Coinbase Prime has partnered with Liquid Collective to offer liquid staking for Ethereum (ETH). This means:
You deposit ETH to Liquid Collective’s smart contract
Liquid Collective stakes your ETH
Alluvial mints (creates) LsETH tokens
You receive the LsETH tokens as a receipt for your staked ETH
You earn rewards/yield on your staked ETH while the LsETH can be transferred, traded, and used in DeFi and dapps
LsETH is a liquid representation of your staked ETH. It can be transferred, stored, traded, and utilized in DeFi. LsETH is burned upon redemption, which means the tokens are removed from the available supply. As LsETH represents your staked ETH, if you sell it, then you can’t claim the ETH you staked once withdrawals are unlocked.
LsETH tokens aren’t pegged, in other words – the price isn’t designed to remain the same, or expected to trade 1:1 with staked assets. LsETH tokens follow the cToken model and are minted or burned according to the Liquid Collective protocol’s conversion rate. This conversion rate is determined by the underlying staked ETH, accrued staking rewards, and potential penalties or fees. When you stake ETH, you mint the equivalent LsETH based on the current conversion rate at that given point in time. While your staked ETH earns rewards, you can utilize your LsETH token or hold it in your wallet. LsETH evidences legal and beneficial ownership of the base amount of your staked ETH, plus any accrued staking rewards generated by the blockchain network, minus any potential penalties and protocol service fees.
As the staked ETH accrues additional staking rewards or is slashed, the same LsETH would represent more or less staked ETH and may be redeemable for a different amount of ETH based on the protocol redemption rate. LsETH gains value as network staking rewards are accrued. The rate will be updated daily on chain and on Coinbase Prime. It is calculated according to the beacon chain’s validator data that is generated via an oracle network (i.e. 1.85 LsETH = 1 ETH). It will start at 1:1 and will update every 24 hours.
Let's see an example…
For illustrative purposes only:
1 ETH is converted to 1 LsETH at 1:1 ratio.Overtime, the LsETH and ETH do not remain at parity (1 Staked ETH + 1 ETH Reward) - (0 penalties + 15% protocol fee) = 1.85 conversion rate
The benefits of liquid staking via Liquid Collective include:
Zero opportunity cost – you can use liquid staked assets to earn more yield
More utility of assets – you can interact and use funds while simultaneously earning rewards
Instant entry and exit – you can bypasses the long wait times for staking and unstaking
Institutional-grade compliance – KYC / AML whitelisting for all participants (including validators)
Top performing validators – rewards and slashing socialized across high quality validators, held to stringent security standards further lowering risk
The risks of liquid staking include:
Smart Contract Risk: Similar to any protocol providing a service, there is a potential for code vulnerabilities that are missed by third-party auditors.
Compared to a typical DeFi lending protocol, where all tokens are held in a layer of smart contracts that have the potential for code vulnerabilities, the Liquid Collective smart contracts only hold tokens as they flow through to Ethereum’s core ETH Deposit contract.
Multiple third-party service providers have been engaged to conduct audits of Liquid Collective’s code. In addition to conducting third party audits, Liquid Collective’s strategy to deliver multi-chain liquid staking involves collaborating with existing liquid staking Technology Providers and leveraging their already battle-tested code.
Slashing Risk: As with any proof-of-stake network, validators may be penalized for failing to perform their job efficiently.
LsETH staking has a robust slashing coverage program to mitigate this risk.
Limited Validator Set: There is a small risk that a validator would surpass a certain threshold of tokens staked and be incentivized to act maliciously by censoring transactions on a given network.
Liquid Collective intends to work with third party validator rating providers to establish validator standards and increase the active set of Validators. The staked assets will be distributed across Validators in a round-robin manner so that the Liquid Collective protocol is supported by a broad and dispersed active validator set.
Risk of Hack: A hack could occur where the minting functionality for LsToken is compromised. The protocol will monitor the LsETH supply to ensure that it’s always reconciled with the balance of ETH staked on validators.
Protocol activity, such as LsETH supply updates, will be monitored and analyzed. In case of any anomalies a first incident response plan will be executed to remedy the issue, which may result in pausing the protocol to temporarily disable all types of activities.
This feature is currently only available on CB Inc. and CCI and is not yet available on CCTC. To begin using this feature, you’ll need to sign two agreements: a Liquid Collective protocol level user agreement and a Coinbase Custody Institutional Liquid Staking Addendum in the Prime platform. You will also need ETH in your vault wallet.
Once your ETH wallet is funded, click Stake ETH and select Liquid Staking to see more information and sign the staking terms of service and the Alluvial protocol agreement. Follow the instructions to select your wallet and reach consensus. Once the transaction is processed, you will receive a deposit of LsETH.
LsETH is displayed as a separate asset within the portfolio page and your new LsETH balance will be shown there.
What are the fees associated with liquid staking?
You will be charged for your existing assets under custody rate for any LsETH tokens custodied with Coinbase. Additionally, Liquid Collective will charge a 15% gross protocol service fee on all staking rewards generated by the protocol. Liquid Collective will share a portion of the fee with Coinbase.
If I have already participated in staking, can I use the same ETH to stake with Liquid Collective to receive LsETH?
No, only ETH holders can stake with the Liquid Collective Protocol. If you have participated in ETH staking but have any unstaked ETH remaining, you can stake that with liquid collective.
Is there a minimum amount of ETH needed to participate?
The staking minimum on Coinbase Prime is 0.1 ETH.
Does my staked ETH earn network rewards?
Yes, while your staked ETH earns rewards, you can utilize your LsETH token or hold it in your wallet. LsETH evidences ownership of the base amount of your staked ETH, plus any accrued staking rewards generated by the blockchain network, minus any potential penalties and protocol service fees. As the staked ETH accrues additional staking rewards or is slashed, the same LsETH would represent more or less staked ETH and may be redeemable for a different amount of ETH based on the protocol redemption rate.
LsETH gains value as network staking rewards are accrued. After Ethereum withdrawals are enabled (estimated to occur this spring), you can redeem LsETH for ETH. You will also be able to trade LsETH on the open market, or use LsETH to participate in DeFi.
What is the tax treatment for liquid staking?
Tax treatment for liquid staking and traditional staking may differ based on your jurisdiction and regulations; please contact a qualified tax professional for more information.
How is the Liquid Collective protocol secured?
The Liquid Collective protocol implements a number of best practices to ensure security:
Best-in-class node operators like Coinbase Cloud providing enterprise-grade staking infrastructure
Multiple code audits and partnering with battle-tested, industry-leading technology providers like Coinbase Prime
DAO governance and decision making process alongside industry leaders, including Coinbase.
How does slashing risk work? Is slashing risk covered? Who are the validator providers?
Liquid Collective partners with leading validator providers (including Figment and Coinbase Cloud) to minimize slashing risk. The Liquid Collective protocol also offers a robust slashing coverage program.
Why do I not see the option for LsETH in my account?
This feature is currently only available on CB Inc. and CCI. If your Coinbase Vault account is papered with CCTC the LsETH feature is not currently available.
Coinbase is a founding member of the Liquid Collective and has a financial and reputational interest in Liquid Collective’s success. Through its participation in Liquid Collective, Coinbase may propose, approve, or otherwise influence changes to underlying blockchain protocol. Coinbase will earn fees from your use of Liquid Staking Services offered by Liquid Collective through revenue sharing.