[ARFC] Add FBTC to Aave v3 Main Market on Ethereum

##[ARFC] Add FBTC to Aave v3 Main Market on Ethereum

author: @ACI

created: 2024-11-25


Summary

The proposal aims to onboard Ignition’s FBTC, to the Aave v3 protocol Main Market on Ethereum.

Motivation

FBTC is a cross-chain BTC protocol that uses the Threshold Signature Scheme network to enable secure, decentralized Bitcoin scalability across multiple blockchains. By leveraging multi-party computation, FBTC strengthens bridge security, safeguarding user assets and ensuring robust cross-chain interoperability. This setup also integrates a cross-chain hub, allowing seamless BTC transfers while reducing issues linked to Bitcoin L2 growth.

This new asset will broaden opportunities for Bitcoin holders aiming to participate in DeFi on Aave v3. The introduction of FBTC offers users more flexibility in leveraging their Bitcoin, enhancing liquidity and driving increased engagement within the Aave protocol.

With $480M in total value locked (TVL), FBTC is emerging as a compelling solution in Bitcoin bridging, supported by its upcoming Chainlink Oracle integration to accelerate growth across EVM networks.

Aave is positioned to benefit from a material increase in AUM resulting from FBTC deposits. This capital is being sourced by from within the Ignition team’s network. Several sophisticated investors are looking to user Aave at size and some teams have built products specifical for investors in anticipationg of the Aave listing. The Ignition team is expected to provide incentives supporting Aave users directly and also strategy providers built on top of Aave. @TokenLogic has been coordinating with various prospective users to ensure there is adequate demand ahead of the listing.

Benefits of listing FBTC

With the evolving landscape surrounding wBTC, having alternative wrapped BTC tokens available for use on Aave is crucial. With Antalpha and Mantle serving as core contributors, Ignition strong reputations position this initiative as a credible alternative to wBTC. This collaborative effort has already garnered over $850 million in TVL.

The cbBTC listing has demonstrated how impactful an Aave integration can be for both parties involved. Aave successfully captured 74% of the cbBTC supply, showcasing the significant growth potential and mutual benefits such integrations can bring.

Liquidity commitments

FBTC current points campaign is focused on maximizing user engagement and incentivizing interactions within the DeFi ecosystem. As part of this initiative, they aim to highlight Aave by listing it in the featured section, providing prominent exposure to its offerings. Additionally, they plan to create a new DeFi lending category, with Aave being the inaugural protocol, further showcasing its significance in this space.

To enhance user participation, they will introduce boosted points under the Sparks program, with Aave receiving 2x-4x sparks by default; double the rewards compared to other protocols, which offer 1x-2x.

For a limited period, it will further amplify rewards by offering a 4x-8x sparks boost on Aave V3 instance, driving even greater engagement and usage.

Specification

Ticker: FBTC

Contract address on mainnet: 0xC96dE26018A54D51c097160568752c4E3BD6C364

Chainlink oracle: 0xe5346a4Fd329768A99455d969724768a00CA63FB

Project: https://fbtc.com/

Reserves addresses: Bitcoin Reserve Address | FBTC

Proof of Assets dashboard: FBTC proof of assets dashboard

GitHub: GitHub - fbtc-xyz/fbtc-contract

Docs: https://docs.fbtc.com/

Audit: fbtc-contract/audits at main · fbtc-xyz/fbtc-contract · GitHub

Twitter: x.com

Parameters Value
Isolation mode No
Borrowable Yes
Collateral enabled Yes
Supply Cap 450
Borrow Cap 45
Debt Ceiling -
LTV 73%
LT 78%
Liquidation Bonus 7.5%
Liquidation Protocl Fee 10%
Variable Base 0%
Variable Slope1 4%
Variable Slope2 300%
Uoptimal 45%
Reserve Factor 20%
Stable Borrowing Disabled
Flashloanable Yes
Siloed Borrowing No
Borrowed in Isolation No
Liquid eMode N/A

Risk Parameters will be provided by Risk Services Providers at the earliest possible and ARFC will be updated with that feedback.

Disclosure

The ACI is not directly affiliated with Ignition and did not receive compensation for creation this proposal.

Next Steps

  1. If consensus is reached on this [ARFC], escalate this proposal to the Snapshot stage.
  2. If the ARFC snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal.

Copyright

Copyright and related rights waived via CC0.

Summary

LlamaRisk supports onboarding FBTC as collateral on Aave Core Instance. We welcome diversity in wrapped Bitcoin offerings and believe Aave should remain protocol-agnostic, which aligns with recent tBTC and cbBTC integrations. The asset, launched <6 months ago, exists in locked and unlocked variants, with the locked version showing strong growth (6.6K BTC TVL vs ±350 BTC for unlocked). This integration would unlock new utility and growth potential for FBTC0 (non-yield bearing).

Primary risks center on liquidity concentrated in a single Uniswap LP (likely Ignition-affiliated) and restrictions limiting minting, burning, and transfers to “qualified users.” Governance operates through a 5/8 multisig with significant permissions and no timelock, with many signers being known, competent, and value-add ecosystem partners. The asset is entirely governed and custodied by a security council that has yet to be fully created, introducing risks from uncertainty and dependence on current contributors’ continued engagement. Custody risk is also to be considered, given that BTC on Bitcoin is held by a security council consisting of Cobo, Mantle, and Antalpha Prime.

The system architecture is well-designed, with planned improvements, including expanding qualified users to KYC’d CEX users and a liquidity incentives program, which should help with diversification. The multisig is controlled by reputable ecosystem partners, and an ImmuneFi bug bounty ($100K) is expected in mid-December.

Expand to reveal our full Collateral Risk Assessment

Collateral Risk Assessment

1. Asset Fundamental Characteristics

1.1 Asset

FBTC is a bitcoin wrapper developed by Ignition. It initially launched in May of this year on Mantle and Mainnet. It is designed to increase BTC usage within DeFi across various networks. Utilizing different strategies such as lending or liquidity provision, this asset offers additional use cases (yield) to a traditionally underutilized coin (in DeFi).

Source: Ignition Proof of Assets Dashboard, 25 November 2024

The asset complies with the ERC20 standard and has 379 FBTC on mainnet and 292 FBTC on Mantle. There is also 47 FBTC on BNB Chain. It is 1:1 backed by BTC on the Bitcoin chain held in addresses with various security measures, including Threshold Signature Schemes and Multi-Party Computation (MPC) wallets.

The asset is a custodied offchain by a security council (more in Section 4) and can be brought on / off EVM chains through “Qualified Users”, who pass stringent KYB / AML checks. Smart contract permissions enforce this on EVM chains and MPC wallets enforce this on Bitcoin Chain.

The asset has two forms: FBTC0 (liquid) and FBTC1 (locked). This ARFC onboards FBTC0. FBTC1 is the locked, yieldbearing version of FBTC0 with a segregated, programmatic delineation between the two. FBTC1 is used in onchain DeFi strategies, and FBTC0 is held “naked”.

Most FBTC1 is held on Mainnet (see image above).

Source: GoPlus $FBTC Token Security Page, 25 November 2024

This asset is heavily concentrated at this time, with >80% of this asset being held by four addresses.

1.2 Architecture

FBTC operates through two primary components: a Bitcoin Chain deposit address and a mainnet minter, with access restricted to qualified users (entities that meet Ignition’s KYB requirements, including AML analysis, documentation, and industry-standard compliance, as verified by LlamaRisk’s General Counsel under NDA). The system employs three core workflows:

Minting Process:

  • Qualified users deposit BTC and initiate a mint request
  • Bridge Monitor verifies deposit and forwards to TSS gateway
  • Multiple TSS nodes validate requests through risk controls
  • FBTC minted upon validation

Burning Process:

  • User initiates burn request through Bridge contract
  • Bridge Monitor detects burn and sends a withdrawal request
  • TSS nodes validate and process BTC withdrawal
  • Bridge contract confirms completion

Cross-chain Transfer:

  • User initiates bridge contract request
  • FBTC burned on the origin chain
  • TSS gateway validates and confirms the transfer
  • FBTC minted on the destination chain

The system uses Chainlink’s Proof of Reserves to ensure 1:1 BTC backing. While the architecture is conceptually sound and prevents double counting, the qualified user requirement could impact arbitrage efficiency and DEX liquidity.

1.3 Tokenomics

FBTC’s tokenomics are straightforward. The number of FBTC in circulation is directly managed programmatically to ensure that the number of EVM FBTC is always backed 1:1 with BTC Chain BTC. No additional tokenomic considerations are at play with this asset.

2. Market Risk

2.1 Liquidity


Source: CoW Swap, 25 November 2024

Liquidity for this asset is good, with 7% slippage at a 620 FBTC / $55M trade size.


Source: Revert.Finance, 25 November 2024

The Uniswap V3 liquidity provision is staggered, preparing the asset for some potential depeg. All Uniswap liquidity is provided by one address that offers significant FBTC liquidity across many chains. This address was deployed by a Mantle address. Given Mantle addresses sit on the FBTC Security Council; it is unlikely that this liquidity will disappear as it would restrict product growth. Nevertheless, this high LP concentration presents significant risk as it may be immediately withdrawn, leaving liquidators unable to purchase and exchange FBTC collateralized in the protocol profitably.

This makes liquidity risk manageable in the short term but considerable if it does not improve in the future.

2.2 Volatility

Source: FBTC/WBTC via Coingecko Terminal , 25 November 2024

This asset has kept a tight peg on the value of underlying collateral.

2.3 Exchanges

Source: Coingecko FBTC, 25 November 2024

This asset is available on various decentralized exchanges, especially on Mantle. The majority of liquidity on Mainnet is paired to WBTC and held in one pool. This presents some degree of concentration risk in a black swan event. Liquidators may struggle to profitably buy collateral and swap it if the WBTC/FBTC pool goes out of range of the configured LP tick. Notably, no centralized exchanges are trading FBTC.

2.4 Growth


Source: FBTC/WBTC via Coingecko Terminal, 25 November 2024

FBTC has enjoyed limited growth when denominated in BTC prices. 2 BTC have been added to its market cap, an increase of 0.2% in BTC terms. Nevertheless, in USD terms, the asset has grown by ±$23,000,000.

3. Technological Risk

3.1 Smart Contract Risk

This asset has been audited three times. Neither BlockSec, MixBytes, nor Secure3 found any high or critical issues. This indicates a team with robust development practices, reducing smart contract risk.

No bug bounty is currently active. The Ignition team is working to have one running through ImmuneFi by mid-December. It will, on launch, be $100K for critical smart contract findings and Ignition reports. This is likely to increase as FBTC grows in adoption.

3.2 Price Feed Risk

An FBTC/BTC exchange rate Chainlink Feed is available. This robust oracle posts the exchange rate of BTC to FBTC onchain for smart contracts. Given its onchain, verifiable, programmatic data source, it is more robust than any web2-based pricing solution.

Chainlink Proof of Reserves verify that the asset is more than 1:1 backed, but this does little to price the asset in dollar terms. It is not enforced at minting. It functions through Blocksec, an onchain security firm that counts the amount of BTC held in FBTC contracts. This is shared to Chainlink via an API, with 10 nodes then posting this data to an aggregator contract. It introduces a dependency on Blocksec attesting the correct ratio of Bitcoin.

Given that all mainnet liquidity is paired with WBTC in a Uniswap pool, this is not a suitable oracle. An exchange rate oracle may be used in line with other wrapped Bitcoin assets on Aave. This presents some friction for liquidations should “qualified users” not be able to redeem / mint the asset and, therefore, risk.

3.3 Dependency Risk

This system has a variety of dependencies:

  • Architectural
    Significant technological dependencies exist in this system architecture, including Threshold Signature Schemes, Bridge Monitors, and Bridge Contracts. The system may function in an unintended way if any of them fail.
  • Custodian
    This Bitcoin is custodied on Bitcoin chain. This introduces custodian risk.
  • MPC
    EVM chain contracts are managed by Cobo MPC wallet. This introduces a dependency on the continued operation of this wallet. Many assets use this MPC solution.
  • PoR
    FBTC benefits from the continued operation of the Chainlink PoR. Our eyes believe its continued operation is necessary for this asset’s maintenance.
  • Qualified users
    “Qualified users” are a significant dependency in this system. Given the difficult nature of becoming one, few will achieve this status. This results in a concentration of those able to mint / burn / transfer the asset, potentially reducing FBTC velocity. The FBTC system is dependent on these qualified users.

While these dependencies present risk, they are not so great that we cannot recommend onboarding the asset.

4. Counterparty Risk

4.1 Governance and Regulatory Risk

This asset has no onchain governance. Ignition has yet to make plans to decentralize asset management. Should these change, Ignition has indicated that they will inform LlamaRisk (who will monitor this matter).

Instead, the asset is entirely managed by Ignition. This team is largely based in Singapore and Hong Kong. Singapore, which is known for being one of the more forward-thinking cryptocurrency regulatory regimes, has no existing DeFi specific laws. Nonetheless, Singapore’s Monetary Authority (MAS) is paying more attention to decentralized finance—uncertainty stemming from limited clarity results in risk.

Hong Kong is likewise similarly unclear on Decentralized Finance legislation. While not the most hostile jurisdiction to cryptocurrency activity, limited clarity on this issue in Hong Kong once more introduces regulatory risk.

A security council consisting of Cobo, Mantle, and Antalpha Prime currently runs TSS nodes and is responsible for Bitcoin custody MPC utilizing contracts. This introduces additional counterparty risk. It is worth mentioning that Cobo and Mantle are established DeFi actors with a long history of good faith contributions. Antalpha Prime appears to be in part owned by BITMAIN and ANTPOOL, both Chinese cryptocurrency mining entities collectively responsible for >25% of Bitcoin’s hash rate. This introduces risk driven by these entities’ obscurity, mitigated by the clear council power limits detailed in protocol documentation. This security council is expected to grow in membership, presenting further uncertainty risk.

4.2 Access Control Risk

The FBTC system employs a 5/8 GnosisSafeProxy ownership model across its core contracts with significant permissions:

FBTC Contract Powers:

  • Pause functionality
  • Qualified user management
  • Ownership transfer
  • FBTC rescue capabilities
  • Fee structure modifications
  • Parameter adjustments

Bridge Contract Powers:

  • Qualified user management
  • Contract pausing
  • Fee parameter control
  • Ownership transfer
  • Self-upgrade capability

Minter Contract Powers:

  • Role management
  • Mint request confirmation
  • Ownership transfer
  • Bridge address modification
  • Self-upgrade capability

The Safe signers include several addresses associated with the Mantle deployer and ecosystem partners. While the system clearly documents roles and permissions, it lacks timelocks and concentrates significant control in a single Gnosis Safe.

This introduces centralization risk - a compromise of sufficient signer addresses could affect the entire system. While the 5/8 threshold provides some security, the concentration of critical permissions in one Safe presents notable risks. Therefore, the access control risk is high but actively managed through multi-signature requirements.

Note: This assessment follows the LLR-Aave Framework, a comprehensive methodology for asset onboarding and parameterization in Aave V3. This framework is continuously updated and available here.

Aave V3 Specific Parameters

We will present joint parameters recommendations with @ChaosLabs. LlamaRisk suggests parameters aligned with other, growing wrapped BTC assets, with some LT/LTV premium accounting for the centralized and developmental ownership.

Price feed

Like tBTC and cbBTC, we propose using the BTC/USD Chainlink feed as a price oracle. This is the most reliable, decentralized solution available, and that will provide accurate pricing in times of stress.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.

2 Likes

@TokenLogic supports the proposed integration of FBTC into the Core instance of Aave v3. After spending some time discussing the near term roadmap for FBTC with Ignition, we present some other considerations complimentary to the risk analysis provided by LlamaRisk and Chaos Labs.

We expect the following from onboarding FBTC:

  • Over 300M stablecoin debt at competitive market rates;
  • Incentives for users who deposit FBTC;
  • Enhance liquidity upon ByBit listing; and,
  • Ignition Aave deployment with stablecoin supply.

Provided reasonable borrowing conditions exist, we expect strong FBTC adoption on the Core Market.

There exists considerable upside via deploying a dedicated instance of Aave that has both stablecoin liquidity and FBTC commitments being progressed. Further details are to emerge when the TEMP CHECK is submitted for governance consideration.

Click me

Stablecoin Demand

Based upon feedback from various FBTC holders, we anticipate FBTC to generate over $300M in stablecoin demand across USDC, USDT, USDS and GHO. This is subject to Aave Protocol being able to offer liquidity at competitive borrow rates.

Screenshot 2024-11-26 at 16.20.15

Engaging with some players in the mining industry has highlighted the potential for Aave’s deployment to foster significant adoption within the mining community. These entities often have a consistent demand for borrowing USD to cover operational expenses, presenting an opportunity for Aave to cater to a substantial and reliable source of borrowing activity. This alignment between Aave’s offerings and the financial needs of the mining sector positions it as a valuable tool for miners, potentially driving broader retail adoption.

Note: The continued success of sUSDe may lead to short term elevated borrowing rates that dampen the immediate upside of FBTC. sUSDe is expected to be a strong catalyt for higher borrow rates in the forseeable future.

Roadmap and Strategic Integration

ByBit is expected to onboard FTBC as early as Q1, 2025. This integration will ensure seamless minting and burning operations via deposit and withdrawals. The integrations mirrors Coinbase’s approach for DeFi liquidity. We expect FBTC’s liquidity to benefit greatly from this integration.

Users depositing FBTC on ByBit will immediately burn FBTC in exchange for BTC, while withdrawals will automatically mint FBTC to their wallets. This streamlined process significantly enhances liquidity and enhances the pegged nature of FBTC.

In the meantime, we are expecting additional liquidity to be deployed on-chain to support the Aave listing. This is most likely via Maverick v2 or ECLPs on Balancer v2 via Gyroscope.

FBTC Deposit Demand

Ignition has committed to providing incentives on FBTC deposits. Aave Protocol users are to receive a premium relative to other DeFi integrations. With additional incentives and liquidity, this combination is expected to deepen engagement with institutional participants. This arrangement grants Aave a commanding position in the lending vertical as the cornerstone for FBTC activity.

FBTC Borrowing Demand

A catalyst for FBTC borrowing demand is the ability for Babylon to receive FBTC deposits. Any previous challenges relating to custody of the underlying has been resolved and the integration is progressing. This use case has the potential to drive meaningful demand for FBTC and is expected to support the business case for deploying an instance of Aave protocol with Prime market like growth prospects.

Future Considerations

A dedicated instance of Aave Protocol to facilitate:

  • Stablecoin liquidity sourced by Ignition;
  • Ignition aligned LRT borrow demand; and,
  • Pendle PTs benefiting from points and LRT derived yield.

Note: The liquidity sourced from Ignitions partner(s) is conditional upon exclusively being back by FBTC collateral. This is a barrier preventing stablecoin from being deposited in the Core market to support FBTC collateral holders.

Engagements with the BTC mining community highlight a significant opportunity to align Aave’s offerings with their financial needs, leveraging consistent demand for liquidity to drive sustained value and foster a mutually beneficial relationship.

2 Likes

Given the information from @TokenLogic there seems to be a chance for the DAO to capture some good revenue with fBTC and maybe a dedicated market for Ignition.
Although the DAO is currently voting on having a 3 instance based system, if there are good reasons to create a market outside of this I would be fine. As long as the rationale behind it is good enough to justify it towards the DAO.