewards as "validator" has a fee of 25%, which remains on Coinbase hands.
While main competitors such as Lido and RocketPool charge 10% and 15% respectively.


Let's go by one one on the risks mentioned by Coinbase on [cbETH whitepaper](https://www.coinbase.com/cbeth/whitepaper)

- Slashing risk
Ethereum’s consensus mechanism has several rules intended to protect
the integrity of the network. If any of these rules are broken (voluntarily
or not), a portion of the staked ETH is removed (validator downtime and double-signing for example). In the event of a validator or protocol failure, this network.
“slashing” could reduce the amount of staked ETH held by Coinbase on
behalf of cbETH holders. In this event, the cbETH<>staked-ETH conversion
rate would decrease.
- Smart-contract Risk
Besides it had been [audited by Open Zeppelin](https://blog.openzeppelin.com/coinbase-liquid-staking-token-audit/), cbETH is relies on the smart contract and it could be exploited in multiple ways.
- Blockchain (Eth merge)
The merge is the largest upgrade ever right now. Potential flaws with the Beacon Chain or the upcoming Merge could lead to adverse consequences for cbETH, like all staked ETH.
There is no guarantee that the merge happens smoothly and probably one of the reasons of th 7% [de-peg with ETH](https://app.uniswap.org/#/swap?chain=mainnet) at this moment
- Custodial Risk (Coinbase wallets)
Not your Keys, not your coins. We already seen what happened with Celsius and it's bankrupt. No one is to big to fall and the [4.7 billions of custodial assets Celsius](https://www.cbsnews.com/news/bankrupt-crypto-lender-celsius-former-executive-93k-a-month/#:~:text=Celsius%20filed%20for%20bankruptcy%20in,users%2C%20according%20to%20bankruptcy%20filings.) had are the best example of it.

- cbETH price risk
As we mentioned before, if you hold a LSD you are probably looking to have liquidity. All of the factors mentioned above could have a big impact on cbETH price letting you no more option than making a very bad trade or having to wait until the [Shanghai upgrade](https://www.gfinityesports.com/cryptocurrency/ethereum-shanghai-upgrade/), where staked ETH will be unlocked and there will be a big selling pressure (DCA of total holders of LSD is around 700-800$. Source: [Bankless](https://www.youtube.com/watch?v=Itf2pWAguWo)).

In addition, we can go deeper and check numbers of Coinbase entity as a hole. If we analyze last [quarter report released to the SEC](https://sec.report/Document/0001679788-22-000085/#ibd16326c8f82466fbb851d71853b44a8_265), we can get some conclusion about some ratios to analyze how solvent Coinbase is.

The **current ratio** of a company measures a company's ability to pay current, or short-term, liabilities (debt and payables) with its current, or short-term, assets (cash, inventory, and receivables).
Looking into Coinbase current ratio we can see it's around 1.06. This means the company has just enough liquidity available in the short term in case it needs to cover all his current liabilities. A good ratio to consider a business solvent is at least is of 1.5.

The **quick ratio** of a company is a similar measure of liquidity but even more conservative since it doesn't include all of the items used in the current ratio (includes only assets that can be converted to cash within 90 days or less).

It takes into account:
- Cash and cash equivalents
- Marketable securities
- Accounts receivable

A logical ratio for solvent business is expected to be at least at 0.8 while Coinbase ratio is around 0.06 !!!
We already see that the goverment's power with [Tornado Cash ban.](https://time.com/6205143/tornado-cash-us-crypto-ban/). Now, imagine if the Goverment makes something similar with USDC or just there is a big FUD in crypto and people want to exchange thei USDS for USD.... Coinbase wonn't have enough liquidity to cover all these liabilities in the next 90 days.

Last but not least, [recently](https://twitter.com/brian_armstrong/status/1560016827253551104?s=20&t=lMI_cKuWbZl4bphJFjSE5g) a user asked main centralized exchanges:
"If regulators ask you to censor at the #ethereum protocol level with your validators will you:

A) Comply and censor at protocol level
B) Shut down the staking service and preserve network integrity"

This was the Coinbase CEO answer..

In conculsion, it's logical to think that the 3% difference nowadays with other LSDs is due to the 25% fee and the centralization factor.
The other spread on the de-peg is mainly driven by the other factors mentioned in this post, mainly The Merge Uncertainty.

The question we must answer is:
Does the actual yield you win from the de-peg compensate the less rewards you could obtain vs other LSDs or by solos staking (if you can do so) until Shanghai upgrade?