Binance WBETH

1. Market Risk

LIQUIDITY: Does the LSD have a liquid market that can facilitate liquidations in all foreseeable market events?

WBETH ranks sixth in the LSD market, making up .72% of the market share. While WBETH has liquidity in multiple pools and platforms, the analysis highlights potential challenges in terms of liquidity depth, utilization, and slippage.

As of July 8th, 2023, Ethereum on-chain liquidity for WBETH is only present on Curve ($3.1M TVL), Balancer ($4.5M TVL), and PancakeSwap ($2.6M TVL) with the majority of WBETH on Binance. This is orders of magnitude less than its main competitors stETH (~$600M on-chain TVL) and cbETH (~$40M on-chain TVL).

The DefiLlama token liquidity tool estimates a swap size of $3.25M would produce a 1% slippage. This is a very low figure compared to competitors. stETH would require a ~$300m swap and cbETH an ~$18m swap to produce similar slippage.

VOLATILITY: Has the LSD had any significant depeg event (post merge)?

As indicated by the daily LSB, BETH has generally traded at a discount relative to ETH before staking withdrawals were enabled. The maximum price difference was at a maximum around -5%, although over time the magnitude of the discount has decreased. No significant price depeg can be observed for BETH post-merge.

A unique feature of Binance’s LSD is the Binance-managed withdrawal pool that helps ensure a stable supply of exit liquidity. This may be advantageous to Binance during times of high withdrawal demand and may be a stronger assurance to support the WBETH peg than is offered by competitors.

Binance does have a 5 day withdrawal processing time, and in addition to not guaranteeing exit liquidity during times of high withdrawal demand, they may change the processing time without notice.

2. Technology Risk

SMART CONTRACTS: Does the analysis of the audits and development activity suggest any cause for concern?

There are no published audits specifically for the BETH or WBETH contracts. However, Binance has an internal auditing team, and the contracts may have been audited internally. While Binance’s security and compliance team has been expanded and the company has a bug bounty program, the lack of specific audits for BETH and WBETH raises some concerns about the transparency and external verification of the contract’s security. Additionally, the closed-source nature of the Github repository specifically for WBETH and BETH limits the ability to assess the code and development activity.

DEPENDENCIES: Does the analysis of dependencies (e.g. oracles) suggest any cause for concern?

The WBETH contract relies on a centralized oracle system to update the WBETH:ETH exchange rate based on staking rewards earned by Binance validators. This operation is controlled by a Binance-approved address. This introduces a potential concern regarding the reliance on a centralized entity for updating the exchange rate between BETH and WBETH. Because minting WBETH from ETH is a permissionless function, unauthorized access or vulnerabilities in the ExchangeRateUpdater contract could lead to manipulation of the exchange rate and potential financial losses or market disruption.

WBETH does not have a reliable pricefeed oracle on Ethereum which may be a blocking factor from introducing WBETH as collateral. Both Chainlink and Binance Oracle have a pricefeed on Binance Chain, but do not support Ethereum at this time. WBETH DEX pools have low liquidity and untested pricefeed oracles that cannot be considered reliable sources.

3. Counterparty Risk

CENTRALIZATION: Are there any significant centralization vectors that could rug users?

Binance has full control over the governance of the service. Additionally, Binance acts as the sole node operator for the staking service, handling a large number of validators. This high level of centralization increases the risk of manipulation and control by a single entity, which could potentially be harmful to users.

Binance articulates the user’s agreement when using Binance staking services in the Binance ETH Staking Terms and Conditions and general agreements in the Terms of Use.

LEGAL: Does the legal analysis of the protocol suggest any cause for concern?

The legal analysis of the Binance ETH Staking Service protocol suggests some cause for concern. The Terms and Conditions require users to consent to Binance or a Binance Operator staking their assets, acting as a validator, and delegating voting rights attached to the assets. The lack of clear designation of the governing law and the legal entities responsible for providing the service could lead to ambiguity and uncertainty in legal disputes. It may also make it difficult for users to identify the applicable jurisdiction and understand their legal exposure.

Moreover, the complex corporate structure and undisclosed ownership of Binance raise regulatory and compliance issues, as highlighted by the recent enforcement actions by the CFTC and complaint by the SEC. Although Binance specifically restricts U.S. citizens from using the exchange, U.S. regulators are placing a high level of scrutiny on Binance’s operations.

4. Risk Rating

Based on the risks identified for each category, the following chart summarizes a risk rating for WBETH as collateral. The rating for each category is ranked from excellent, good, ok, and poor.

  • We rank WBETH poor on liquidity because of limited DeFi integrations resulting in poor on-chain liquidity. Most WBETH liquidity is on Binance and only 3,037 WBETH is in Ethereum liquidity pools as of July 8th.

  • We rank WBETH good in volatility because Binance manages a withdrawal pool that helps ensure ample exit liquidity which may strengthen its peg assurance compared with competitors.

  • We rank WBETH ok in smart contract because WBETH is mostly forked from cbETH which has been audited and have somewhat mature contracts on mainnet. However, Binance has not released any audit report of their additions to the contracts or open sourced their development activity.

  • We rank WBETH poor in dependencies because there is no reliable pricefeed oracle available on Ethereum for WBETH at this time which may be a blocker for integration into lending platforms.

  • We rank WBETH poor in decentralization because not only is WBETH completely centralized to Binance, the ownership structure and official jurisdiction of Binance have remained elusive, raising suspicion that Binance intentionally obscures this information to circumvent scrutiny and regulation.

  • We rank WBETH poor in legal because of enforcement actions, complaints, and investigations from multiple agencies in multiple jurisdictions that may threaten Binance’s ability to continue supporting WBETH in the future. Agencies include the CFTC, SEC, the U.S. DOJ, and the French AMF.

We assess that WBETH is riskier in all categories except volatility compared with both stETH and cbETH.

There are potential advantages of a centralized LSD product within a diversified collateral basket, namely that the service provider can react more quickly during adverse circumstances, leading to less volatility and possibly greater user trust in the product.

Care should be taken to limit WBETH exposure for the primary reasons:

  1. There is no reliable pricefeed for WBETH/BETH on Ethereum. It is possible that WBETH loses its peg to ETH which may result in the accrual of bad debt to a lending platform that lacks a reliable pricefeed.

  2. WBETH is the least liquid LSD of the initial proposed Prisma basket (wstETH, cbETH, sfrxETH, rETH, and WBETH). It has poor DeFi integration and, as a result, the vast majority of BETH/WBETH liquidity is on Binance.

Compared with other LSDs being considered for onboarding, WBETH offers no real advantage from a risk perspective. Its most analogous competitor, Coinbase cbETH, scores higher in almost every category. Whereas the risk profile of cbETH may balance certain deficiencies observed in stETH, WBETH does not adequately balance the risk profile of a diversified basket.

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