Summary
Chaos Labs supports the following changes of this proposal:
- 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;
- Amend cbBTC and fBTC Borrow Rate.
However, we recommend the adoption of slightly more conservative parameters for the Base Instance, and introduce the following changes:
- Introduce tBTC as a viable debt asset within LBTC-collateralized eMode configurations.
- Amend cbBTC, fBTC and tBTC Slope 2
- Increase cbBTC, fBTC and tBTC Reserve Factor
This post includes an analysis of the expected outcome of the proposed changes.
Motivation
Onboard LBTC
As an in-depth technical coverage of LBTC has been previously provided in conjunction with its asset listing proposal on the Ethereum Core instance, we refer to the analysis listed here. In the following paragraphs, we cover the differences between the assets in the Ethereum chain and their base-bridged counterparts.
Mint/Redeem
Minting LBTC involves depositing BTC into Lombard, which then gets staked with Babylon. The deposit is verified by the Security Consortium, and once approved, LBTC is minted on Ethereum. Redeeming requires burning LBTC, which triggers the unstaking of BTC from Babylon. The process includes a 7-day withdrawal period and a 0.0001 LBTC Network Security Fee. Additional options include depositing LBTC into the Lombard DeFi Vault, which has no deposit fees but carries a 1.5% annual management fee and a three-day withdrawal processing period.
Slashing
Slashing only occurs if over one-third of the total stake signs conflicting blocks, significantly reducing risk. Validators are not slashed for being offline, unlike Ethereum, and slashing applies only if they actively vote on duplicated blocks. The initial slashing rate is 10% but can be adjusted via network consensus. Additionally, slashed funds may be timelocked rather than fully burned, further mitigating losses.
Market Cap and Liquidity
Since its inception, LBTC’s supply and corresponding TVL have shown steady growth. Currently, the supply of LBTC on Base has reached 1,259, representing 6.5% of the total TVL.
The DEX Liquidity of LBTC has demonstrated resilience over the last three months, which was shortly after the deployment. It is only slightly declining from a peak of $40M TVL, largely caused by the decline in BTC’s price. The current DEX liquidity is composed largely of BTC, representing $23M of buy liquidity for the asset.
Volatility
LBTC on base has demonstrated remarkable stability against cbBTC in its biggest Aerodrome pool, suggesting an efficient execution of liquidations during times of high market volatility.
Relative to BTC, LBTC has exhibited a 7.66% daily annualized volatility. This has not decreased in the last 30 days, measuring at 9.85%.
Bridging
LBTC adopts Chainlink CCIP Bridge technology to transfer assets between chains. The bridge between Base and Ethereum takes roughly one hour to finalize a transaction. The fast bridging speed enabled the liquidity pools to be arbitraged efficiently between the two chains, effectively enhancing the stability and liquidity available.
Supply and Borrow Cap
Following Chaos Labs’ methodology for initial caps, which considers available DEX liquidity and the asset’s volatility, we recommend setting an initial supply cap of 400 LBTC. Additionally, given the lack of use cases for borrowing LBTC and yield-bearing assets and the risks posed by them, as outlined here, we recommend setting LBTC as non-borrowable.
LT, LTV, and Liquidation Bonus
While the asset has demonstrated strong peg adherence and reliable liquidity, we recommend adopting a slightly lower LT and LTV due to the additional risk posed by bridging speed and a more limited on-chain supply. Hence, we recommend adopting 73% and 68%, respectively.
Recommendation
Based on this, we propose the following parameters:
| Parameters | Value |
|---|---|
| Network | Base |
| Isolation mode | No |
| Borrowable | No |
| Collateral enabled | Yes |
| Supply Cap | 400 |
| Borrow Cap | - |
| Debt Ceiling | - |
| LTV | 68% |
| LT | 73% |
| Liquidation Bonus | 8.5% |
| Liquidation Protocol Fee | 10% |
| Variable Base | - |
| Variable Slope1 | - |
| Variable Slope2 | - |
| Uoptimal | - |
| Reserve Factor | - |
| Stable Borrowing | Disabled |
| Flashloanable | Yes |
| Siloed Borrowing | No |
| Borrowed in Isolation | No |
E-Modes
Thanks to the high demand for BTC-correlated assets as borrow demand against LBTC collateral, we support all of the proposed E-Modes. Additionally, the separation of liquid E-Modes on the Ethereum Core instance allows for finer granularity in order to better adapt the risk parameters to the asset in the future. We further recommend the creation of an additional LBTC/tBTC Liquid E-Mode on Ethereum with parameters aligned to the rest of the E-Modes proposed in this post.
However, for LBTC on Base, we take a slightly more conservative approach by lowering the LT and LTV, given the aforementioned reasons. Additionally, we note that the proposed LBTC/WBTC E-mode on the Ethereum Core instance already exists with the proposed parameters.
Based on this, we propose the following parameters:
Ethereum Core Instance:
| Parameter | Value | Value |
|---|---|---|
| Asset | LBTC | fBTC |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| LTV | 84.00% | - |
| LT | 86.00% | - |
| Liquidation Penalty | 3.00% | - |
| Parameter | Value | Value |
|---|---|---|
| Asset | LBTC | cbBTC |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| LTV | 84.00% | - |
| LT | 86.00% | - |
| Liquidation Penalty | 3.00% | - |
| Parameter | Value | Value |
|---|---|---|
| Asset | LBTC | tBTC |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| LTV | 84.00% | - |
| LT | 86.00% | - |
| Liquidation Penalty | 3.00% | - |
Base Instance:
| Parameter | Value | Value |
|---|---|---|
| Asset | LBTC | cbBTC |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| LTV | 82.00% | - |
| LT | 84.00% | - |
| Liquidation Penalty | 3.00% | - |
Amend Interest Rates
We strongly support the initiative to amend cbBTC and fBTC Uoptimal, and we recommend including tBTC in this parameter change, as it enhances market efficiency and is a key step toward establishing the BTC-correlated E-Mode.
In accordance with such a change, we recommend amending the Slope 2 from 300% down to 60% to minimize artificial rate volatility.
We further recommend increasing the Reserve Factors, as detailed in this recommendation for WBTC. This is expected to increase the DAO revenue without negatively affecting the supply of assets.
As such, we propose the following parameters:
| Instance | Asset | Parameter | Current | Proposed |
|---|---|---|---|---|
| Ethereum Core | cbBTC | UOptimal | 45% | 80% |
| Base Core | cbBTC | UOptimal | 45% | 80% |
| Ethereum Core | fBTC | UOptimal | 45% | 80% |
| Ethereum Core | tBTC | UOptimal | 45% | 80% |
| Ethereum Core | cbBTC | Slope2 | 300% | 60% |
| Base Core | cbBTC | Slope2 | 300% | 60% |
| Ethereum Core | fBTC | Slope2 | 300% | 60% |
| Ethereum Core | tBTC | Slope2 | 300% | 60% |
| Ethereum Core | cbBTC | Reserve Factor | 20% | 50% |
| Base Core | cbBTC | Reserve Factor | 20% | 50% |
| Ethereum Core | tBTC | Reserve Factor | 20% | 50% |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
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