How traders are trading cbETH on Euler

Coinbase Staked Ether (cbETH) has recently been promoted to a collateral asset, meaning traders can benefit from Euler’s unique and open infrastructure while retaining cbETH exposure. This article will explain what techniques they are using and how they do it.

What is cbETH

The ethereum network is secured by users staking their ETH to confirm transactions. Different node operators offer receipts of ETH that are staked, which can then be rehypothecated for other uses in DeFi.

Users often prefer to hold these utility tokens because they accrue staking yield while still being able to be used elsewhere, whereas base Ether does not earn yield. cbETH is an example of such a utility token, and it is minted exclusively by Coinbase.

If you are familiar with stETH (offered by Lido) or rETH (Rocket Pool) then understanding the premise of cbETH will be very straightforward. For more information and documentation, please see this webpage.

cbETH was recently promoted to collateral status on Euler, so users can now borrow against the asset. This unlocks a host of new strategies offered nowhere else in DeFi.

How traders access the cbETH market on Euler

Traders are able to access the cbETH market at this page. They are greeted with a few different options, but will always start by connecting their wallet to the Euler front-end.

Upon entry to this page, the traders see important information pertinent to their strategies. Key variables such as APY for supply and borrow, liquidity, utilization and reserves are placed front and center for their viewing pleasure.

Based on these, they make decisions about how to navigate the market. Some of their strategies may prove more profitable than others, and traders pay careful attention to metrics such as interest rates to remain competitive.

Different trading strategies on Euler

As it stands, there are four major ways traders are using cbETH. These are:

1. Simply lending cbETH to borrowers to earn yield
2. Depositing a collateral (such as cbETH), then multiplying it to earn EUL allocation
3. Simple long / short on cbETH
4. Going levered long cbETH versus regular, unstaked Ether

Note that users are able to trade cbETH using Euler in a variety of different ways and these are some of the more straight forward strategies being employed. Far more complex alternatives no doubt exist and if they would like to share or discuss them please do so in Discord.

Lets focus on these strategies in more detail:

Simple deposit of cbETH

This trading strategy is very simple and easy to implement. All a trader does is deposit their cbETH into the Euler protocol. This can be achieved quickly for traders by merely connecting a wallet, depositing, and clicking “Enter Market”.

This strategy is good because it is the highest yield users can earn on a cbETH token as it stands. This is down to the yield they enjoy being a result of both the staking earnings paid out by Coinbase validators as well as the interest paid out by borrowers. This is the most straightforward of the trading strategies traders are performing. See the yield these traders enjoy at time of writing below.

Minting cbETH for EUL allocation

Minting is the process of borrowing and depositing funds automatically with a preselected multiplier. Since cbETH borrowers are allocated EUL tokens thanks to Euler’s gauge system, the interest they pay can be offset by these EUL emissions.

This trade involves first depositing cbETH, then creating a large multiplied position of depositing by using the “mint” function in the transaction builder (see here). In doing this, traders enjoy large (and multiplied) exposure to cbETH and therefore receive a multiplied emission of EUL. This trade is especially popular at the moment due to the relatively low utilisation of cbETH, making borrow APYs low.

See an example of a user profiting off a relatively small cbETH deposit thanks to a high appetite for risk. Traders using a collateral other than cbETH when using the mint function on cbETH pay extremely close attention to the “Health Monitor” because a small divergence in price could result in a liquidation. For more information about the health monitor, see this article. Traders simulate change in price for different assets using it, something very useful if using mint with a non-mint collateral. Traders can also simulate the change in interest rates, as this will affect time to liquidation.

See this account and how they are benefiting from low cbETH utilization. Note the EUL emissions offsetting the cost of borrowing fully when combined with the deposit incentive.

Simple long or short on cbETH

To long, traders act in the following way:

Supply any collateral to Euler and then borrow USDC / a stable asset (or indeed any asset that traders think will appreciate less than their cbETH, such as UNI or WBTC) like USDC.

Swap the asset that they’ve borrowed (USDC) and buy an equal amount of cbETH. This can be all handled inside the Euler finance app “quick action” menu swap function, which uses 1inch or Uniswap.

If the cbETH has appreciated in value, say 1.5x, traders can repay the loan to finance the cbETH swap. Swap the portion of the cbETH that they borrowed back to the loaned asset, then repay the loan and interest.

The increased cbETH price means they earn profit. They keep the difference, though this is only if the value of cbETH increases relative to the borrowed asset. They remain mindful that if cbETH decreases and the value of their borrow stays the same / appreciates in value they have lost money here. Note they’ll be paying some interest on the loan. Traders always keep careful watch on their health factor to avoid liquidation.

To short, traders act in a way which is essentially the same but in reverse.

They supply any collateral asset, but this time borrow cbETH against it and then sell the cbETH for an asset they believe will appreciate in value against the cbETH.

Once the cbETH decreases in value enough for them to be satisfied, they close the short by buying back the same amount of cbETH and depositing it to repay the loan. Once more, they keep the difference.

Traders can use multipliers using the “Short / Long” function and swapping deposited collaterals or borrows, but this is a complex function that newer traders seem to avoid due to the risks of liquidation.

Long cbETH vs short wETH

While this trade is a subsection of the previous type of trade, this is such an established trade that has proliferated across the space that we felt it wrong to omit identifying it. It multiplies cbETH deposits and swaps their borrowed position for WETH. This creates a position in which the trader is implicitly long on cbETH and short on WETH.

The theory behind this trade is that wETH has no value accrual to it, meaning that simply by holding a staking utility token (such as cbETH) traders can easily profit. By having staking rewards (paid out in ETH) to the utility token holders, there will be a natural divergence in the price of the asset.

This is a very established trade, and as such traders looking to perform the trade may want to pay close attention to the interest rate they pay on the wETH borrow. Indeed, traders looking to anticipate the demand for this trade may simply borrow ETH to arbitrage the interest rates.

See how this trader is currently benefiting from this trade.

How traders operate the Euler UI in order to make these trades

To start, traders begin each of these trades by first visiting the cbETH market page, and then to connect their wallet. Once this has been done, they are greeted by this view. Notice the red arrows indicating the different buttons they can click on in order to operate the trades other traders are currently performing.

Strategy 1: Simple Deposit

For trade 1, a simple deposit, traders merely have to click the light blue deposit button. This will show this menu.

Traders click “sign permit” (which will be displayed next to the Euler logo) and then they sign the permit in their wallet. Traders will make sure that the address matches the Euler contract address to ensure correct operation.

Once they have done this, they will be greeted with an additional menu which in turn will allow them to select how much cbETH they would like to deposit.

Once they have selected the amount they’d like to deposit, they click “Deposit”. If traders later wish to borrow against the cbETH, they will make sure the “Enter market” checkbox is selected.

Once they confirm the transactions with their wallet, they are now earning yield from users borrowing cbETH as well as the underlying staking reward itself. Traders can check the yield they will be earning in a simulated fashion in advance of submitting the transaction to the chain by simply closing the “Transaction Builder” and viewing their updated “Annual Net Income”.

Should they seek to stop this trade, they can withdraw the cbETH by clicking on “withdraw” and confirming the transaction in their wallet in the “Quick Action” menu.

Strategy #2: Mint

The second strategy traders use is called “mint”. Start this process by “depositing”, as identified in the first trading strategy. Once their cbETH is confirmed as deposited, users may operate the Mint function. This can be achieved by clicking the “Mint” button on the image at the start of this section. Good traders will take note of their simulated Annual Total Income before submitting the transactions to ensure profitability.

cbETH mints could also be handled via batch transaction, which will easily handle all of this in one transaction. Traders looking to deposit and mint could do so by clicking deposit, selecting the asset and amount and then sending all transactions at once. Batching is one of Euler’s key improvements over existing money markets, and traders know this well.

Traders choose the desired multiplier they wish by dragging the slider. Traders pay close attention to the estimated time to liquidation (this is largely dictated by cbETH interest rates).

Since they’re collateralising their “mint” with the same token (cbETH) that they are minting, there is a limited risk of liquidation due to asset price convergence since the asset is the same.

This would not be the case if they were collateralising the cbETH mint with an asset such as USDC, since the value of the collateral asset would not fluctuate in step with the minted cbETH. Traders acting in this way pay close attention to health scores.

Once they have used the mint function, they can just sit and wait. The EUL will be distributed on a 2 week rolling basis, as each epoch comes to an end.

Strategy #3: Simple long / short

If traders want to long cbETH, they follow the instructions for a simple deposit operation. Once they’ve completed that, they borrow an asset that they think will appreciate less in value more than they anticipate cbETH will. They open the transaction builder and select borrow.

Once they’ve done that, they select the amount that they’d like to borrow. Traders with a higher risk appetite will borrow more against their cbETH deposits. Those with a less strong risk appetite will borrow less.

Once they’ve borrowed the amount and confirm the transactions in their wallet, they will go to the “Swap” tab of the Transaction Builder. To offset the interest cost of borrowing, they ensure “enter market” is selected. They choose cbETH as the asset to swap to, and confirm the transaction. They are now long cbETH and short USDC.

When the time comes that they seek to close the short, they’ll swap the cbETH back to the USDC, pay off the loan and interest under the “repay” section of the UI, and the short will have closed.

In order to repay their loan, traders will use the cbETH they swapped the borrowed USDC to. This can be selected in the “from” menu, under which they select Euler Deposits. They choose their liability asset (USDC) and select the swapped asset (CBETH). Once this is repaid, the short is closed and the difference is kept in profit.

Be mindful that if cbETH decreases in value versus USDC, they will still have to pay the original value of the borrow + interest (in token terms, 1 ETH borrow = 1 (+ interest) ETH repay). There is no way around this if they want to receive the original cbETH they put up as collateral. Their long has not paid off in this case.

To short cbETH, the operation is relatively similar though they supply the collateral asset they think will appreciate in value more relative to cbETH and borrow cbETH.

Once they’ve borrowed their desired amount of cbETH to short, swap it using the transaction builder as identified above to another asset they think will appreciate in value relative to cbETH. This could be USDC, for example.

Traders will hold it until the moment they feel satisfied and then close the option in the way identified above by repaying the debt. The deviation in price between USDC and cbETH (in this example) is the profit they keep.

Note, if cbETH appreciates in value they are still subject to repaying the loan they took out and swapped for USDC, in cbETH terms. This means they can lose money if this trade does not go the way they would like it to. If cbETH really appreciates in value, traders are subject to liquidation. Traders ensure that they are always monitoring their health score when operating this trade.

Strategy #4: Long cbETH / short WETH

The final trade to discuss is the long cbETH short WETH trade that some traders prefer. This trade is very straightforward to operate.

Traders simply open the “Quick Action'' tab, select “Short/Long” and then select WETH as their short asset and cbETH as their long asset. They click “short” in the bottom right then they are shorting the asset.

That is all that is required to do. They simply select the asset to short (WETH) and select the asset to long (cbETH). To repay the short, they swap the cbETH collateral to WETH using the “swap” function and repay the WETH debt. This operation is the same as the Strategy #3 (repay using Euler deposit). Traders love Euler’s simplicity for a reason! The short is closed.

Traders as ever pay close attention to their health scores. This is to avoid liquidation.

Operating Euler UI to trade cbETH is intuitive, and traders using this guide will be able to emulate some of the most popular trades. For more discussion on how traders operate, please join the Euler discord.

Disclaimer:

None of this constitutes suggestions on how you might trade x,y or z. Call up your financial advisor for a moment and ask them “hey uhhh I’m thinking of doing some day trading on derivatives of staked ether custodied by a centralised exchange”. What did they say?

This discussion is for educational purposes only. This is not financial advice, and not an endorsement of any particular crypto strategy. The views expressed here are the opinions of the speakers only and do not represent the views of Euler Labs, Coinbase, or any other party.