Сoinbase announces liquid staking for Ethereum ahead of The Merge

Coinbase announced it will launch its own liquid staking token, titled cbETH, which users can get in exchange for ETH that Coinbase will stake on the proof-of-stake version of Ethereum. Ahead of Ethereum’s Merge, the exchange aims to diversify the liquid staking market, which is currently single dominated by the Lido protocol. 

On August 24, the exchange revealed in a tweet about cbETH, which stands for Coinbase Wrapped Staked ETH, and released a detailed white paper. Users will be able to transfer for cbETH as early as August 25, provided that necessary liquidity conditions are met.

Ethereum’s shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus, known as The Merge, is on track to begin on September 6.

The new token will let Coinbase users engage in so-called liquid staking. On Ethereum, staking requires users to lock their ETH. That staked ETH is then utilized for establishing consensus, validating transactions, and securing the network. While those tokens are locked up, they cannot be traded. Liquid staking is a way around this.

The new token (cbETH) will let Coinbase users engage in so-called liquid staking. On Ethereum, staking requires users to lock their ETH. That staked ETH is then utilized for establishing consensus, validating transactions, and securing the network. While those tokens are locked up, they cannot be traded. Liquid staking is a way around this.

As it is already possible to stake ETH, services like Lido have arisen to let users exchange ETH for a derivative token that can be used in DeFi protocols. Lido’s version is called stETH.

In the white paper for cbETH, Coinbase highlighted current issues in the liquid staking market that it says may pose a danger to Ethereum. So far, liquid staking has been dominated by Lido, which maintains approximately a 90% market share.

A side-effect of dominating the liquid staking market is that Lido also now accounts for more than 30% of the staked ETH. One protocol having such a large share “is untenable when it comes to consensus-bearing systems like Ethereum,” the Coinbase white paper said. It added that “there are consensus thresholds that should act as soft limits to any one solution.”

A breach of a consensus threshold would introduce significant risks to Ethereum’s security.

“Today, the liquid staking market on Ethereum is dominated by a single solution that is on the verge of breaching 33% network penetration (the first consensus threshold). Therefore, it is necessary for the liquid staking market to have strong, competing solutions with differentiated qualities,” Coinbase wrote in the white paper.

According to Kaiko, Coinbase is on the verge of losing its dominance in the crypto market. As reported earlier, the market share of trading volumes for Uniswap, one of the biggest decentralized exchanges, against Coinbase has increased from 27% to 50% since the beginning of the year. The growing use of Uniswap has been related to a significant drop in Ethereum’s gas fees.