[ARFC] Core & Base - BTC Correlated Asset Update


title: [ARFC] Core & Base - BTC Correlated Asset Update
author: @TokenLogic
created: 2025-02-04


Summary

This proposal focuses curating LBTC for growth across Core and Base instances of Aave v3. Several initiatives are included:

  • Onboard LBTC on Base;
  • Create LBTC/cbBTC eMode on Core instance;
  • Create LBTC/fBTC eMode on Core instance;
  • Create LBTC/cbBTC eMode on Base instance; and;
  • Amend cbBTC Borrow Rate.

Motivation

Lombard has demonstrated consistent growth, surpassing $1.8B in TVL, and has established itself as the leading BTC LST in the market. Its initial onboarding, coupled with the first liquid eMode alongside WBTC, quickly reached supply caps, highlighting strong demand for leverage loops between LBTC and BTC wrappers.

On Aave’s Core instance, cbBTC is the second-largest BTC wrapper. While it experienced strong growth post-listing, the absence of borrowing opportunities has limited its potential. The onboarding of LBTC introduces a new growth avenue for both LBTC, cbBTC and fBTC. The new liquid eModes will allow users to loop LBTC exposure while offering attractive deposit rates for cbBTC and fBTC holders, incentivizing them to supply liquidity and fuelling this strategy.

Specifically to fBTC, a points program will be applied to users who deposit fBTC and also, to different users who borrow fBTC. Leveraging LBTC/fBTC is expected to stimulate demand for fBTC.

To support this growth strategy, the optimal utilization rate (Uoptimal) for cbBTC and fBTC should be increased from 45% to 80%, aligning them with wBTC. The initial Uoptimal was set when cbBTC had minimal borrowing demand, but the introduction of this liquid eMode is expected to significantly boost cbBTC borrowing activity, warranting this adjustment. For fBTC, not yet listed, the opportunity between Lombard and Ignition developed relatively recently.

Additionally, Base has emerged as the second-largest platform for cbBTC growth. Onboarding LBTC to Base will replicate this successful dynamic, with LBTC users leveraging existing cbBTC liquidity. For Lombard, Base is already the third-largest ecosystem (after Mainnet and Berachain), with over $117M in TVL, making it an ideal environment to extend this growth strategy.

Specification

Core Instance

Amend cbBTC Borrow rate Uoptimal

Description Current Proposed Change
Borrow Rate Uoptimal 45% 80% +35%

Amend Proposed fBTC Borrow rate Uoptimal

Description Current Proposed Change
Borrow Rate Uoptimal 45% 80% +35%

Liquid E-modes

Parameters Value Value Value Value
Asset LBTC wBTC cbBTC fBTC
Collateral Yes No No No
Borrowable No Yes Yes Yes
Max LTV 84% - - -
Liquidation Threshold 86% - - -
Liquidation Bonus 3.00% - - -

Note: This ARFC assumes fBTC has already been listed on Aave by the time the Snapshot vote has finished. If not, the proposed changes shall feature in the AIP that onboards fBTC to Aave Core instance

Base Instance

Onboarding of LBTC

Parameters Value
Network Base
Isolation mode No
Borrowable Yes
Collateral enabled Yes
Supply Cap 800
Borrow Cap 80
Debt Ceiling -
LTV 70%
LT 75%
Liquidation Bonus 8.5%
Liquidation Protocol Fee 10%
Variable Base 0%
Variable Slope1 4%
Variable Slope2 300%
Uoptimal 80%?
Reserve Factor 20%?
Stable Borrowing Disabled
Flashloanable Yes
Siloed Borrowing No
Borrowed in Isolation No

Liquid E-modes

Parameters Value Value
Asset LBTC cbBTC
Collateral Yes No
Borrowable No Yes
Max LTV 84% -
Liquidation Threshold 86% -
Liquidation Bonus 3.00% -

The above is to be reviewed with feedback from Risk Service Providers to be incorporated.

Amend cbBTC Borrow rate Uoptimal

Description Current Proposed Change
Borrow Rate Uoptimal 45% 80% +35%

Disclosure

TokenLogic does not receive any payment for this proposal.

Next Steps

  1. Gather feedback from the community.
  2. If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage.
  3. If Snapshot outcome is YAE, escalate this proposal to the AIP stage.

Copyright

Copyright and related rights waived via CC0.

Summary

LlamaRisk supports the initiative; however, we propose slightly adjusted parameters for LBTC onboarding on Base due to insufficient liquidity relative to the proposed requirements. We also recommend disabling LBTC borrowing on Base since there is no envisioned utility beyond shorting the asset. Regarding the uOptimal changes for cbBTC and fBTC, as well as the E-mode additions on both the Core and Base instances, we support these modifications.

Overall, the proposal aims to bolster the leveraged looping of LBTC against other BTC wrappers. LBTC holders currently receive points only - there is no redistribution of Babylon staking yield at this time. We believe the future native LBTC yield will generate a significantly larger demand. We previously published a complete review of LBTC for its onboarding on the Core instance.

LBTC on Core instance

The LBTC supply/borrow caps were recently increased from 800 to 1600, and the supply utilization quickly grew to 70% as of February 5th, 2025, indicating a strong demand from the community.


Source: ChaosLabs Community Analytics, February 5th, 2025

In the core instance, LBTC is primarily used as collateral against WBTC at 85%, followed by cbBTC at 9.5%. $70m out of $82m of all borrows against LBTC are made through the LBTC/WBTC E-mode, showing that leveraged looping is the main driver of borrowing demand. Adding cbBTC and fBTC (soon to be onboarded) will provide more BTC wrappers to borrow against LBTC for that use case.

LBTC on Base

Liquidity

Source: Kyberswap, February 5th, 2025

We found 172 LBTC ($16.5m) available within an 8.5% price impact on Base. Following our usual methodology, this would yield a supply cap of around 350 LBTC. Those figures are more than half of what is being proposed for the Base instance; therefore, we recommend decreasing those figures to align better with the available LBTC liquidity on Base.

We recommend disabling LBTC borrowing entirely, as its primary function will serve as collateral against other BTC wrappers for leveraged looping strategies. We support the proposed E-mode parameters, which align with the LBTC/WBTC E-mode configuration on the Core instance.

Access Controls (bridge infra)

Bridging transactions between Base and other networks requires the consortium’s approval, an off-chain federation organized by LombardFinance, and CCIP from Chainlink. LBTC can be minted from BTC and directly redeemed for BTC on Base.

Here are the main controlling wallets:

Here are the contracts related to the LBTC deployment on Base:

  • Bridge: Allows for the bridging of LBTC between Base and other chains. It is deployed behind a TransparentUpgradeableProxy and is owned by the LombardTimelock.
  • LBTC: The ERC20 token contract for LBTC. It is deployed behind a TransparentUpgradeableProxy contract from OpenZeppelin, is owned by Multisig A and is pausable by Multisig B.
  • LBTC Boring Vault: Restaking vault managed by EtherFi.
  • ConsortiumGovernance: Responsible for verifying signatures made by the consortium. Deployed behind a TransparentUpgradeableProxy contract from OpenZeppelin, it is owned by LombardTimelock.
  • BasculeDrawbridge: Independently verify the correctness of BTC deposits and withdrawals into and from LombardFinance. It is owned by EOA A and is operated by Cubist.

The LBTC contract has multiple roles for which we could find the following assignment:

The BasculeDrawbridge contract has multiple roles for which we could find the following assignment:

  • DEFAULT_ADMIN_ROLE is assigned to EOA A
  • DEPOSIT_REPORTER_ROLE is not assigned
  • PAUSER_ROLE is assigned to EOA B
  • VALIDATION_GUARDIAN_ROLE is assigned to EOA A
  • WITHDRAWAL_VALIDATOR_ROLE is assigned to the LBTC contract

Aave V3 Specific Parameters

For the onboarding of LBTC on Base, we propose half of the proposed supply cap, a 50% reserve factor (to align with LBTC on Core instance), and to disable the borrowing of LBTC. We agree with the other proposed parameters and E-modes.

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.