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Coinbase introduced its wrapped Ethereum staking token, or cbETH, late last month, and it’s been trading at a discount ever since. That discount today got as high as 8% compared to Ethereum—the crypto asset that it’s meant to represent. Why?
It helps to know that Lido Staked ETH, a similar staking token known as stETH, is also trading at a discount—albeit a smaller one of 3%, according to CoinMarketCap.
These liquid staking tokens, so named because they’re a spendable representation of an illiquid asset, are not meant to hold a 1:1 peg with ETH. So this doesn’t have the same significance as a stablecoin losing its peg.
As of Friday, Lido and Coinbase were far and away the two largest Ethereum staking entities—Lido accounts for $4.2 billion and Coinbase for $2 billion. But analysts have pointed out that the two liquid staking tokens have different reward models and the varying discounts show that, so far, users prefer Coinbase’s competitors.
As of this writing, 677,308 cbETH has been issued by Coinbase, representing just over $1 billion in staked ETH, according to Etherscan. Coinbase has an illiquid ETH staking option, too, which makes up the other $1 billion.
Alex Thorn, head of firm-wide research at Galaxy Digital, wrote in a note Friday that it’s easier to understand the significance of cbETH’s discount when it’s compared to Rocket Pool ETH, or rETH.
They both use a cToken model, meaning that neither token’s value changes to reflect the accrual of rewards. Instead, they are redeemable for a growing portion of staked ETH plus rewards, minus fees and any penalties the issuer has had to pay. So, theoretically, the longer it’s held, the greater the value for which it can be redeemed.
For that reason, Thorn writes, cTokens typically trade at a premium compared to their underlying asset. But while rETH was trading at a 3% premium on Friday, cbETH was still discounted.
“This dynamic is likely due to the simplicity of redeeming rETH vs. cbETH, with the latter requiring KYC and account signup at Coinbase,” he wrote.
KYC refers to know your customer, a process that financial institutions use to identify their customers and enforce anti-money laundering. In this context, even if a user who’s never been a Coinbase customer buys cbETH on a secondary market, they would need to sign up for an account—providing their legal name, address, and date of birth—if they wanted to redeem it. That could be unappealing to users who prefer to keep their personal information private.
Thorn also points to “Coinbase’s larger regulatory footprint,” which the analyst believes “increases cbETH’s counterparty risk profile” and could be contributing to its discount.
That’s a topic that ARK Invest highlighted in a note earlier this week.
“Importantly, because Coinbase will be able to freeze cbETH assets when required by law, will its proliferation increase crypto centralization and the risk of censorship,” ARK analysts wrote in their note on Monday. “After OFAC’s sanctioning of Tornado Cash in August, this hot topic is getting hotter by the minute.”
The U.S. Office of Foreign Assets Control added a handful of wallets associated with Tornado Cash to its sanctions list last month. Since then, Coinbase CEO Brian Armstrong has said on Twitter that he would rather abandon staking than censor transactions, like those from sanctioned Tornado Cash wallets.
Shutting down the service would stop the flow of rewards, but potentially spare Coinbase from being slashed, a type of penalty that removes tokens from a validator in proof-of-stake systems, for censoring transactions.