Useful links:

• Website: WBETH | BETH

• Documentation: FAQ

• Social: Twitter

• Contracts: (Ethereum)WBETH | (Ethereum) ExchangeRateUpdater | (BNB) WBETH

• Markets: Binance WBETH/ETH | Curve WBETH/ETH | Balancer WBETH/wstETH | PancakeSwapv3 WBETH/WETH

• Dashboards: WBETH Dune Dash | WBETH DexGuru Ethereum and BSC

Introduction

This report is part of a series on liquid staking derivative collateral risk assessments conducted by the Prisma independent risk and research team operated by Llama Risk. In this report, we examine Binance's Wrapped Beacon ETH (WBETH).

This report will comprehensively cover all relevant risk factors of WBETH for collateral onboarding. Our approach involves both quantitative and qualitative analysis to help determine whether the collateral can be safely onboarded and to what extent there should be restrictions on the protocol’s exposure to the collateral.

As Prisma will be onboarding a variety of LSDs as collateral, our review involves comparative analysis to determine suitability as collateral. Risks are categorized into:

• Market Risk - risks related to market liquidity and volatility

• Technology Risk - risks related to smart contracts, dependencies, and oracle price feeds

• Counterparty Risk - risks related to governance, centralization vectors, and legal/regulatory considerations

These risk categories will be summarized in the final section of this report and are meant to assist tokenholders in their determination around WBETH onboarding and setting suitable parameters.

Section 1: LSD Protocol Fundamentals

This section addresses the fundamentals of WBETH and covers (1) the value proposition of the LSD, and (2) the overall architecture of WBETH. This section contains descriptive elements that cannot be quantified and serves as a descriptive introduction to the collateral.

This section is divided into 2 sub-sections:

• 1.1: Description of the Protocol

• 1.2: System Architecture

1.1 Description of the LSD Protocol

Key metrics (as of July 9, 2023)

• Circulating Supply: 71,926.76 WBETH

• Staked Tokens: 73,524 ETH (~$137.28m)

• Number of stakers (validators): 39,736

• Number of operators: 1

• Market share of ETH staked: .35%

• Market share of LSDs: .72%

1.1.1 Underlying Collateral

Beacon ETH (BETH) is a tokenized version of Ethereum 2.0 staked ETH issued by Binance. It represents the ownership of ETH that is staked in the Ethereum 2.0 Beacon Chain. BETH allows users to participate in Ethereum 2.0 staking while also having liquidity and transferability of their staked ETH.

Wrapped Beacon ETH (WBETH) is a wrapped version of BETH. It is a token created by depositing BETH into the WBETH wrapper. Each WBETH represents 1 BETH (1:1 to staked ETH) plus all of its accrued ETH2.0 staking rewards. Unlike BETH, the value of WBETH should increase over time, reflecting the accumulation of staking rewards.

By wrapping BETH into WBETH, users can benefit from higher yield by utilizing WBETH in on-chain opportunities such as by providing liquidity on Pancake Swap or lending/borrowing on Venus.

1.1.2 Yield Accural Mechanism

The BETH and WBETH yield accrual mechanism is outline by Binance in the WBETH announcement.

BETH is a rebasing LSD Token that allows users to receive ETH staking rewards from the Ethereum Network. These rewards are distributed to users in the form of BETH, which is based on the amount of BETH held in their Binance Spot Wallet, Binance Simple Earn (flexible), and used in Binance Loan collateral. BETH maintains a 1:1 peg with ETH and the token supply increases to account for the yield earned through staking. This is similar to Lido stETH model.

BETH tokens withdrawn from Binance do not earn staking yield. However, since WBETH was released on April 24th, BETH withdrawals from Binance have been disabled in favor of WBETH.

Unlike BETH, WBETH operates as a reward-bearing token rather than a rebasing token. In this model, the value of WBETH increases to reflect the staking yields and does not maintain a strict 1:1 peg to the native token. As a result, the reward-bearing token grows in value relative to the underlying native token. This approach provides better compatibility with various DeFi protocols.

Each day, a Binance operator updates the WBETH:ETH exchange rate to reflect the accumulation of ETH staking rewards from the Ethereum Network based on the daily APR of the ETH staking service.

Users have the option to unwrap their WBETH tokens and redeem the corresponding ETH staking rewards in the form of BETH. The redemption amount will depend on the daily BETH/WBETH conversion rate, allowing users to claim their earned staking rewards.

1.1.3 Provider Fee

Binance covers validator expenses and on-chain penalties. Since December 15th, 2022, Binance has charged a 5% provider fee on ETH staking rewards to offset hardware and network maintenance costs. There is no cost to wrap/unwrap WBETH.

1.1.4 Node Operator Set

There is little known about the node operator set of Binance's ETH Staking Service. However, the initial announcement of their ETH Staking Service suggests it is run in-house by Binance with a dedicated security team. Therefore, we can assume the node operator set to be private and operated exclusively by Binance.

1.1.5 Validator Selection

As Binance operates their own validators, selection can be classifed as centralized and entirely governed by Binance.

1.1.6 Governance Model

WBETH is a centralized LSD and fully controlled by Binance.

Two general considerations regarding governance are how Binance's business operations could have implications for WBETH (more details in section 5.1) and how Binance validators participate in Ethereum Governance.

Ethereum governance involves a diverse stakeholder group including node operators, protocol developers, ether holders, application users, application developers, and EIP authors. The full scope of Ethereum governance is beyond this report but may have relevance depending on how Binance-run validators choose to participate in this governance process.

1.2 System Architecture

1.2.1 Network Architecture Overview

Users can deposit ETH in return for BETH or redeem BETH in return for ETH on the Binance Platform. There is also functionality in the WBETH contract that allows users to deposit ETH and permissionlessly mint WBETH. Users cannot directly redeem ETH through the contract, but instead must be logged into their Binance account.

Once the user has BETH, they can convert it to WBETH by wrapping it on Binance. Alternatively, the user can acquire or sell WBETH on the open market.

Every day at 00:00 UTC, Binance dynamically adjusts the WBETH:BETH conversion rate based on the daily APR from ETH staking. This is done through an ExchangeRateUpdater contract stored as the oracle in the WBETH contract.

A whitelisted caller has a rate-limited ability to update the rate. A whitelisted operator can withdraw any ETH in the WBETH to a designated ethReceiver address (the staking receiver). Binance currently uses the same EOA address for both the exchange rate caller and ETH operator.

1.2.2 Architecture Diagram

1.2.3 Key Components

BETH Component

Binance has sole control over the BETH Contract to mint and burn any of the existing supply. The contract appears to have minted 15000000 units of BETH. Binance seems to store them in a hot wallet and utilizes them as needed. Therefore, unlike conventional providers, such as Lido, BETH is not issued proportionally to locked ETH. It instead depends on Binance's internal accounting.

WBETH Component Two instances of the WBETH contract can be found: one on Ethereum (ERC20) and another on BSC (BEP20) under the same address.

Section 2: Performance Analysis

This section evaluates WBETH from a quantitative perspective. It analyzes token usage and competitive metrics, and addresses any subsidized economic activity.

This section is divided into 3 sub-sections:

• 2.1: Usage Metrics

• 2.2: Competitive Analysis Metrics

• 2.3: Subsidization of Economic Activity

2.1 Usage Metrics

2.1.1 Total Value Locked

WBETH has ~73,166 ETH staked across both Binance Smart Chain and Ethereum, worth $136m on July 6th. WBETH has a short history (since April 28th, 2023) and in that time has not experienced significant change in its TVL.

Source: DefiLlama

The breakdown shows that $96.73 million is locked in BSC, while $39.36 million is locked in Ethereum at the time of writing.

Source: DefiLlama

2.1.2 Transaction Volume

BETH

Since inception of the BETH smart contract, transaction volume has declined. This may be due to the overall market cycle or the emergence of more competing LSD protocols. However, it may suggest a decline in interest for BETH as a product or a combination of multiple factors. Since WBETH was released in April 2023, Binance has halted BETH withdrawals, as it seeks to supersede activity on secondary markets with WBETH.

Source: Collateral Onboarding LSD: BETH, WBETH

WBETH

All time WBETH shows a relatively stable transaction volume for both BSC and ETH, fluctuating approximately between 50-100 Transaction per day. However, this should be read with the caveat that the contract is less than 3 months old.

Source: Collateral Onboarding LSD: BETH, WBETH

30 days The 30 day transaction volume shows similar patterns as the all time resolution. The majority of trading activity takes place on BSC.

Source: Collateral Onboarding LSD: BETH, WBETH

2.1.3 Dex Trading Volume

BETH

Last 30 Day Trading Volume The average trading volume over the last 30 days was $13,518.86. The minimum daily trading volume recorded was $2,763.57. The maximum daily trading volume reached $62,727.91. The majority of volume takes place on BakerySwap.

Note: The analysis only cover Uniswap V2 AMM contracts

Source: Collateral Onboarding LSD: BETH, WBETH]

All Time All time on-chain trading volume chart of BETH showed a significant decline since inception.

Source: Collateral Onboarding LSD: BETH, WBETH

A note on volume distribution While this section focuses on on-chain liquidity as liquidation of collateral has to happen on-chain, it is worth noting that DEX Trading Volume is insignificant relative to on-chain volume and the dominant trading venue is Binance itself.

Source: Coingecko

WBETH

Last 30 Day Trading Volume The mean volume for WBETH was 374,476.77 USD, the maximum volume reached 1,828,495.15 USD, and the minimum volume recorded was 12,481.4 USD. The majority of WBETH trading activity takes place on Curve and PancakeSwap.

Source: Geckoterminal API

A note on volume distribution Unlike BETH, WBETH's overall trading volume is most prominent on DEXs, in particular Curve and PancakeSwap.

Source: Coingecko

2.1.4 Average Transaction/Trade Size

Over the observed 30-day period, the average daily transaction size is $80,901, with a range from $111(min) to $378,194(max). The monthly average transaction size (avg on all transactions) is $96,138.

Source: Etherscan

2.1.5 Trading Volume to Market Capitalization Ratio

The Trading Volume to Market Capitalization Ratio indicates the proportion of the total market capitalization that is being traded within the analysis timeframe.

WBETH For WBETH, the Vol-Mcap Ratio suggests relatively low trading activity in relation to the overall market capitalization. With a ratio below 1%, it indicates that the trading volume is relatively small compared to the market value of the assets. This observation could be indicative of a market with lower liquidity.

Source: Goingecko

A low Vol-Mcap Ratio for WBETH might also imply that a significant portion of market participants are holding their positions for longer periods, possibly for use as collateral. This behavior could indicate a preference for long-term investment strategies.

2.1.6 Daily Active Addresses

Daily Active Addresses (DAA) indicates the number of distinct addresses actively interacting with the specified smart contract address on a daily basis.

BETH For BETH, DAA varies generally from 40-80 address. This is not a significant number. Furthermore, given that most interactions happen off-chain (i.e. on the Binance platform) real user figures most likely differ.

Source: Collateral Onboarding LSD: BETH, WBETH

WBETH WBETH DAA is most dominant by BSC. Yet, overall usage figures are low, ranging from 30-60 address. This suggests low adoption of WBETH and limited utility at the time of writing. Given the young age of the WBETH contract (April, 2023) this may be expected.

Source: Collateral Onboarding LSD: BETH, WBETH

2.1.7 User Growth

User growth is calculated based on the unique addresses interacting with the BETH and WBETH contract since contract inception.

BETH Source: Collateral Onboarding LSD: BETH, WBETH

Over the analyzed time frame, we see relatively consistent metrics of new addresses interacting with the contract, potentially indicating sustained usage independent of market conditions and indicating a positive sign in terms of adoption.

Note: Due to limitation of on-chain data retrieval through the Covalent platform, the assumed date of contract creation was the 2022-06-01 instead the actual 2021-12-22.

WBETH While the time frame of analysis is significantly shorter, WBETH displays similar adoption metrics to BETH with sustained inflow of first time addresses interacting with the contract.

Source: Collateral Onboarding LSD: BETH, WBETH

2.1.8 Integration with Other Protocols

BETH When looking at the BSCScan token holder distribution from the 28/06/2023 and limiting the analysis to a BETH balance above $100K (or roughly 50 BETH at the time of writing), there are only three smart contracts interacting with BSC. The only meaningful non-DEX DeFi presence is in the Venus vBETH Token Contract. The remaining addresses are mostly LP Pools for DEXes.

Source: Nansen | Date: 6/28/23

WBETH Similarly for the same day of analysis, WBETH is mostly present in LP pairs, apart from the WBETH contract as shown in the DeFi Presence chart below.

Source: Nansen | Date: 6/28/23

2.2 Competitive Analysis Metrics

2.2.1 Market Share

WBETH's TVL relative to other LSD competitors is quite low, only commanding .71% of overall marketshare at the time of writing with only 72,619 ETH staked (~$134m). This value represents the combined amount of assets locked in both Binance Smart Chain and Ethereum.

It is, however, a much newer product than most of its competitors. wstETH was deployed in 2/21 and cbETH in 2/22. By contrast, WBETH was deployed in 4/23 and has only been on mainnet for three months.

WBETH ranks sixth by marketshare after (in descending order) stETH, cbETH, rETH, frxETH, and sETH2.

Source: DeFiLlama | Date: 7/7/23

2.2.2 Trading Volume Share in Total LSD Trading Volume

BETH manages to maintain a meaningful share of total LSD trading volume during the timeframe since WBETH was deployed (04/19/23) and when incorporating CEX volume. While BETH has meaningful trading volume, the majority comes from trading on Binance. Binance has stated an intention to deprecate BETH on secondary markets in favor of WBETH.

WBETH volume as a share of total LSD trading volume is essentially negligible.

Source: Geckoterminal API

2.2.3 Protocol Staking Yield

BETH/WBETH staking yield between June 5th and July 4th, 2023 ranged between 3.85% and 4.83% which has been competitive with other LSD products.

Source: Binance

cbETH is the most analogous competitor to WBETH, given that they are both centralized LSD products. WBETH consistently outcompetes cbETH on yield. This is attributable to the difference in fees on staking rewards: cbETH charges 25% while WBETH charges only 5%.

Source: DefiLlama

2.2.4 Slashing Rate

According to Rated Network, Binance has never experienced a slashing event, suggesting reliable operation. Binance did incur a total of 489.25 ETH in penalties during its time of operation which is rather small compared to the overall 106,906 ETH consensus rewards earned.

Source: Rated Network | 7/4/23

Compared with competitors, Binance has performed reasonably on par, although its loss from penalties has been slightly higher than the median.

Source: Rated Network | Date: 6/27/23

Binance does advertise that they will take on all slashing risk for its users. This is not a perk offered by larger competitors such as stETH or cbETH.

2.3 Subsidization of Economic Activity

2.3.1 Existence of an Incentive Program

Binance has periodically advertised rewards incentives and preferred interest rates for using BETH and WBETH with Binance's own financial services:

• Binance ran a promotion to supply liquidity to its WBETH/ETH Liquid Swap pool. The promotion ran from 5/24/23 - 6/23/23 and advertised ETH rewards in addition to BNB and pool rewards. As of the most recent Earn Wednesday announcement on July 5th, both the BETH/ETH and WBETH/ETH pools have a promotion advertising a 3.57% and 3.59% yield, respectively.

• Binance also advertised a minor promotion for new and existing ETH stakers running from 7/4/2023 - 7/24/2023.

• Binance advertised a reduced interest rate loan promotion to VIP users who borrow against BETH, along with a side incentive for regular users who advertise Binance's VIP Loan prduct on Twitter. Binance then advertised a cash reward incentive for using BETH as collateral in its Loan product.

2.3.2 Size of the Incentive Program in USD

The promotions run by Binance typically specify a short duration of a month or several weeks. The values are generally quite small and targeted toward existing Binance users who may have a low threshold for participating in the promotions.

For instance, the WBETH/ETH pool promotion is currently paying 3.85% on 4,746 ETH. This pays out ~15.2 ETH/month, and is likely to be a short term incentive.

Likewise, incentives to new and existing ETH stakers amounted to around $5,000. These are very small scale incentives that are more likely to introduce Binance users to new Binance products rather than drive meaningful adoption of WBETH.

Section 3: Market Risk

This section addresses the ease of liquidation based on historical market conditions. It seeks to clarify (1) the Liquid Staking Basis & Volatility of WBETH, and (2) the liquidity profile of the collateral. Market risk refers to the potential for financial losses resulting from adverse changes in market conditions.

This section is divided into 2 sub-sections:

• 3.1: Volatility Analysis

• 3.2: Liquidity Analysis

3.1 Volatility Analysis

3.1.1 Liquid Staking Basis (LSB)

The LSB represents the price difference between BETH (liquid staking token) and its underlying asset, ETH. It measures the deviation of the BETH price from the ETH price.

The LSB values range from negative to positive, indicating periods when BETH traded at a discount or premium relative to ETH. Over the past 6 months BETH mostly trade at a discount relative to ETH.

The LSB_abs represents the absolute value of the LSB, indicating the magnitude of the price difference between BETH and ETH without considering the direction (positive or negative). In general we can see that the magnitude of BETH/ETH variance has reduced over time. In particular, it has improved markedly since staking withdrawals were enabled in mid-April.

In absolute dollar terms, the spread between BETH and ETH range from -60 USD to +10 Dollars.

3.1.2 LSD Volatility

The table below shows the volatility values for BETH and ETH over different periods of time. Volatility is a measure of how much the price of an asset fluctuates over a given period, indicating the liquidity depth and uncertainty associated with the asset.

Source: Geckoterminal | Date: 6/28/23

Comparing the volatility values, we can observe that BETH and ETH have similar volatility patterns. Looking at the "All Time" period, BETH has a volatility of 0.0277977, while ETH has a slightly lower volatility of 0.0274388.

Analyzing the shorter time periods, we notice a consistent trend. In the 90-day period, BETH has a volatility of 0.0299552, whereas ETH has a slightly lower volatility of 0.029297. Similarly, in the 60-day and 30-day periods, BETH consistently demonstrates higher volatility compared to ETH.

In summary, BETH and ETH exhibit similar volatility patterns, but BETH tends to have slightly higher volatility than ETH across various time periods. BETH has experienced relatively larger price swings and fluctuations compared to ETH, presenting a slightly increased risk in terms of price stability.

3.1.3 Yield Volatility

The Compass Staking Yield Reference Index Ethereum (STYETH Index) measures the annualized daily staking yield obtained when staking on the Ethereum blockchain. The Index value is expressed in % and provides a reference value compared to BETH APR.

Source: Binance and Compass STYETH | Date: 6/5/2023 to 7/4/2023

In general we can see BETH APR to be less stable (i.e. more volatile) over time relative to STYETH. This may be attributable in part to Binance's withdrawal pool. Binance periodically refills the pool to supply exit liquidity for users, and this activity may cause some disturbance in yield generation.

3.2 Liquidity Analysis

3.2.1 Supported DEXs & CEXs

As WBETH is both an Ethereum ERC20 token and Binance Chain BEP20 token, the breakdown for both is shown below. The charts are highlighted such that yellow = Binance, Green = Dex, Red = CEX other than Binance, Pink = non-DEX DeFi application.

WBETH (ERC20) For centralized exchanges, WBETH is present primarily on Binance, with a minor presence on OKX (and may be present on additional CEXs that are not identified by Nansen). The DEX liquidity pools including WBETH on Ethereum are Balancer, Curve, and PancakeSwapV3.

Source: Nansen | Date: 7/8/23

WBETH (BEP20) For centralized exchanges, WBETH is present primarily on Binance. The DEX liquidity pools including WBETH on Ethereum are Wombat Exchange, PancakeSwap, and Thena.

Source: Nansen | Date: 7/8/23

3.2.2 LSD Token Liquidity

BETH

The most liquid pool for BETH is the BakerySwap BETH/ETH pair accounting for 71.7% of the top 20 On-chain liquidity pools with $1.5m TVL. This is followed by the Bakeryswap BETH-BUSD pair and PancakeSwap BETH-ETH pair.

Source: Geckoterminal API | Date: 6/28/23

WBETH

The most liquid pool for WBETH on Ethereum is the Curve ETH/WBETH pools with approximately $9m in TVL. This is followed by the Balancer WBETH/wstETH pool with $4m TVL. The remaining pool liquidity is on BSC in the PancakeSwap pool with approximately $3.3m TVL.

Source: Geckoterminal API| Date: 6/28/23

3.2.3 Liquidity Utilization Rate

A higher liquidity utilization rate indicates that the available funds within the LPs are being actively traded.

Source: DexGuru, Etherscan, BscScan and CoinGecko | Date: 6/3/2023 to 7/3/2023

From the chart we can see that over the analyzed timeframe, the maximum daily utilization rate was 27.8% and the minimum rate was <1%. Generally, the trend of liquidity utilization for WBETH is quite low.

3.2.4 LSD Leverage Ratio

WBETH as collateral is only supported on Venus protocol (BSC chain) with a total supply of (2,291 WBETH). There is currently ~$755k borrowed in WBETH (383.44 WBETH) and available liquidity (borrowable amount of WBETH) is ~$3.76m (1,910 WBETH). The Loan-to-Value parameter for WBETH on Venus is set conservatively at 50%.

3.2.6 Slippage

Using the DefiLlama Liquidity tool to estimate a swap from WBETH>ETH, a swap size of 1,741.51 WBETH (~$3.25m) would produce a 1% slippage.

Source: DefiLlama Liquidity Tool

This is a very low figure compared to competitors. stETH would require a ~$300m swap and cbETH an ~$18m swap to produce similar slippage.

3.2.7 Spread as an Estimator of Historical Slippage

Historical spread is estimated between 0 to 0.04. This suggests that BETH is generally less liquid and more volatile than the underlying ETH.

Source: Geckoterminal API

Section 4: Technology Risk

This section addresses the persistence of collateral properties from a technological perspective. It aims to convey, (1) where technological risk arises that can change the fundamental properties of the collateral (e.g. unresolved audit issues), and (2) do any composability/dependency requirements present potential issues (e.g. is a reliable pricefeed oracle available?).

This section is divided into 3 sub-sections:

• 4.1: Smart Contract Risk

• 4.2: Product and Layer Composability

• 4.3: Oracle Pricefeed Availability

4.1 Smart Contract Risk

4.1.1 Protocol Audits

Binance has not published any audits regarding the staking contracts, although it does inherit most functionality from well established contracts.

The WBETH implementation inherits from the StakedTokenV1 contract used by cbETH. The cbETH system was audited by OpenZeppelin with a report published in August 22nd, 2022. StakedTokenV1 itself inherits from Centre's FiatTokenV2_1, the implementation for USDC.

WBETH's implementation, WrappedTokenV1ETH, adds functionality that allow users to deposit ETH and mint WBETH at the current exchangeRate and for a designated operator to supply ETH or withdraw ETH to a designated ethReceiver address.

It should be noted that Binance has an internal auditing team and most likely has audited the contracts themselves. According to the Binance End of Year Report 2022 Binance security and compliance team has been extended to over 750 employees.

4.1.2 Concerning Audit Signs

As there are no audits available for BETH or WBETH, no specific concerning signs can be highlighted. The StakedTokenV1 contract, where WBETH inherits most functionality, was found by OpenZeppelin to be "clean, very well documented and tested." No critical or high severity issue was found, and only 1 medium severity issue:

[M01] Insufficient allowance of the callers can prevent the update of exchange rate

• The owner of the RateLimit contract sets allowances for callers to update the exchange rate. In a rare scenario, callers could deplete their allowance and be unable to update the exchange rate for a long time. The likelihood of this issue depends on the number of callers assigned and allowance parameters set.

4.1.3 Bug bounty

Binance operates a bug bounty program for security issues related to Binance services. However, it should be noted that it does not cover BETH or WBETH contracts specifically. The program offers rewards in BNB (Binance Coin) and follows a rating system based on the Bugcrowd Vulnerability Rating Taxonomy. The rewards vary depending on the severity of the vulnerability, with exceptionally severe issues potentially being rewarded up to $100,000. Binance may also provide additional reward bonuses for exceptional reports.

It should be noted that there have been claims of dishonesty in payouts against the Binance Bug Bounty program.

Overall, there is uncertainty in payouts, relatively low payout amount for most issues, and lack of clarity around BETH and WBETH's eligibility in the bug bounty program.

4.1.4 Contract Immutability

The contacts for WBETH and BETH are upgradable proxies owned by a Binance controlled EOA. This is not surprising and is consistent with practices by other centralized services such as Coinbase cbETH. Interacting with the WBETH contracts implies a trust relationship with Binance to properly custody the admin keys and responsibly manage the WBETH contract.

4.1.5 Developer Activity

This metric cannot be meaningfully captured as the BETH and WBETH contract GitHub repositories are closed source.

4.1.6 SC Maturity

BETH The BETH contract was deployed on 12/22/2020 and in October will mark 3 years being live on mainnet and therefore can be considered somewhat mature.

WBETH The WBETH contract was deployed on 4/19/2023 on Ethereum and BSC respectively. Most functionality inherits from Coinbase's cbETH implementation (on mainnet since February 2022), although WBETH does introduce additional functionality. Thus, with less than 3 months of deployment, WBETH cannot be considered mature.

4.1.7 Previous Incidents

There have been no previous incidents for WBETH nor BETH. However, Binance has had multiple hacks and exploits in the past, and have generally ensured to make users whole.

4.2 Product and Layer Composability

4.2.1 Dependencies

Since smart contracts cannot natively access the amount of underlying ETH staked (division of execution and consensus layer), the architecture requires external exchange rate updating functionality. Hence, the on-chain part of WBETH consists of these contracts:

• A Proxy contract (FiatTokenProxy.sol)
  Based on Centre's proxy contract

• WBETH contract (WrapTokenV1ETH.sol)
  The WBETH smart contract is inherited from cbETH which includes features: storage of exchange rate and an oracle role which has the special privilege to update the rate.

• Exchange Rate Updater (ExchangeRateUpdater.sol)
  This smart contract allows designated callers to update the rate-limited exchange rate of WBETH:ETH.

The WBETH contract has the contract address 0x81720695e43a39c52557ce6386feb3faac215f06 listed as Oracle. The designated caller updates the exchange rate daily from an EOA address.

An example of an updateExchangeRate function call can be seen below.

Source: Phalcon

4.2.2 Withdrawal Processing

Users can redeem their staked ETH (BETH) back to ETH at a 1:1 ratio on Binance. However, the redemption process is subject to limitations. Due to withdrawal processing constraints on the Ethereum network, the amount of staked ETH that can be unstaked and released from BETH is subject to network-wide withdrawal demand.

Binance maintains a BETH redemption pool, and users who redeem their BETH will receive a portion from this pool. The daily redemption quota for each user is determined by their past 15-day average holding of BETH on Binance. If the average holding is less than 50 BETH, the maximum redemption limit is set at 10 BETH per day. For users with an average holding of 50 BETH or more, the daily redemption limit is 20% of their average BETH holdings.

Prior to May 18, 2023, Binance required a 15-day withdrawal processing time. An announcement on May 11th advertised a reduction to 5 days. Binance disclosed that processing times are ultimately determined by the Ethereum network and therefore processing times would be subject to change without notice. However, they promise that once a withdrawal process begins, the processing time will not be changed. Withdrawal processing cannot be canceled by the user once initiated.

Source: Binance ETH2 staking Page

It is important to note that if the on-chain daily quota is fully utilized, Binance will be unable to unstake ETH from the network, resulting in the temporary unavailability of BETH redemption until the quota resets. The personal daily quota may be subject to changes without prior notice.

4.3 Oracle Pricefeed Availability

4.3.1 Understand the Oracle

BETH/WBETH do not currently have a pricefeed available on Ethereum by a reputable oracle service. Chainlink has a BETH/USD feed available on BNB chain and Binance oracle has both a WBETH/USD and BETH/USD feed also on BNB chain.

In the absence of a reputable third-party oracle service, it may be possible to create a custom WBETH pricefeed from on-chain DEX liquidity sources. The Curve WBETH/ETH pool has an EMA oracle using a 10-minute time frame. Curve's docs explain the EMA oracle and discloses that the oracle may be resistant to single-block manipulation attempts but may be vulnerable to prolonged attacks over multiple blocks, particularly in low volume pools.

4.3.2 Token Liquidity and Distribution

The on-chain WBETH liquidity sources as of July 8, 2023 for Ethereum are Curve WBETH/ETH ($3.1M TVL), Balancer WBETH/wstETH ($4.5M TVL), and PancakeSwapv3 WBETH/WETH ($2.6M TVL).

Of the 71,926 WBETH supply, 21,001 WBETH are ERC20 Ethereum tokens (29.2%). Of the ERC20 supply, 1,544 WBETH is on Balancer (2.1%), 955 is on Curve (1.3%), and 543 is on PancakeSwap (0.75%). Only 4.23% of the total token supply is on Ethereum-based DEXs.

4.3.3 Attack Vector

DEX Pricefeed Dependency: WBETH's only immediately available pricefeed source on Ethereum is the Curve EMA oracle of the WBETH/ETH pool. An attacker gaining control over a substantial share of this pool could potentially manipulate the EMA oracle price.

Centralized Exchange Influence: A substantial portion of liquidity is held on a centralized exchange, specifically Binance. In theory, this centralization could provide an additional opportunity for price manipulation.

Limited Total Value Locked (TVL): The TVL for WBETH is relatively low, which could lower the cost of market manipulation, thereby increasing its feasibility.

4.3.4 Associated Vulnerabilities

Creation of Bad Debt: Price feed manipulation, if successful, could result in bad debt within the protocol. Lending protocols rely on accurate price feeds for maintaining appropriate collateralization ratios. Any manipulation could lead to the generation of bad debt.

Faulty Liquidation: An oracle manipulated to lower the price of the collateral asset drastically could trigger unfair liquidations, causing significant financial losses for users and disturbing the normal operations of the lending protocol.

Section 5: Counterparty Risk

This section addresses the persistence of WBETH's properties from an ownership rights perspective (i.e. possession, use, transfer, exclusion, profiteering, control, legal claim). The reader should get a clear idea of (1) who can legitimately change properties of the collateral (e.g. minting additional units) and (2) the extent that changes can be implemented and the effect on the collateral.

This section is divided into 4 subsections:

• 5.1: Governance

• 5.2: Decentralization of the LSD

• 5.3: Economic Performance

• 5.4: Legal

5.1 Governance

5.1.1 Governance Scope

Binance has unilateral control of the product offering with terms described in sections 9 and 10 of the Terms of Use.

In section 9.c Binance reserves "the right to initiate or terminate Staking Program for any Digital Currencies or modify rules on such programs in its sole discretion"

In section 10.g Binance "reserves the right to suspend or terminate Binance POS service. If necessary, Binance.com can suspend and terminate Binance POS service at any time."

5.1.2 Access Control

WBETH has a number of roles (addresses) that control functionality:

RoleDescriptionAddressadminupgrade the WBETH implementation contract0xA3eE6926edcce93BacF05F4222c243c4d9F6d853masterMinteradds and removes minters and increases their minting allowance0x099d699C07Bbc8eE6eB5703746063E04B2aA62A7minterscreate and destroy tokensnullpauserpause the contract, which prevents all transfers, minting, and burning0x099d699C07Bbc8eE6eB5703746063E04B2aA62A7blacklisterprevent all transfers to or from a particular address, and prevents that address from minting or burning0x099d699C07Bbc8eE6eB5703746063E04B2aA62A7ownerre-assign any of the roles0x099d699C07Bbc8eE6eB5703746063E04B2aA62A7oracleupdates the WBETH/ETH exchange rate0x81720695e43A39C52557Ce6386feB3FAAC215f06rescuerrescue ERC20 tokens sent to the contract0x0000000000000000000000000000000000000000operatordeposits ETH or withdraws to ethReceiver address0x2B59215778e99035CF38663454eF1240a7AE70F5

The owner, blacklister, pauser, and masterMinter are all the same EOA that has no transaction history. The oracle is a contract that has an assigned caller to update the exchange rate daily. It is the same EOA address as the operator. The minter role is not active.

ETH may be used to mint WBETH directly within the contract. Users can deposit ETH and mint WBETH at the current exchangeRate. Only the operator can withdraw the ETH and only to the ethReceiver address as assigned by the owner.

5.2 Decentralization of LSD

5.2.1 Number of Node Operators

Binance seems to be the sole node operator at the time of writing, handling 39,736 validators on behalf of Binance clients. It holds a network penetration (i.e. the percentage of the whole network stake) of 6.15% according to Rated Network.

The staking User Agreement does include the clause:

2.1.1. Binance or a Binance Operator staking your Staked Assets, in whole or in part; 2.1.2. Binance or the Binance Operator acting as a validator on an Applicable Network

The term “Binance Operator” encompasses “all parties that run Binance, including but not limited to legal persons (including Bifinity UAB), unincorporated organizations and teams that provide Binance Services and are responsible for such services”, implying that Binance may contract out node operator services.

5.2.2 Validator Enter/Exit (Churn)

ETH staking withdrawals went live with the Shanghai/Capella upgrade as of April 12, 2023, allowing validators to exit. 6,492 validators have exited, amounting to 314,495.2 ETH withdrawn. Most validator exits occurred between April 12th and June 6th with only 1% of all validator exits occurring in the past month.

Source:Rated Network

This suggest that early BETH stakers may have sought to exit when withdrawals were enabled, but after the initial rush withdrawal demand has tapered off.

5.2.3 Stake Distribution Across Geographic Jurisdictions

It is unknown if Binance distributes its staking operations across diverse geographic jurisdictions.

5.2.4 Node Software Diversity

When looking at the Rated Network Consensus layer metrics for the entire duration, Binance's client distribution is fairly evenly split between Prysm (47.8%) and Lighthouse (52.1%).

5.2.5 Node Hosting Infrastructure

No further information about Binance Node Hosting Infrastructure is available. Given Binance's capital and in-house capacities, it is likely they have proprietary infrastructure run and maintained by Binance.

5.3 Economic Performance

5.3.1 Revenue Source

Binance offers a wide range of services, although according to CoinDesk, Changpeng Zhao recently said that 90% of its revenue comes from transaction fees (See trading fees). ETH Staking Services makes up a minuscule portion of Binance's revenue.

Binance Revenue sources include:

• Spot trading fees - 0.1% standard fee minus loyalty incentives

• Instant buy/sell fees - 0.5%

• Withdrawal fees - based on current network cost

• Deposit fees - 4.5% fees for buying with debit card. Deposits made via the automated clearing house (ACH) has no limit and fee

• Margin borrow interest - futures trading is offered perpetually with leverage up to 125x. Fees are based on the cumulative 30-day trading volume, avg 24.h holdings in BNB and VIP level of the user

• Collateral Cross-Interest Rates - for users and institutions who want to apply for crypto loans but also lend their own holdings and use it as collateral. Binance earns on the borrow interest rate and offers many products for users to deposit their funds, like: Savings, BNB vault, Launchpool and Locked Staking. Binance also earn on the spread between lending and borrowing IR

• Synthetic Stock - Binance offers synthetic stock tokens (like Tesla or Apple shares). Users are able to buy and sell sythetic stock tokens without fees but Binance generates income through the spread

• Broker Program - Binance works with crypto brokers and offers them services like account management, order matching, API, Wiget Broker, marketing, consulting, and settlement systems. Currently, Binance works with over 570 partners in 30 countries. Binance earns revenue via trading fees

• Binance Cloud - a SaaS offering that allows other businesses to launch "white label" crypto exchanges. For this service, Binance provides the underlying infrastructure, security and liquidity while the partners can focus on business development and operations

• Interchange Fees - fee applied on every Binance debit card payment. Binance has partnered with Visa, so a portion of the fees are shared with Visa. Binance also charges transaction fees for payments and ATM withdrawals of up to 0.9%

• PoW Mining (Binance Smart Pools) - Binance charges a "mining fee"

• ETH Staking - Binance charges a 5% fee on rewards earned, passing the remainder to BETH/WBETH holders

• Binance Launchpad - A service for new projects to launch their token on Binance as an "Initial Exchange Offering"

• Binance also provide various services for merchants and retail like Binance Pay, Binance Gift cards, P2Pro merchant program, P2P merchant application and others

Binance released an End of Year Report in 2022 that does not include specific financial information about the company but offers an overview of all company services and operations. The report may be useful to determine the health of the company generally.

5.3.2 Revenue

Binance is a private company and is not required to publicly release financial reports. There are methods to estimate Binance's revenue, however figures may be imprecise or misleading.

For instance, on-chain data provider CryptoQuant estimates Binance revenue by observing BNB burns (20% of Binance revenue is used to burn BNB). Their estimate includes spot trading volume but may exclude other revenues from derivative/futures trading, lending, etc. According to CryptoQuant, Binance is currently generating around $12 Billion annual revenue.

[Source: CryptoQuant]

CryptoQuant estimates that the company's annual revenue has experienced a tenfold growth over the past two years. Binance maintains consistently high levels of reserves, with indications of an upward trend. Stablecoin deposit transactions have surged recently, reaching record-high levels. Lastly, Binance's clean reserves remain notably high, approaching approximately 90%.

By comparison, Coinbase has $2.72 Billion revenue in the past 4 quarters. Binance apears to earn more in a single quarter than Coinbase does in a year (based on potentially fallible estimates).

5.3.3 Net Profit

Due to a lack of transparency, Binance's net profit is not possible to estimate accurately. In 2020, Binance CEO Changpeng Zhao expected the exchange to record $800 Million to $1 Billion in profits.

Financial figures and estimates from Binance are more difficult to come by since the crypto market downturn from 2021-2023 and Binance's balance sheet was likely impacted along with the adverse market conditions.

5.4 Legal

See also our general LSD Legal Framework Considerations

5.4.1 Legal Structure

Consent to the current terms and conditions is a mandatory requirement in the wrapping (BETH to WBETH) process. The latest Binance ETH Staking Terms and Conditions, in effect since 27 April 2023, stipulate the User's acceptance of:

2.1.1. Binance or a Binance Operator staking your Staked Assets, in whole or in part; 2.1.2. Binance or the Binance Operator acting as a validator on an Applicable Network; and 2.1.3. delegating any voting rights to Binance, or Binance Operator, that are attached to your Staked Assets.

Definition of Binance Operator is not provided therein but General Terms section refers to Binance Terms of Use to explain the meaning of the designation. The term “Binance Operator” encompasses “all parties that run Binance, including but not limited to legal persons (including Bifinity UAB), unincorporated organizations and teams that provide Binance Services and are responsible for such services”

Pursuant to the disclaimer in the second part of the paragraph, Binance Operator's scope of activity is broadly set forth:

UNDER THESE TERMS, BINANCE OPERATORS MAY CHANGE AS BINANCE’S BUSINESS ADJUSTS, IN WHICH CASE, THE CHANGED OPERATORS SHALL PERFORM THEIR OBLIGATIONS UNDER THESE TERMS WITH YOU AND PROVIDE SERVICES TO YOU, AND SUCH CHANGE DOES NOT AFFECT YOUR RIGHTS AND INTERESTS UNDER THESE TERMS. ADDITIONALLY, THE SCOPE OF BINANCE OPERATORS MAY BE EXPANDED DUE TO THE PROVISION OF NEW BINANCE SERVICES, IN WHICH CASE, IF YOU CONTINUE TO USE BINANCE SERVICES, IT IS DEEMED THAT YOU HAVE AGREED TO JOINTLY EXECUTE THESE TERMS WITH THE NEWLY ADDED BINANCE OPERATORS. IN CASE OF A DISPUTE, YOU SHALL DETERMINE THE ENTITIES BY WHICH THESE TERMS ARE PERFORMED WITH YOU AND THE COUNTERPARTIES OF THE DISPUTE, DEPENDING ON THE SPECIFIC SERVICES YOU USE AND THE PARTICULAR ACTIONS THAT AFFECT YOUR RIGHTS OR INTERESTS.

Inasmuch as Binance Operator or the law applicable to staking services is not clearly defined in the Binance Terms of Use, it could potentially increase legal risk by causing uncertainty and ambiguity in legal disputes or interpretations of the terms of service. If a company does not clearly identify the legal entity responsible for providing services, it could give rise to unpredictable consequences. This is especially true in cases of legal disputes, such as breach of terms or other forms of provider’s liability. If the legal entity is not designated, it might not be clear who to hold accountable in these situations.

In the next place without a clear designation of the governing law, it might be unclear which jurisdiction's laws and regulations apply to the functions performed by Binance Operators. This could lead to legal disputes about which jurisdiction's laws should be used to interpret the terms of service or resolve disputes. Also, users cannot unequivocally identify their exposure to certain jurisdictions. This is potentially a problem for citizens of certain countries who must strictly comply with various restrictive regimes.

Key provisions of the governing terms:

• Redemption of staked assets is restricted until the Shanghai update.

• Binance permits the conversion of BETH to WBETH and vice versa on a 1:1 basis, with the conversion rate determined on 2023-04-27 and then modified according to the prevailing WBETH Conversion Rate (flexible rate that allows users to enjoy the benefits of staking rewards while also having the option to remove their asset from the exchange). However, during the daily rate update period between 23:45-00:15 (UTC), these conversion functions are suspended. Users should note that any delays or losses during these periods will be solely their responsibility.

• The number of WBETH and BETH users will receive after conversion is determined by the conversion rate published on the platform, which may change periodically.

The ownership structure and official jurisdiction of Binance have remained elusive despite journalists' attempts to unmask them. A previously leaked US government report implied that Binance intentionally obscures this information to circumvent scrutiny and regulation.

Parent company, Binance, is currently known to be Cayman Islands based but the exchange first launched in Shanghai. Later, as the Chinese government cracked down on cryptocurrency trading, the company moved its headquarters to Japan and then Malta.

The leaked TaiChi document suggests establishing an entity in the United States to give the illusion of regulatory compliance while simultaneously implementing strategies to divert revenue, including licensing fees, back to Binance, the parent company. The plan also involves educating prospective clients on circumventing geographical limitations and developing technological solutions to facilitate this.

The proposed corporate structure) discloses that the holding company based in the Cayman Islands will be linked to an unnamed Delaware C-corporation and the separate Tai Chi entity, illustrating how revenue from the U.S. business could be redirected back to Binance, the parent company. The diagrammed setup was initiated in August 2019 when Delaware-domiciled BAM (Binance America) Trading Services, was registered as a C-corp with an alternative name of Binance.US.

A look at the business registries in Malta, UK and Ireland confirms that the ownership system is hidden behind a web of different companies linked together by a distributed shareholding by different owners.

• Binance Europe LTD (UK): https://find-and-update.company-information.service.gov.uk/company/12495902/persons-with-significant-control

• Binance Digital Limited (UK): https://find-and-update.company-information.service.gov.uk/company/12340481/persons-with-significant-control

• Binance Europe Services Limited (Malta): https://registry.mbr.mt/ROC/index.jsp#/ROC/companyDetailsRO.do?action=involvementList&companyId=C%2085624

• Binance Marketing Services Limited (Malta): https://registry.mbr.mt/ROC/index.jsp#/ROC/companyDetailsRO.do?action=involvementList&companyId=C%2085602

• BINANCE (SERVICES) HOLDINGS LIMITED (Ireland): https://core.cro.ie/e-commerce/company/4758994 (fee gated)

Binance holds its largest companies in secretive jurisdictions. Binance Capital Management is registered in the British Virgin Islands, Binance Holdings is registered in the Cayman Islands, and Binance Investments Company is registered in the Seychelles.

5.4.2 Licenses

Binance is active on several continents and reportedly holds a number of regulatory licenses, registrations, authorisations and approvals. Countries where Binance held licenses, registrations, and authorizations by EoY 2022 are shown below.

Source: Binance End-of-Year Report 2022

Europe

• Binance France SAS is registered as a Digital Asset Service Provider providing services like digital asset custody, exchange of digital assets and operating a digital asset trading platform;

• Virtual Asset Service Provider registration in Italy, Lithuania, Spain and Poland, allowing the company to provide crypto asset exchange and custody services;

• Authorized Financial Institution in Sweden, offering services like spot trading, OTC convert, custody, staking, savings, card, and pay services.

Commonwealth of Independent States

• Kazakhstan - Astana International Financial Centre (AIFC): BN KZ Technologies Limited is licensed to operate a digital asset platform and provide custody services.

Middle-East

• Abu Dhabi Global Market: Binance (AD) Limited and BV Investment Management Limited have Financial Services Permissions to provide custody services and fund management services respectively, once they've met certain conditions.

• Bahrain: Binance Bahrain BSC holds a Category 4 licence enabling it to provide crypto asset exchange and custody services.

• Dubai World Trade Center: Virtual Asset Service Provider licence allowing Binance FZE to offer services like exchange, custodial, broker-dealer, and payments and remittance services.

Asia-Pacific

• Australia: InvestbyBit Pty Ltd is registered as a Digital Currency Exchange provider.

• Indonesia: PT. ASET DIGITAL BERKAT has been enabled it to carry out transaction activities related to crypto assets.

• Japan: Binance has acquired a licensed exchange in Japan, enabling it to operate as a Crypto Asset Exchange Service Provider.

• New Zealand: Investbybit Limited is registered financial service providers, allowed to provide a range of financial services involving virtual assets.

• Thailand: Gulf Binance Co., Ltd., a joint venture between Binance and Gulf Innova Co., Ltd., holds digital asset operator licenses.

Americas

• Mexico: Bmex Techfin, S. de R.L. de C.V. has a Vulnerable Activity registration enabling Binance to provide virtual asset services in Mexico.

Africa

• South Africa: Brickhouse Trading Ltd offers Futures and Options to users in South Africa in its capacity as a Juristic Representative of FiveWest OTC Desk (Pty), an authorised financial services provider.

5.4.3 Enforcement Actions

CFTC Enforcement Action The CFTC Charges Binance and its founder, Changpeng Zhao, with willful evasion of federal law and operating an illegal digital asset derivatives exchange.

The lawsuit alleges that Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited (collectively referred to as Binance), under the leadership of Changpeng Zhao (CZ) as owner and CEO, run the Binance digital asset trading platform and several other corporate entities as a deliberately complex joint venture. It's claimed that the defendants deliberately chose to overlook relevant sections of the Commodity Exchange Act (CEA) while pursuing a strategic approach of regulatory arbitrage for their commercial advantage:

Defendants have disregarded applicable federal laws while fostering Binance’s U.S. customer base because it has been profitable for them to do so. (p. 2)

ETH is labeled as a commodity:

Certain digital assets, including BTC, ETH, LTC, and at least two fiat-backed stablecoins, tether (“USDT”) and the Binance USD (“BUSD”), as well as other virtual currencies as alleged herein, are “commodities,” as defined under Section 1a(9) of the Act, 7 U.S.C. § 1a(9) (p. 9)

The CFTC argues that Binance is under direct control of CZ:

Zhao Controls Binance and Operates Binance as a Common Enterprise 82. Throughout the Relevant Period, Zhao has directly or indirectly owned and controlled all of the corporate entities, including Binance Holdings, Binance IE, Binance Services and dozens of other corporate vehicles included in the Binance ecosystem that operate the Binance platform together as a common enterprise (p. 26-27)

CFTC measures have been neglected:

Internally, Binance officers, employees, and agents have acknowledged that the Binance platform has facilitated potentially illegal activities. For example, in February 2019, after receiving information “regarding HAMAS transactions” on Binance, Lim explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering.” Lim’s colleague replied: “can barely buy an AK47 with 600 bucks.” And with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: “Like come on. They are here for crime.” Binance’s MLRO agreed that “we see the bad, but we close 2 eyes.” (p. 33)

The CFTC seeks to ban Binance CZ and all affiliates from:

• engaging in any of the conduct described in this case.

• from trading on registered entities

• Holding any commodity interest

• Directing any trading of digital assets

• Accepting any funds from anyone for the purpose of purchasing or selling digital assets

• Registering or exempting with CFTC

• Acting as a principal, officer, or employee of a registered entity.

• To disgorge (pay back in a fine) the trading profits, revenues, salaries, commissions, loans or fees derived from US persons.

• To make whole ever customer impacted within these violations

• To pay civil penalties assessed by the court

• To stand jury trial on this matter.

SEC Complaint On June 5th, 2023 SEC Filed 13 Accusations Against Binance Establishments and Founder Changpeng Zhao (CZ). Much of the SEC's lawsuit mirrors the accusations made in the CFTC's complaint.

The accusations encompass operating unlicensed exchanges, broker-dealers, and clearing organizations; providing false information about trading supervision and regulation on the Binance.US platform; unauthorized offering and sales of securities and misleading investors.

The lawsuit asserts that Binance, Binance.US, and CZ provided unregistered securities to the public in the form of BNB token and Binance-associated BUSD stablecoin. It also alleges that the staking service offered by Binance contravened securities regulations.

Second, Binance and BAM Trading have unlawfully engaged in unregistered offers and sales of crypto asset securities, including Binance’s own crypto assets called “BNB” and “BUSD,” as well as Binance’s profit-generating programs called “BNB Vault” and “Simple Earn,” and a so-called “staking” investment scheme available on the Binance.US Platform. In so doing, they have deprived investors of material information, including the risks and trends that affect the enterprise and an investment in these securities. (p.2)

Binance is further accused of commingling of customer funds. It suggested that CZ was covertly managing Binance.US, and that an entity owned and operated by CZ was artificially boosting the trading volume of Binance.US. The lawsuit repeatedly accuses Binance of enabling U.S. individuals (referring to U.S. citizens or those residing in the U.S.) to carry out trades on its platform, despite its assertions to the contrary.

BAM Trading and Binance have not disclosed Binance’s responsibilities and ongoing involvement in the custody and control of these crypto assets or their participation in the Binance.US Platform’s staking-as-a-service program and custody and control of crypto assets that are staked or accrued as part of that investment program. (p.44)

As of at least June 3, 2023, Binance continues to participate in the custody and control of Binance.US Platform’s digital wallets and these crypto assets through the various services it provides to the Binance.US Platform and its possession, custody, and control of private keys or portions thereof (sometimes referred to as “key shards”) associated with the security access protocols that govern the digital wallets holding certain of these crypto assets, the authorization for transfers, and operations as part of the staking-as-a-service program. (p. 46)

BAM Trading did not register with the SEC any of its offers and sales of its Staking Program—also public unregistered offerings of securities. (p. 70)

А temporary agreement between SEC and Binance was signed off on June 17th, 2023. As per the consent order, Binance.US is committed to ensuring that none of the Binance officials have access to private keys for wallets or hardware wallets, staking operations, withdrawals, transfers of assets or root access to Binance.US's Amazon Web Services resources.

The consent order permits BAM Trading to transfer customer crypto assets involved in trading, staking or gained through BAM's staking-as-a-service program to custodians BitGO or Aegis, under certain conditions. These include:

• The control of these assets, specifically the private and administrative keys, must be managed solely by BAM Trading officials and employees in the United States, or by BitGO and Aegis.

• If BAM Trading possesses the keys for these wallets, custody and control of these keys must be held in the United States by BAM Trading personnel.

• All transfers and withdrawals must have the approval of both BAM Trading and, if necessary, BitGO and Aegis.

• The Binance Entities cannot have possession, custody, or control of these assets, including any authority, whether formal or informal, direct or indirect, to control, transfer, or withdraw these assets.

5.4.4 Sanctions

Blog posts dated 2018 and 2019 announced collaborations with Refinitiv, a KYC services provider affiliated with Thomson Reuters and blockchain investigation software Chainalysis. Refinitiv will provide automated customer due diligence, while Chainalysis will enhance anti-money laundering (AML) compliance and investigation capabilities.

Binance has partnered with IdentityMind, a risk management platform offering KYC and AML services to improve data protection and compliance measures across Binance's global operations.

A comprehensive list of restrictions and eligibility requirements is provided with the Terms of Use. By accessing and using Binance services, User is confirming and promising that he has not not been included in any trade embargoes or economic sanctions lists. Binance reserves the right to decide where to operate and can choose to restrict or refuse its services in specific countries or regions based on its own judgement.

On the licenses section of their website Binance published several short statements regarding the customer onboarding process. Binance does not engage with or offer services to individuals living in restricted territories or business entities registered or conducting business in these areas. Restricted Jurisdictions include, but are not limited to, the United States of America, Canada, Cuba, Crimea Region, Iran, Syria, and North Korea.

Company mandates that all users undergo a Know Your Customer (KYC) procedure as part of their onboarding process. Recently, Binance has been actively self-promoting overview articles of their compliance program and membership with sansctions experts association.

Contrary to claims of compliance, Binance is being investigated by the U.S. Department of Justice's national security division for allegedly enabling Russians to bypass U.S. sanctions. The investigation is also focused on potential AML violations.

The French division of the exchange is under investigation by local authorities for allegedly providing illegal digital asset services and engaging in "acts of aggravated money laundering." According to media publications, the investigation pertains to Binance's operations as a digital asset service provider prior to receiving regulatory approval in May 2022, with accusations including investment operations, concealment, and conversion. Despite Binance being registered as a digital asset service provider with the French financial regulator, AMF, it is suspected of having poor money laundering checks.

5.4.5 Liability Risk

Notices regarding certain product restrictions are available on a separate page, incl. Binance commitments to fiat payment flows, digital wallet operations, activities under the purview of FCA, and Ontario Securities Commission.

Technology disclaimers are incorporated into the Binance ETH Staking Terms and Conditions. The Company retains the right to suspend access to user accounts, its platform, or services under certain circumstances. Responsibility for securing the necessary data network access to Binance services is entirely on the User.

10.1. Binance may, from time to time, suspend access to your Binance accounts, the Platform, and/or the Binance services, for both scheduled and emergency maintenance. Binance will make reasonable efforts to ensure that transactions on the Platform are processed in a timely manner, but Binance makes no representations or warranties regarding the amount of time needed to complete processing, which is dependent upon many factors outside of our control.

10.2. Although Binance makes reasonable efforts to update the information on the Platform, we make no representations, warranties, or guarantees, whether express or implied, that the content on the Platform, including information in relation to the Binance services, is accurate, complete, or up to date.

10.3. You are responsible for obtaining the data network access necessary to use the Binance services. You are responsible for acquiring and updating compatible hardware or devices necessary to access and use the Binance services, the Platform, and any updates thereto. Binance does not guarantee that the Binance services, or any portion thereof, will function on any particular hardware or devices. Binance services may be subject to malfunctions and delays inherent in the use of the internet and electronic communications.

Disclaimer of Damages and Limitation of Liability

• Binance and its affiliates won't be held liable for any losses due to the use of Binance services, unless a final legal judgement deems such damages as a result of Binance's gross negligence, fraud, willful misconduct, or intentional violation of law. Applicability of may vary based on jurisdiction.

• Liability of Binance and its affiliates due to the services offered by or on behalf of Binance, won't exceed the total fees paid by User to Binance in the twelve-month period before the event that gave rise to the liability claim.

Terms of Use preamble outlines that by using Binance Services, User agrees to resolve any dispute via legally binding arbitration. It further emphasizes the inherent risks in dealing with cryptocurrencies and their derivatives, which include substantial financial losses due to value fluctuations. User acknowledgments of risks is obtained, as well as acceptance of full responsibility for any adverse outcomes or losses resulting from transactions involving cryptocurrencies and their derivatives.

The arbitration process is more informal than court and there's no judge or jury. Court review of an arbitration award is limited and there may be less discovery than in court. The arbitration process shall be kept confidential, administered by the Hong Kong International Arbitration Centre and governed by the laws of Hong Kong. Disputes must be raised within a certain timeframe (one year), which limits the potential for long-term liability of Binance.

5.4.6 Adverse Media Check

A $100M hack hit Binance Smart Chain in October 2022.

Binance allegedly facilitated the transfer of approximately $2.35 billion in illicit funds through its exchange from 2017 to 2021.

A (bit outdated) online project is dealing with various fraud claims against Binance. Along with a lawsuits tracker, the website lists traders' complaints, reports on token fraud techniques, and complaints about NDA violations.

Section 6: Risk Management

This section will summarize the findings of the report by highlighting the most significant risk factors in each of the three risk categories: Market Risk, Technology Risk, and Counterparty Risk.

6.1.1 Market Risk

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.

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.

6.1.2 Technology Risk

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.

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.

6.1.3 Counterparty Risk

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.

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 binance.com exchange, U.S. regulators are placing a high level of scrutiny on Binance's operations.

6.1.4 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.