Summary
A proposal to adjust WBTC’s risk parameters.
Motivation
Following an announcement from BitGo that the company would be creating a joint venture with BiT Global to “diversify [WBTC] custody operations and cold storage across multiple jurisdictions,” Chaos Labs has engaged in detailed research on how this affects WBTC’s risk profile. Previously, we posted an update stating that issuing a risk-off recommendation immediately after the announcement would be premature. Since then, we have engaged in discussions with the BitGo team and published research on proofs of reserve and attestations for wrapped assets.
Following this process, we find that the material risk of WBTC has changed, given its new jurisdictional set up, which may increase regulatory risk, as well as its new “strategic partnership” with Justin Sun, which may increase counterparty risk.
As discussed in the X thread linked previously, it is impossible to eliminate the need for trust when it comes to centralized wrapped assets. However, users and protocols should demand transparency from issuers, including detailed legal structures and complete ownership disclosures. Additionally, the announcement has sparked new competition, providing the Aave protocol more options for BTC-linked assets. As such, we find it prudent to begin changing WBTC’s risk parameters to ensure the Aave protocol is protected.
WBTC is one of the largest markets on Aave, so making any changes to its parameters is critical. We welcome community feedback on the proposed parameters.
Supply and Borrow Caps
To prevent significant new deposits, we propose decreasing supply and borrow caps for all WBTC markets to a level 5-15% higher than current utilization. This ensures that users can still manage the health of their WBTC collateral positions while limiting market growth. This is a critical change to manage Aave’s exposure to WBTC.
Liquidation Threshold
An asset’s liquidation threshold determines the health at which a position is liquidated. Setting the liquidation threshold lower ensures that there is a larger buffer with which to process liquidations, helping to reduce the risk of bad debt, especially during periods of stress. We recommend reducing WBTC’s LT to create a larger buffer. However, we note that reducing LT can induce liquidations for previously healthy positions. We have thus tailored our recommendations to each market to mitigate potentially induced liquidations at current price levels (included in the Potential Liqs. column below; note that these values will fluctuate as the price of BTC and borrowed assets change). WBTC.e’s reduction on Avalanche to 60% is due to the market being frozen. As markets deleverage with reduced LTVs, we may continue recommending LT reductions.
LTV
LTV determines the borrowing power of users’ collateral. Given that WBTC is primarily used as a collateral asset, it is important to reduce this figure to limit future borrowing against WBTC. For all V3 markets (except Avalanche, where WBTC.e is frozen), LTV is currently set to 73%. We propose reducing LTVs to maintain a 5 percentage point difference between LTV and LT in each respective market.
Reserve Factor
Increasing Reserve Factor is one of the most commonly used levers when limiting or reducing an asset’s market on Aave. However, in this instance, we note that this will not be as effective on its own. As shown above, WBTC is primarily used a collateral asset and generally has limited borrow demand, and thus a low borrow and supply rate; it currently offers a supply APY of 0.04% on Ethereum. We recommend increasing the Reserve Factor to 40% for all WBTC markets where it is currently lower than that figure, reflecting the increased risk associated with this asset. We may recommend further changes to this parameter in the future.
Specification
Given these observations, we recommend making the following changes, with the new recommended value following the arrow:
| Version | Asset | Chain | Reserve Factor | LT | Potential Liqs. | LTV | Supply Cap | Borrow Cap |
|---|---|---|---|---|---|---|---|---|
| V3 | WBTC | Arbitrum | 20% → 40% | 78.0% → 73.0% | $121 | 73.0% → 68.0% | 5000 → 3300 | 1115 → 250 |
| V3 | WBTC | Optimism | 20% → 40% | 78.0% → 73.0% | $568 | 73.0% → 68.0% | 1200 → 600 | 250 → 40 |
| V3 | WBTC | Polygon | 20% → 40% | 78.0% → 75.0% | $1,300 | 73.0% → 70.0% | 3100 → 1750 | 851 → 70 |
| V3 | WBTC | Ethereum | 20% → 40% | 78.0% → 76.0% | $533 | 73.0% → 71.0% | 43000 → 37500 | 28000 → 3000 |
| V3 | WBTC.e | Avalanche | 20% → 40% | 67.0% → 60.0% | $94.30 | 0.0% | 2000 → 175 | 1100 → 7.5 |
| V2 | WBTC | Ethereum | 80% | 82.0% → 78.0% | $1,400 | 72.0% → 73.0% | 0 | 0 |
| V2 | WBTC | Polygon | 99.99% | 75.0% → 74.0% | $1,100 | 70.0% → 69.0% | 0 | 0 |
| V2 | WBTC.e | Avalanche | 75% | 70.0% → 55.0% | $1,100 | 0.0% | 0 | 0 |
Next Steps
- Following community feedback, submit the ARFC for a snapshot vote for final approval.
- If consensus is reached, submit an Aave Improvement Proposal (AIP) to implement the proposed updates.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
Copyright and related rights waived via CC0