Overview
Chaos Labs supports listing FBTC on Aave V3’s Ethereum Main instance. Below is our analysis and initial risk parameter recommendations.
Technical overview
FBTC is a BTC wrapper by Ignition that allows holders to participate in DeFi activities. As described in its documentation, the token is minted by users depositing native BTC to a custodial address (each “qualified user” is assigned their own) and initiating a mint request with the Bridge contract; the Bridge Monitor then detects the minting request and sends the request to the TSS Gateway, which initiates a contract to confirm minting, after which, TSS Nodes (using independent risk control systems) co-sign using the MPC algorithm to create a transaction signature. Following these procedures, the FBTC token is minted. Redemptions work in a similar, reversed flow, as shown below.
The FBTC protocol employs custodial addresses, managed through Multi-Party Computation (MPC) and Multi-Signatures, to maintain the security of the assets backing FBTC. The protocol also utilizes Chainlink’s Proof of Reserves (its total native BTC backing, including FBTC1), which can be found here for Ethereum. This aims to provide real-time verification of reserve assets.
FBTC employs a different fee structure based on the type of operation. Minting FBTC incurs no fee (0%), with an average request completion time of approximately 4 hours. In contrast, burning FBTC is subject to a variable fee structure that starts at 0.2% and decreases for larger amounts, alongside a flat fee of 0.01 FBTC. Burn requests typically take significantly longer to process compared to minting, making arbitrages of a downside deviation impractical. For cross-chain transfers between EVM-compatible networks, a fixed fee of 0.0001 FBTC is applied, enabling cost-efficient arbitrage opportunities across chains.
The token contract on Ethereum is currently controlled by a 5-of-8 Gnosis Safe multisig. Since September, the multisig has only completed one transaction, adding destination chains to the FireBridge contract, which also maintains the qualified users’ list.
FBTC Backing Exposure
There are two forms of the asset: FBTC0 and FBTC1; the two assets represent circulating and deposited assets, respectively. FBTC0 is the standard, fully liquid FBTC token backed 1:1 by BTC in Ignition’s custody. Conversely, FBTC1 represents FBTC that has been deposited into a protocol, effectively transferring custody of the underlying BTC to the protocol’s strategy address. This conversion occurs when a user deposits FBTC into a protocol (e.g., Avalon, Pump, Solv), which withdraws the corresponding Bitcoin from the FBTC contract to its strategy. FBTC1, therefore, is not “locked” in the traditional sense; rather, it serves as a representation of the protocol’s BTC owed to the FBTC ecosystem. When users withdraw their FBTC from the protocol, the underlying Bitcoin must be returned to the FBTC contract, converting FBTC1 back to FBTC0. This design makes FBTC1 a dynamic measure of FBTC utilized in DeFi protocols, indirectly reflecting protocol adoption and TVL.
Thanks to the dynamic mint and burn flow of FBTC1, the risks stemming from the partners’ contracts are isolated from the FBTC0 token. During a hack of a partner protocol, if the underlying BTC is stolen, the partner protocol is unable to convert the FBTC1 back to FBTC0, hence not inflating the FBTC supply relative to the backing. Meanwhile, if the partner’s Ethereum contracts get hacked, the FBTC1 is likely to be the asset stolen, which cannot be redeemed to FBTC0 without having control of the underlying BTC assets in the partner’s strategy address.
On the other side, this dual-token system offers significant benefits to FBTC, ensuring that the supply deposited into partners’ vaults, such as restaking, does not get redeemed and converted to a different wrapped BTC asset prior to the redemption from the users.
This ARFC is intended to onboard FBTC0, and currently, the plurality of FBTC0 are on Ethereum, followed by Mantle. While FBTC1 is deposited into DeFi protocols, it still represents accessible TAM for the Aave protocol.
Market Cap and Liquidity
FBTC’s market cap has grown consistently on Ethereum since September 2024. While the FBTC0 supply on the chain has remained stable, fluctuating between 1200 and 385, the FBTC deposited into DeFi protocols (FBTC1) has shown strong growth, reaching a peak of 8100 FBTC.
The entirety of the asset’s liquidity is concentrated within 2 WBTC/FBTC Pools on Uniswap V3. Both pools are recognized by Odos, although the 0.01% WBTC/FBTC pool is the largest and facilitates the vast majority of volume.
Simulated 150 FBTC for USDC swap; Odos.
This 0.01% pool is currently skewed, with 100.76 WBTC and 27.67 FBTC, indicating sufficient liquidity for FBTC. The 0.3% pool, on the other hand, has just 0.99 WBTC and 87.66 FBTC.
Overall, the asset maintains a total TVL of $20M between the two pools, of which $10M is in WBTC buy-side liquidity. The DEX liquidity of FBTC is increasing steadily, even though the asset’s liquidity is provided by a singular entity that we were able to identify as Ignitia. Its average daily trading volume across all venues over the last 180 days was $26.7M.
Volatility
Relative to BTC, FBTC has a 30-day annualized volatility of 7.96%, down from 12.14% over the past 180 days.
This is slightly high for a pegged asset, though the decreasing volatility is a positive sign that the asset’s pricing is improving even as BTC volatility has increased. FBTC has displayed no persistent discounts relative to WBTC in its primary Uniswap pool.
LTV, Liquidation Threshold, and Liquidation Bonus
Given the volatility relative to BTC, we recommend a Liquidation Bonus of 7.5%, an LTV of 73%, and an LT of 78%, aligned with other BTC wrappers like cbBTC on Base.
Supply and Borrow Cap
Chaos Labs’ typical approach to setting initial supply caps involves setting the supply cap to 2x the liquidity available under the Liquidation Bonus. This leads us to a recommendation of 200 FBTC, more than 50% of supply on Ethereum. While we normally would not recommend setting it higher than 50%, the fact that FBTC1 can be burned into FBTC0 means that the asset’s “true” on-chain supply is significantly higher than the 390 FBTC figure.
Thanks to its prolific utilization within restaking protocols, FBTC represents a prime asset for borrow demand to be utilized within the DeFi ecosystem. Hence, we recommend setting a borrow cap of 50% of the proposed supply cap.
Interest Rate Curve
Given the current absence of BTC LRTs on Aave, we anticipate limited initial demand for FBTC. As such, we recommend setting the UOptimal at 45% to reflect expected utilization rates, with plans to increase this value following the listing of additional BTC assets.
Additionally, we suggest aligning the Interest Rate Curve for FBTC with that of WBTC, as the two assets are expected to exhibit comparable demand dynamics.
Oracle Configuration/Pricing
Below is a chart of the FBTC/BTC Chainlink exchange rate, showing numerous surges in the exchange rate likely derived from minting and burning delays in which FBTC’s reserves exceed its supply. The spikes make this exchange rate infeasible to use, as users borrowing the asset could be liquidated in the event of an exchange rate spike that is not indicative of the asset’s value changing.
Given all the risks outlined previously in this post and the unfeasibility of using the FBTC/BTC Chainlink exchange rate, it is preferable to price the asset using the BTC/USD market oracle.
Specification
Following the above analyses, we have aligned with @LlamaRisk on the following parameter recommendations:
| Parameter | Value |
|---|---|
| Network | Ethereum |
| Isolation Mode | No |
| Borrowable | Yes |
| Collateral Enabled | Yes |
| Supply Cap | 200 |
| Borrow Cap | 100 |
| Debt Ceiling | - |
| LTV | 73.00% |
| LT | 78.00% |
| Liquidation Bonus | 7.50% |
| Liquidation Protocol Fee | 10% |
| Variable Base | 0.0% |
| Variable Slope1 | 4.0% |
| Variable Slope2 | 300% |
| Uoptimal | 45% |
| Reserve Factor | 50% |
| Stable Borrowing | Disabled |
| Flashloanable | Yes |
| Siloed Borrowing | No |
| Borrowable in Isolation | No |
| E-Mode Category | N/A |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
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