December 9, 2023

Coinbase offers Ether staking service which may become more popular after the upgrade.

Tiffany Hagler-Geard / Bloomberg

While Coinbase Global should profit from a major upgrade to the Ethereum blockchain network this week, there is one risk: The part of the business that stands to profit has already attracted scrutiny from regulators.

Even as bitcoin prices rise above $30,000 for the first time since June, the focus of many crypto traders is on Ether,
The second largest digital asset and the token underpinning the Ethereum blockchain network. Ethereum’s overhaul, known as the Shanghai upgrade, is the biggest change to the ecosystem since last year’s merge.

In the merge, Ethereum was replaced with an energy-intensive “proof of work” system that awarded tokens to crypto miners using computers to solve increasingly complex puzzles for “proof of stake”. Under proof of stake, participating holders of ether lock up their tokens as collateral while they validate transactions and secure the network, earning interest in the process.

The current yield for staking ether is around 4.5%, but staking tokens are temporarily locked by the system. The Shanghai upgrade will allow those tokens to be withdrawn.

“The merge will complete the most significant upgrade of the Ethereum network since the merger,” analysts led by Clara Medley at crypto data provider Caco wrote in a Tuesday note. “This raises some big questions: Will large stakeholders give away their newly unlocked tokens? Will this lead to more trust in staking and thus increased participation?”

These questions have been at the center of traders’ bets that have driven ether prices higher in recent weeks. Whether that trade will work is unclear.

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Ether price may face downward pressure as some investors withdraw Ether and sell it. But the Shanghai upgrade, which will make staking even easier, is expected to make trading more popular. This should support the prices.

If staking becomes more popular, Coinbase will benefit.

The staking services it offers are a pillar of its efforts to diversify revenue away from the core business of crypto trading, which is highly sensitive to price fluctuations and driven by retail investors who make up the bulk of trading volumes. Are. Those looking to stake Ethereum would need to lock up 32 Ether, or about $61,000, but Coinbase is one group that offers a solution to smaller investors. It lets customers place bets regardless of how much Ether they have, while collecting a healthy fee in the process.

In February, Kenneth B. A team of JP Morgan analysts led by Worthington said Shanghai could immediately impact “meaningful revenue potential for intermediaries like Coinbase”, as intermediaries can earn more than 20% of clients’ income.

But that was before the Securities and Exchange Commission (SEC) weighed in.

Coinbase said in March that the regulator had warned the company of an upcoming enforcement crackdown, which it believed would focus on services including crypto trading as well as staking.

Coinbase is still offering Ether, and this week’s Shanghai upgrade is likely to further improve this part of the company’s business. But as is true throughout the crypto industry, a lack of regulatory clarity and the potential for crackdowns are significant risks.

Write to Jack Denton at [email protected]

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