cbETH Risk Assessment: Is it suitable as collateral for lending protocols?
cbETH Risk Assessment: Is it safe to use as collateral for lending protocols?
In terms of market share, Coinbase’s cbETH is the second most popular LSD product. Currently, lending protocols such as PrismaFi’s acUSD and Curve’s crvUSD have added cbETH as collateral. Crypto researcher LlamaRisk evaluated the risks of using cbETH as collateral for lending protocols from multiple perspectives, including liquidity, volatility, centralization, and compliance.
Liquidity: 97% of cbETH is concentrated on Coinbase. A chain transaction of approximately $18 million will result in a 1% slippage, while higher liquidity stETH requires a transaction of $300 million. Volatility: cbETH may benefit from centralized services and has maintained a good correlation with ETH’s fair value since ETH withdrawals opened.
Smart contract: The contract architecture is simple and managed by authorized Coinbase addresses based on proven contracts. The contract itself does not handle user funds. Independence: cbETH has reliable price information. Centralized services have advantages in managing system accounting, withdrawal processing, and unforeseen network issues (high withdrawal demand, Ethereum network issues, etc.).
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Centralization: cbETH relies on centralized services operated by Coinbase, so users face counterparty risk. Coinbase has indeed tried to reduce the centralization of its validators by diversifying across multiple software clients. Compliance: A recent SEC enforcement action suggests that regulatory scrutiny creates uncertainty about the future of cbETH products or at least Coinbase’s competitiveness in LSD products.
Viewpoint: We believe that cbETH is a supplement to stETH in a diversified collateral basket, but due to its relatively poor liquidity and ongoing regulatory issues, we recommend limited protocol risk exposure at present.