[ARC] Add Support for cbETH

Governance New Asset
1

Title: [ARC] Add Support for cbETH
Author: @Fig Lead Governance Contributor at Flipside Crypto, with additional support from @AndrewA, a Protocol Specialist at Coinbase
Created: 10/27/2022

This proposal is to add cbETH to Aave v2 on Ethereum mainnet (and Aave v3 if contracts have been launched on mainnet by the time a formal AIP is appropriate). With Aave v2 having incumbent liquidity and Aave v3 being close to launch on mainnet, the community will decide the best route forward with a Snapshot vote.

References

Project - https://www.coinbase.com/price/coinbase-wrapped-staked-eth
Whitepaper - https://www.coinbase.com/cbeth/whitepaper
Documentation - cbETH Intro | Using cbETH | Sourcing cbETH on Coinbase
Github / source code - Source code | Github
Ethereum contracts - Coinbase Wrapped Staked ETH | Etherscan
Chainlink oracle - cbETH / USD Chainlink Price Feed
Audit - Coinbase Liquid Staking Token Audit - OpenZeppelin blog
Twitter - https://twitter.com/coinbase
Blog - https://blog.coinbase.com/
Support - https://help.coinbase.com/

Summary

This is a proposal to add Coinbase Wrapped Staked ETH (cbETH) to the Aave protocol on Ethereum mainnet. cbETH is an ERC-20 compliant token on Ethereum that represents underlying staked ETH on the Coinbase platform.

Motivation

cbETH is a liquid staking token for ETH created by Coinbase with a goal of facilitating a more competitive liquid-staked ETH landscape.

There is a meaningful amount of demand for borrowing against liquid-staked ETH. Liquid-staked assets (such as cbETH) make for efficient collateral with underlying margins typically improving over time.

Specifications

1. What is the link between the author of the AIP and the Asset?

  • @Fig is a Governance Contributor at Flipside Crypto, a leading delegate on Maker, Aave, Optimism, and Hop. Additional support provided by @AndrewA, who is employed by Coinbase. Andrew and Fig also help review grants as part of the Aave Grants DAO.

2. Provide a brief high-level overview of the project and the token

  • Coinbase is supporting liquid staking for its ETH stakers with Coinbase Wrapped Staked ETH (cbETH), where the staked asset is Ether (ETH), and the staking provider and token issuer is Coinbase. With cbETH, Coinbase aims to contribute to the broader crypto ecosystem by supporting high-utility wrapped tokens and open sourcing smart contracts.
  • cbETH follows the cToken model, which allows it to be ERC-20 compliant and easier to integrate with DeFi more broadly. cbETH can be unwrapped for staked ETH plus accrued rewards net of Coinbase staking fees and any network-imposed penalties. Rewards and penalties affecting Coinbase staked ETH change the conversion rate between cbETH and underlying staked ETH.

3. Explain positioning of the token in the AAVE ecosystem. Why would it be a good borrow or collateral asset?

  • With maturing volumes, integration of cbETH would allow those that have staked their ETH with Coinbase to borrow against their locked positions while continuing to earn rewards on the underlying staked ETH.
  • The introduction of cbETH into the Aave ecosystem could bring a new wave of retail users who learn about Aave through Coinbase and holding the cbETH token. Many of these new customers may become regular users of the Aave protocol.

4. Provide a brief history of the project and the different components: DAO, is it live? Products, are they live? How did it overcome some of the challenges it faced?

  • Coinbase, Inc. (Parent company NASDAQ: COIN) is a prominent cryptocurrency trading platform in the United States. As of 6/30/2022, the company and its global affiliates had 103M+ verified users, $96B assets on platform, and offered services in 100+ countries [source]. Coinbase is allowing customers who stake ETH to wrap it for an ERC20 utility token called Coinbase Wrapped Staked ETH (“cbETH”), which is a liquid representation of their staked-ETH.
  • Coinbase’s mission is to increase economic freedom in the world. In pursuit of this mission, Coinbase builds products to improve access to economic freedom, cbETH being one of these projects.
  • With ETH staked on Ethereum being illiquid and unstaking not being available until post-Shanghai, liquid staking solutions have been a natural development.

5. How is the asset currently used?

  • cbETH allows users who have staked with Coinbase to sell or transfer the ownership of their staked ETH. cbETH is currently traded on Uniswap, Curve, and the Coinbase trading platform.

6. Emission schedule

  • There is no emissions schedule. Customers who have staked ETH with Coinbase can wrap their staked ETH to obtain the cbETH token.

7. Token (& Protocol) permissions (minting) and upgradability. Is there a multisig? What can it do? Who are the signers?

  • Key roles of the contract:
    1. oracle  - updates the conversion rate for the token. Coinbase controls the oracle's address and updates the ‘exchangeRate’ every 24 hours at 4pm UTC. This update cadence may be changed in the future. 
    2. master Minter - can assign minters and their limits
    3. minter - can mint and burn tokens
    4. pauser - can pause all transfers, mints, and burns for the contract
    5. blacklister - can blacklist an address from transferring, minting, and burning
    6. owner - can assign all roles except the admin’s
    7. admin - can upgrade the contract, and re-assign itself
  • All privileged keys are controlled by Coinbase using best practices

8. Market data (Market Cap, 24h Volume, Volatility, Exchanges, Maturity)

9. Social channels data (Size of communities, activity on Github)

10. Contracts date of deployments, number of transactions, number of holders for tokens

A Security and Risk Assessment of cbETH will be shared later in this discussion as a reply to this thread. For clarity, we’d like to propose that cbETH be initially launched on Aave v2 with an LTV of 0%, to remove any risk to the other assets in the protocol. For a v3 listing, we will provide parameter suggestions alongside the formal risk assessment.

As mentioned at the top of the proposal on Aave v2 vs. v3, the community will decide the best route forward with a Snapshot vote.

12 Likes
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Thank you for the application and always appreciate your team’s contribution to DAO governance. However, I do want to ask whether the team (as well as Coinbase team) believe onchain liquidity is sufficient in case of mass liquidation.

Currently, based on Coingecko, over 80% of volume comes from Coinbase exchange itself and 2% depth is less than 200k. So do wonder whether it needs more onchain liquidity before the community proceeds with it.

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As a huge supporter of LSD diversity my concerns might be unexcepted but here’s my current position on cbETH

  • V3 mainnet is very near, onboarding cbETH on V2 will be nice in the short term but hurt in the long term (liquidity frag)
  • current onchain liquidity impose isolation mode for protocol safety, especially in a pre-shanghai upgrade world that’s a V3 feature.
  • main use case are usage as collateral → needs isolation mode to stay safu
    usage as part of leverage loop in increase staking yield → needs emode to be efficient
    that’s powered by V3.

thus my position is clear:

  • NAY on V2,
  • YAE on V3 with tight isolation mode (that can be pushed up via AIP as asset gain traction onchain) & emode support.
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Hi @Doo_StableNode - thanks for your reply.

The goal of this asset listing is to onboard more users from Coinbase and centralized platforms to a decentralized protocol such as Aave. It additionally leads to greater staked asset diversity.

By doing so, we believe it grows the overall ecosystem - linking critical infrastructure from both worlds.

It seems you may mean “mass adoption” here?

If not, we are currently not pursuing it as collateral and liquidation is not a current concern.

This may change in the future with the introduction of V3 - cbETH is a better fit for it there.

Please standby for risk analysis and parameters in the future.

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MZ - wouldn’t be an Aave proposal with your reply - glad to see you here.

I am grateful for your candidness towards cbETH’s fit on Aave.

As mentioned in the original proposal, users have the agency to choose where this asset lives. This is mentioned in the Intro section:

As for our impetus for allowing the option of V2 - internal stakeholders conveyed an interest in listing on V2 to beat a listing elsewhere. A cToken model, there is value in the listing living on Aave first.

This may inspire other teams to focus borrow / supply liquidity on Aave vs. other platforms.

This is my opinion and not representative of Coinbase or its affiliates.

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I mean you literally point it as a collateral.But please share more about it as I do want to learn more about AAVE governance and it could mean different meaning.

and the application also literally asks about it.

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Doo - I would encourage you to revisit the intro section which I highlighted to Mark.

Our job is to present both cases and let the community decide - there is an option for it to be collateral on V3, with new isolated and eMode features.

There is also an option to have it listed on V2 as LTV of 0% - meaning not eligible as collateral - if users think V3 liquidity transition will not come soon enough.

To reiterate, formal parameters have not been decided. While the end goal is to list cbETH as collateral, this initial proposal for v2 would be to list it with an LTV of 0%

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If this is the case, wouldn’t my concern for low onchain liquidity still apply? Sure, there are other ways for AAVE community to collaborate but that doesn’t change that it wouldn’t make ideal collaterals based on current numbers. Are you saying that I can’t point out such concerns?

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@Doo_StableNode, your concern is valid, on-chain liquidity is paramount for any asset that’s listed as collateral.

However, as @fig mentioned, all that has been proposed is one of the following:

  • A v2 listing with an LTV of 0%, meaning it would not initially be listed as collateral (as Gauntlet has previously suggested for initial listings)
  • Or, upon contracts going live on mainnet, a v3 listing with parameters agreed upon by the community and risk advisors. As @MarcZeller suggested above, launching on v3 in isolation mode would help keep the protocol as a whole safe. Additionally, with supply caps in v3, the protocol can actively govern just how many deposits they’re willing to accept relative to liquidity.

As on-chain liquidity improves, the community (ourselves included) can help monitor and discuss adjusting these parameters to ensure the protocol is safe and any use as collateral is well managed.

Thanks for your engagement!

3 Likes
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Thanks for the response. Look forward to see how it progress :+1:

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If Aave lists cbETH before they list rETH which has many multiples of the liquidity of cbETH onchain then something is very wrong.

There are both philosophical and economic reasons not to move forward with this listing.

Further, there is an idea that withdrawals will make cbETH instantly liquid. This is false. The withdrawal queue will allow arbitragers to buy up depegged cbETH to burn, however, this will be a very minor incentive for users to provide liquidity. Overall volume will remain low and someone always has to foot the bill for liquidity. There is no one that will pay for cbETH liquidity and until that changes it will be a token that is unfit for use in DeFi.

Now, wen rETH?

4 Likes
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I don’t really understand the v2 option. What would be the value of listing a non collateral, non borrowable asset on v2 - why would anyone be interested in supplying this?

Waiting for V3 in this case makes far more sense imo.

I think rETH still has no chainlink price feed Price Feed Contract Addresses | Chainlink Documentation
Better to have rETH discussion in the rETH thread though.

5 Likes
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Thank you @fig and @AndrewA for the proposal. Gauntlet is conducting analysis on the market risk side and will come back to the forums.

Given the imminence of V3 ETH and the meaningful risk control improvements that V3 has over V2, we recommend that the community consider waiting until V3 ETH.

5 Likes
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Thanks to @fig and @AndrewA for the proposal.

I am not in favour of listening cbETH on V2 at all and am not in favour of statements such as:

The benefit of listening before another provider should at no point be a reason to list an asset.

I share @Doo_StableNode concern about low on-chain liquidity, however, with V3 features, this can be mitigated with isolation mode.

In general, I strongly believe that cbETH should wait for V3 Mainnet deployment and in the build-up to that try and build on-chain dex liquidity to make the listening more attractive.

4 Likes
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Really excited to see so much community support.

Given the sentiment of the discussion here, I’d like to acknowledge that there’s a strong preference for waiting for Aave V3 to hit mainnet. This makes sense for many reasons and I personally agree that this is the most likely step forward.

To respect the process, I’d propose that we still include all options in a Snapshot vote. However, I want to make it clear that @Fig and I would expect a “V3 listing” to be the strong favorite in a poll over a V2 option. This expectation is based on the feedback received here–so thank you all :slightly_smiling_face:

With V3 being the expectation, I’d like to request feedback specific to an Aave V3 listing on Ethereum mainnet. How should a V3 market that includes cbETH be structured? These are the open question I have:

  • Isolation mode, how would it be structured?
  • Efficiency mode, should it be enabled? If so, what LTV threshold (EModeCategroy) should be used?
  • Supply caps, should cbETH have them? If so, what should they be as it relates to liquidity?
  • Borrow caps, should cbETH have them? If so, what should they be as it relates to liquidity?

^ Please add to this list above, it’s not comprehensive

cc @MarcZeller @sakulstra @Pauljlei @G-Blockchain as you had thoughts above

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Thanks for writing up the proposal! A few a points/concerns on my side:

First and foremost is the on-chain liquidity (conscious this was also discussed above). Liquidity in the Curve and Uni pools is not sufficient with respect to the supply of cbETH. As things currently stand, there will be too much reliance on centralised liquidity to facilitate liquidations. Aave cannot onboard an asset where liquidity depth is so opaque unless there are supply limits in place which are based off the measurable on-chain liquidity, imo. During events like we experienced earlier this year, centralised entities failed/halted trading and showed they cannot be relied upon. stETH was also listed on multiple centralised exchanges during this time and there was no indication that the CEX liquidity helped in any way. DeFi/DEX liquidity however proved its robustness/importance.

Second, can you shed more light on the node oeprators/decentralisation? Depegging from liquidations is one key risk, but the other is liquidations from slashing/penalties. I am concerned that a token like cbETH will increase systematic risk unless there is a sufficiently decentralised network of node operators.

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On liquidity, as I mentioned above, I agree that on-chain liquidity is paramount for any asset that’s listed as collateral. And given the preference for Aave V3, I’d expect that the community would vote to isolate and cap the supply in line with the on-chain liquidity.

To answer the second question, Coinbase leverages Coinbase Cloud and several external enterprise-grade infrastructure operators for ETH staking. Leveraging multiple providers reduces the risk of correlated downtime or slashing events that could be caused by any one operator. Beyond node operator diversity, these operators run multiple Ethereum clients, using multiple hosting environments, in multiple geographic regions, all in the same effort to reduce the risk of a correlated slashing event.

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Hi all!

Quick update. @fig just posted a temperature check gauging the best path forward. Please vote within the next week!

https://snapshot.org/#/aave.eth/proposal/0xcbb588f0030f7726da3d065a30c2500652bbd0def6ca5f5f17a82daca777578e

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As a part of Certora continuous formal verification activity, we have conducted a formal verification of cbETH token code using our generic ERC20 token specification.
It’s important to note that this is strictly a technical analysis of the smart contract code.

How to look at the dashboard
With Certora technology, we write rules that specify how a smart contract should behave and the tool either proves that the rule always holds or finds a counterexample. It’s impossible to specify general rules for all the ERC20 tokens, since they all have different features. We have chosen to specify a set of strict rules for tokens, for example “supply should always be fixed” and “transfer should always work”. As a result, a token with dynamic supply will obviously fail the fixed supply rule, and a token that has a pause and/or a blacklist function (like USDC) will fail the “transfer should always work”.

In the case of ERC20, the point of these rules is usually to present precise information about the token behavior to the community. This is how we should look at rule failures - usually not as bugs but as information about token features.

Having said that, here is our dashboard with the findings (cbETH is at the bottom of the list):
https://www.certora.com/erc20s/aave-listings/

Here is the rule failures explanation:

  • transferCorrect and transferFromReverts rules fail because the token is pausable and transfers don’t work correctly in a paused state.
  • otherBalanceOnlyGoesUp rule fails because transferWithAuthorization() and receiveWithAuthorization() change “other’s” balance and they’re not accounted for by our standard spec.
  • isMintPrivileged fails because there multiple wallets can get the minter role and mint new tokens by design
  • ChangingAllowance rule fails because the permit() function can change allowance and is not part of our standard spec.

In summary, the cbETH token code complies with our generic ERC20 specification and all the rule violations are by design.

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We support the listing of cbETH to the Aave V3 market. As many of the community suggested, the liquidity of cbETH in DEX is insufficient for the supply itself. The supply of cbETH can be increased as more people stake.

The liquidity in DEX such as the Uni V3 cbETH/WETH pool, the pool size sits around $6.5m which we think it is not enough for mass liquidation. Additionally, around 60-70% of the volume came from Coinbase.

For these reasons, we are not in support of listing cbETH to the V2 market. However, we are in support of listing cbETH to Aave V3 market in isolation mode with a very tight parameters. After that, the e-mode can be supported for looping between ETH correlated assets.

3 Likes