Outline

ExecutiveSummary

CoinbasemissionandEthereumstakingLiquidstaking

cbETHUsecases

cbETHinDeFi

cbethandlsETH(Alluvial)

p.02p.03p.04p.05

Technology

Coinbasetokenwrappingoperations

KeyrolesofthewrappingcontractmanagedbyCoinbaseSecurityaudits

Tokenmodel

aTokenscTokens

RationaleforchoosingthecTokenmodel

Conversionrate

DefinitionsRatecalculation

Marketexchangerate

Coinbase'stokenwrappingoperations

p.06

p.07

p.08p.09

Risks p.10

Slashingrisk

SmartcontractsecurityriskBeaconchaintechnicalriskCustodialrisk

cbETHpricerisk p.11

CoinbaseAdvantagesClientdiversification

NodeoperatordiversificationGeographicalandhostingdiversificationCustody

Protocolspecialists

p.12

Fees p.12

Glossary p.13

ExecutiveSummary

cbETHwhitepaper

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coinbase

ExecutiveSummary

CoinbasemissionandEthereumstaking

Coinbase'smissionistoincreaseeconomicfreedomintheworld.Everyonedeservesaccesstofinancialservicesthatcanhelpempowerthemtocreateabetterlifeforthemselvesandtheirfamilies.Iftheworldeconomyranonanopen,commonsetofstandardsthatcouldnotbemanipulatedbyanycompanyorcountry,theworldwouldbeamorefairandfreeplace,andhumanprogresswouldaccelerate.

Asthelargestandmostdecentralizedsmartcontractplatform,theEthereumnetworkisemblamatictoCoinbase'smissionofincreasingeconomicfreedom.In2020,EthereumbegantransitioningfromaProofofWork(PoW)toaProofofStake(PoS)securitymodel,whichwilldrasticallyimprovesecurity,lowerenergyconsumptionby~99.95%(per

),andenablestakingonEthereum.

StakingonEthereumistheprocessbywhichanyonecanlocktheirETHtoputittoworkonthenetwork,allowingthemtoparticipateinconsensus,validatetransactions,andcreateblocks,therebysecuringthenetwork.

DoingthisworkwellearnsstakersETHrewards,whiledoingitpoorlycanresultinlostETHduetopenalties.

Whilestakingisbeneficialtothenetworkandecosystem,therearesomedrawbacks.Whileauserisstaking,theirETHtokensarelockedonthenetwork,makingthemnon-transferrable.Anduntilthe

Shanghaiupgrade,

itwon'tbepossibletounstakeETH.Furthermore,followingthecompletionofthatupgrade,whenauserwishestounstakeandwithdrawtheirtokens,theymayfaceadelayofanywherefrom27hourstoaslongasseveralweeks,dependingonhowmanyothersareunstakingatthesametime.

ThisunpredictabilityandlackofliquiditylimitsthewillingnessofETHholderstostake,diminishingnetworksecurity.Worsestill,stakedETHcannotbeusedforanythingelse(likecollateralinDeFi),makingtheETHtokenitselflessuseful.

Ourmissionistoincreaseeconomicfreedomintheworld.

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Liquidstaking

Liquidstakingwascreatedtoaddresssomeoftheshortcomingsoftraditionalstaking.Withliquidstaking,lockedstakedassetsarewrappedintotransferabletokensthatrepresentownershipoftheunderlyingstakedassets,andanyrewardsearned.Theresultingtokensarefullytransferableandcanbeunwrappedtoclaimtheunderlyingstakedassets.

Ourviewisthatliquidstakingisinevitableinamaturemarketandisacrucialsteptowardscontinuedadoption.TheEthereumcommunityisabellwetherforthebroadercryptoecosystemandthesuccessofLidoandothersolutionsisanencouragingsign.

Theproblemwiththeliquidstakingmarketisthesameasmanyothermarkets-liquiditybegetsliquidity.Allthingsbeingequal,auserwouldalwayschooseamorewidelyadoptedandliquidsolution.However,this"winnertakemost"outcomeisuntenablewhenitcomesto

consensus-bearingsystemslikeEthereum,asthereare

consensus

thresholds

thatshouldactassoftlimitsonanyonesolution.

Therefore,itisnecessaryfortheliquidstakingmarkettohavestrong,competingsolutionswithdifferentiatedqualities.

TodaytheliquidstakingmarketonEthereumisdominatedbyasinglesolutionthatisonthevergeofbreaching33%networkpenetration(thefirstconsensusthreshold).FollowingthesuccessofUSDC,webelievethatcbETHhasthepotentialtoachievesignificantadoptionanddiversifythecryptoecosystem.OurviewisthatkeyCoinbasestrengthssuchasourtrustedbrand,security,stringentriskpolicies,compliance,andothers,arekeydifferentiatorsforusers.

KeepingEthereumsecureanddecentralizediscriticaltoCoinbase'smissionandourhopeisthatcbETHcontributestothatcause.

cbETH

CoinbaseissupportingliquidstakingforitsETHstakerswithCoinbaseWrappedStakedETH(

cbETH

),wherethestakedassetisEther(

ETH

),andthestakingproviderandtokenissuerisCoinbase.OurhopeisthatcbETHwillachieverobustadoptionfortrade,transfer,anduseinDeFiapplications.

WithcbETH,Coinbaseaimstocontributetothebroadercryptoecosystemthroughcreatinghigh-utilitywrappedtokensandopensourcingsmartcontracts.

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coinbase

cbETHfollowsthe

cTokenmodel

andcanbemintedorburnedaccordingtoafloatingconversionrate.Atahighlevel,thisconversionratetrackstheunderlyingstakedETHtoaccountforstaking/unstakingactivity,rewards,penalties,andfees.ThisallowsuserstoeasilymovebetweenETHand

cbETH(onceunwrappingisavailable)underconstantlychangingnetworkconditions.ItalsomeansthatETHandcbETHarenotpeggedorexpectedtobeinterchangeable1:1.Infact,astheunderlyingstakedETHcontinuestoaccruerewards,eachcbETHtokenisexpectedtorepresentmorestakedETH,whichmayresultinadivergenceinpricesfortheseassetsovertime.

Usecases

ExitingstakedETH:BobstakedETHwithCoinbasein2021andwantstosellhispositionin2022,butstakedETHontheBeaconChainisstilllockedforthetimebeing.HethuswrapshisETHtocbETHattheprevailingconversionrate,andsellsforcashatthecbETHmarketexchangerate.

CollateralinDeFi:AlicewantstoearnstakingrewardsonherETHwhilealsoborrowingUSDConaDeFiprotocol.ShecandothisbywrappingherstakedETHtocbETH,thendepositingthecbETHintotheprotocolascollateralandsubsequentlyborrowingUSDCagainstit.Indoingso,AlicemaintainsherETHpositionandaccruestheassociatedstakingrewardsasaholderofcbETH.

TransferringstakedETH:BrianhasstakedETHwithCoinbaseandwantstogiftittoafriend.HesendsthecbETHfromhisCoinbaseaccounttohisfriend'snon-custodialwallet,whonowhasexposuretoETHandstaking

rewards.cbETHinDeFi

AssoonascbETHislive,anyDeFiprotocolwillbeabletoaddsupportforit

withouthelporpermissionfromCoinbase.Coinbaseisapubliccompany,cbETHcontractsareopensource,andoursmartcontractauditispublishedpublicly,enablingotherentitieslikeDeFiprotocolstomakeinformedchoiceswhenevaluatingcbETHforsupport.

Havingsaidthat,CoinbasehopestodriveadoptionforcbETHamongourecosystemofprotocol,dapp,andbusinesspartners.Wemayputforwardgovernanceproposalsorsupportthirdpartieswhodoso,andwemaypublishresearchordataaboutcbETHaseducationalcontentformarketparticipants.

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cbETHandlsETH(Alluvial)

InMay2022,Coinbase

announced

Alluvial,anenterprise-gradeliquidstakingstandard,withsupportfromCoinbaseCloudandFigment.cbETHandAlluvial'slsETHarebothliquidstakingsolutions,buttherearesomeimportantdistinctionstokeepinmind.

Atahighlevel,havingbothcbETHandlsETHalignswiththeCoinbasephilosophyofofferingafirst-partyecosystemforcustomerswhowanttheeaseandsimplicityofremaininginsidetheCoinbaseecosystem(cbETH),aswellasofferingthird-partysolutionsinparallelforcustomerswhopreferdecentralizedsolutions(lsETH).

Otherdistinctionsincludetargetmarkets,fees,infrastructureproviders,andsoon.Thefullanalysisisbeyondthescopeofthiswhitepaper,butreadersarewelcometorefertothe

Alluvialwebsite

formoreinformation.

Technology

cbETHwhitepaper

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Technology

Tokenmodel

AsDeFihasmatured,severalmodelshaveemergedaswaystorepresenttokenizedownershipofanunderlyingasset.

aTokens

PioneeredbyAave,thesetokensoperatebyconstantlyupdatingsupplytomap1:1withtheunderlyingasset.Becauseofthedynamicnatureofthesupply,aTokensarealsoreferredtoas"

rebasetokens

"or"elasticsupplytokens"

、

Example:AL;cesuppl;es10ETHtolend;ngprotocoland

rece;ves10aETH.Aftersomet;mepasses,sheearns2ETHofrewards.HeraETHpos;t;on;ncrementallyrebasesto12aETHoverthatt;me.Rebas;ngdoesnotrequ;retransact;ons;;t;smoreak;nto"updates."ShethenremovesherL;qu;d;tyfromtheprotocol,convert;ngher12aETHbackto12ETH.

cTokens

Anothermodel,andtheoneadoptedbycbETH,isthe

cToken

model.Pioneeredby

Compound

,cTokensrepresentownershipofunderlying

principalplusanyrewardsaccruedonthatprincipal,minusanypenalties(e.g.,

slashing

).TheconversionratebetweenthecTokenandtheunderlyingassets(principal+rewards-penalties)thuschangesasafunctionoftherewardsandpenaltiesaffectingtheprincipal.

、

Example:Bobsupplies10ETHtoalendingprotocoland

receives10cETH.Aftersometimepasses,heearns2ETHofrewards.HiscETHpositionremainsat10cETH(nochangeinsupplyheld),butit'snowbackedby12ETH(whichchangestheconversionrateofcETHrelativetoETH).Hethenremoveshisliquidityfromtheprotocol,convertinghis10cETHfor12ETH.

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StructuredasacToken,cbETHwillhaverightstounderlyingstakedETHandaccruedrewardsandpenalties.ChangesintheseunderlyingamountswouldhaveeffectsontheconversionratebetweencbETHandETH.

InpreparationfortheMerge,CoinbasewillmovetoaneffectiveAPYrewardsstructure.Post-Merge,transactionfeerewards(i.e.,tips)andanyothersourcesofvalidatorrevenuewillbere-stakedtocompoundETHstakingrewards.

RationaleforchoosingthecTokenmodel

cTokensaremostwidelycompatiblewithdAppsinDeFitoday,duetothefactthattheyareERC-20compliant.aTokens,ontheotherhand,arenot.

ItisworthnotingthataTokensallowforamoreelegantUXbymaintaininga1:1mappingbetweenwrappedtokenandunderlyingasset.Whilecompelling,thisfeaturewasultimatelyoutweighedbyadesignchoicefortheuserthatmaximizedutility,composabilityandefficiencyofcbETH.

cTokensaremostwidelycompatiblewithdAppsinDeFitoday,duetothefactthattheyareERC-20compliant.

Conversionrate

TheconversionrateistherateatwhichcbETHwillbeissuesorredeemedburnedrelativetotheamountofstakedETHbeingwrapped.ItisafunctionoftheamountofETHstaked,anypost-commissionrewardsearned,anypenaltiesimposed,andtotalcbETHtokensupply(seediagrambelow).TheconversionratecanbepulledfromboththesmartcontractandtheExchangeAPI(whichisinformedbythecontract).

Atfirstmint,therewasa1:1ratiobetweenstakedETHonCoinbaseandcbETH.Thismintoccurredon2022-06-12at18:04:35inpreparationforthecbETHpubliclaunch.Thisratiowilldeviateovertimeforthereasonsexplainedabove.ThisisverysimilartotherelationshipbetweencTokensandtheirunderlyingassetsonCompound(

docs

).

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RatecalculationDefinitions

Wraprequest-arequestmadetoconvertstakedETHintocbETH

Unwraprequest-arequestmadetoconvertcbETHbackintostakedETH

(thisfeaturewilllikelybeavailableshortlyaftertheinitialcbETHlaunch)SettledWrapRequest-wraprequestwhichhavegonethroughsettlementSettledUnwrapRequest-unwraprequestwhichhavegonethroughsettlement

Settlement-thepointatwhicharequestisconsideredsettled.Forwraprequests,thisiswhenwesettheamountoftokenswewillissuegiventheamountofstakedETHinthewraprequest.Forunwraprequests,thisiswhenwesettheamountofstakedETHwewillcreditgiventheamountoftokensintheunwraprequest.

Atahighlevel,theconversionrateatthetotalpoolleveliscalculatedasfollows:

ConversionRate=

TotalWrappedStakedETHTotalcbETHSupply

,where

TotalWrappedStakedETH = StakedETH;nsettledwraps StakedETH;nsettledunwraps+NetRewards

TotalcbETHSupply

cbETH;ssued

cbETHredeemed

NetRewards - (Inflationaryprotocolrewards+Transactionfees(tips)&anyothervalidatorrewards-Penalties)x0.75

Userexample

StakedETH:100

cbETH:100

Converstionrate:1

Arewardof25

stakedETHisearned

StakedETH:125

cbETH:100

Converstionrate:1.25

StakedETH:225

cbETH:180

Converstionrate:1.25

Arewardof45stakedETHisearned

StakedETH:270cbETH:180

Converstionrate:1.5

StakedETH:165

cbETH:110

Converstionrate:1.5

Validatorsget

slashedby65

StakedETH:100cbETH:110

Converstionrate:0.9

Userstakes100ETHandrequestscbETH

Userrequeststounwrap70cbETH

Userrequeststounwrap10cbETH

Userreceives SOcbETH

Userreceives 105ETH

Userreceives9ETH

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coinbase

Marketexchangerate

ThepriceofcbETHwillbedeterminedbythemarketandisnotpeggedorinanyotherwaymaintainedbyCoinbase.Marketparticipantscanbuy,sell,wrap,and(eventually)unwrapcbETHbasedonfactorssuchasthedefinedconversionrateinoursmartcontractordifferentformsofrisktoaffectthepriceofcbETHrelativetoETH.

Coinbase'stokenwrappingoperations

cbETHisthefirsttokenbuiltontheCoinbasewrappingtoken

contract

.(Smartcontractcodeopensourcerepository:

Github

)

Onanongoingbasis,CoinbaseassesseshowmucheligibleETHisstakedonplatform,andwillmintacorrespondingamountofcbETH,inaccordancewiththecurrent

conversionrate.

ThecbETHismintedon-chaintothedesignatedreceiverwallet.cbETHsuppliesareupdatedbasedontheunderlyingstakedETH

ona4-hourcadence.

ThecbETHcontractisinheritedfrom

USDC

withtwofeatureadditions:anexchangeRateandanoraclerole.TheexchangeRateallowsanyonetoquerythelatestconversionrate.TheoracleroleupdatestheexchangeRate.Coinbasecontrolstheoracle'saddressandwillupdatetheexchangeRateevery24hoursat4pmUTC.Thisupdatecadencemaybechangedinthefuture.

KeyrolesofthewrappingcontractmanagedbyCoinbase

Admin:canupgradethewrappedtokenimplementationcontract

Owner:canassignallrolesexcepttheAdmin's

Blacklister:canblacklistanaddressfromtransferring,minting,andburning

MasterMinter:canassignmintersandtheirlimits

Minter:canmintandburntokens

Pauser:canpausealltransfers,mints,andburnsforthecontractOtherparametersavailableinthesmartcontract

NumberofunderlyingstakedETHUnits

MaxtotalsupplyofcbETH

ETHprincipalstaked

AccruedrewardsSecurityaudits

CoinbaseengagedOpenZeppelininanauditofthecbETHsmartcontract,which

canbeseenhere(

link

).

cbETHwhitepaper

Risks

coinbase 10

Risks

Slashingrisk

Ethereum'sconsensusmechanismhasseveralrulesintendedtoprotecttheintegrityofthenetwork.Ifanyoftheserulesarebroken(voluntarilyornot),aportionofthestakedETHisremoved.Someexamplesincludevalidatordowntimeanddouble-signing.Wetakeanumberofmeasurestomitigatetheserisks,includingbutnotlimitedto:clientdiversification,nodeoperatordiversification,andgeographical/hostingdiversification(moredetailunderCoinbaseAdvantagesbelow).Thesemitigantsaren'ta

panaceathough.Intheeventofavalidatororprotocolfailure,thisnetwork"slashing"couldreducetheamountofstakedETHheldbyCoinbaseonbehalfofcbETHholders.Inthisevent,thecbETH<>staked-ETHconversionratewoulddecrease-justasitincreaseswhenthenetworkdistributesrewardsforsuccessfullyproposingandvalidatingblocks.

Smartcontractsecurityrisk

cbETHisatitscoreasmartcontract,andwiththatcomesriskthatthecodemaybeexploitedinunforeseenways.ThisriskispartiallymitigatedbythefactthatthefoundationofcbETHisbasedonheavilyauditedandbattletestedsmartcontracts(likeUSDC).AdditionallyCoinbaseobtainedasmartcontractauditfromOpenZeppelinspecificallyforcbETH(

link

).

Blockchaintechnicalrisk

Asmentionedabove,Ethereumisundergoingitslargestupgradeeverrightnow.PotentialflawswiththeBeaconChainortheupcomingMergecouldleadtoadverseconsequencesforcbETH,likeallstakedETH.

Custodialrisk

Thereisalwaysanon-zerocustodialriskincrypto.Inthiscase,CoinbasecustodieskeysassociatedwiththestakedETHunderlyingcbETH.Totheextentthesekeysareevercompromised,thiswouldlikelyleadtotheunderlyingETHtheycontrolbeinglost.

coinbase 11

cbETHpricerisk

ThepriceofcbETHwillbedeterminedbythemarketandisnotpeggedorinanyotherwaymaintainedbyCoinbase.Aswithanyassettradinginfreemarkets,thereisalwayssomedegreeofpriceriskinherentinthetradingofcbETH.Asanexample,becausewithdrawalsfromtheBeaconChainareinitiallyunavailable(untilthe

Shanghaiupgrade

allowsforstakingwithdrawals),marketparticipantsarelimitedintheirabilitytoarbitragethepriceofcbETHtofairvalue.ThismayleadtocbETHtradingatapriceinconsistentwiththeamountofstakedETHandrewardsthatausercouldredeembyunwrappingcbETH.

CoinbaseAdvantages&Fees

cbETHwhitepaper

coinbase 12

CoinbaseAdvantages

Coinbasehasbeenoperatingabest-in-classstakingoperationsince2019andbeganstakingETHonbehalfofusersin2021.AnumberofmeasuresaretakentoensureboththesecurityoftheETHstakingoperationaswellastherobustnessoftheEthereumnetworkbroadly.

Clientdiversification

Coinbase's

provisionedvalidators

runmultipleEthereumclients,reducingtheriskofanetwork-cripplingbugthatcouldresultinaheavilycorrelatedslashingevent.

Nodeoperatordiversification

Whenrunningvalidators,Coinbaseenlistsanumberofdifferentnodeoperators.Thishelpstoreduceriskspecifictoanyoneoperator.

Geographical&hostingdiversification

Ournodeoperatorscollectivelyrunvalidatorsinmultiplehostingenvironments(e.g.,baremetal,AWS,GCP,etc.)andinmultipleregionstomaximizetheresilienceoftheirinfrastructure.Again,thisreducestheriskofcorrelatedslashing.

Custody

CoinbasewillcustodythekeyscontrollingthewalletaddressesholdingthestakedETHwrappedforcbETH.Coinbase'sbest-in-classrigorhasbeenkeepinguserfundssafefor10+years.

ProtocolSpecialists

Coinbasehasateamof

ProtocolSpecialists

contributingtotheEthereumecosystemandstayingontopofthelatestdeve