Can someone explain in layman terms how yield is produced when staking on coinbase?

Should be the same way yield is produced for all staking, from protocol level emissions (inflation).

Are they gambling with my Solana?

Any custodial service could be doing that, but Coinbase is very reputable and it would be unlikely.

Is my solana at risk?

Yes, but risk will always be present and staking with Coinbase is a pretty low risk custodial option.

Where does the extra Solana come from that they are paying me every few days?

Same as my first answer.