[ARFC] Enable cbBTC/WBTC liquid E-Mode on Aave v3 Mainnet

Governance
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[ARFC] Enable cbBTC/WBTC liquid E-Mode on Aave v3 Mainnet

Author: ACI ( Aave Chan Initiative)

Date: 2024-11-06

Summary

This proposal aims to enable cbBTC/WBTC liquid E-Mode for the Main Instance. By implementing this change, we seek to enhance capital efficiency for borrowers using cbBTC/WBTC as collateral, particularly for borrowing other stablecoins.

Motivation

The motivation behind this proposal stems from several key factors:

  • High Utilization: cbBTC/WBTC has demonstrated significant usage as collateral for borrowing stablecoins on the platform.
  • Capital Efficiency: Enabling liquid E-Mode for cbBTC/WBTC will allow borrowers to substantially improve their capital efficiency when using this asset as collateral.
  • Controlled Growth: Liquid E-Mode provides a mechanism for more precise control over the growth and borrow demand in relation to the overall stablecoin liquidity within Aave v3 on Mainnet.
  • Enhanced Borrowing Capacity: This change will enable users to borrow larger amounts of other stablecoins against their cbBTC/WBTC collateral, potentially increasing platform utilization and revenue.

By implementing this proposal, we aim to optimize the use of cbBTC/WBTC within the Aave ecosystem, attracting more liquidity for stablecoins.

Specification

This proposal will add cbBTC/WBTC liquid E-Mode

Nevertheless it may be subject to change based on Risk Service Providers feedback. If that’s the case the ARFC will be updated accordingly.

cbBTC/WBTC E-Mode

Description Value Before Value After
LTV - 93%
Liquidation Threshold - 95%
Liquidation Bonus - 1%
Borrowable - wBTC
Collateral - cbBTC

Useful links

BGD. Aave v3.2: Liquid Emodes

ARFC Snapshot

Github

AIP

Disclaimer

This proposal is directly powered by ACI (Aave Chan Initiative). ACI did not received compensation for creation of 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.

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Summary

LlamaRisk supports enabling a new cbBTC/WBTC liquid e-Mode with the parameters proposed by @ACI. It is a measured and rational decision that would not impact the risk profile of Aave’s Mainnet market while allowing users to take up higher leverage.

Pricing

Both assets are backed 1:1 by BTC. However, the pricing mechanisms used for these assets on Aave V3 are different:

Therefore, users who borrow WBTC using cbBTC as collateral will only be exposed to fluctuations in WBTC’s exchange rate. As pricing data suggests, this exchange rate has never deviated from the base by a larger than 30 bps (0.3%) threshold in any direction.

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Source: Chainlink WBTC/BTC exchange rate feed, 12th November, 2024

Notably, WBTC being a borrowable asset in this proposed liquid e-Mode setup, liquidations would occur only if the WBTC/BTC exchange rate is>2% above the peg (the LTV-to-LT buffer). While historical data indicates a minor risk of potential liquidations, users should exercise caution, especially regarding the recent WBTC custody update situation.

Current Borrows

As the borrower data on Mainnet suggests, a small part of users are currently leveraging cbBTC using WBTC. This amounts to 5.2% of the total loan backed by cbBTC, indicating that the leveraging interest is already present. The introduction of a proposed liquid e-Mode would increase this borrow ratio further.

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Source: ChaosLabs Community Dashboard, 12th November, 2024

Estimated Increase in Leverage

The new liquid e-Mode would enable more leverage for cbBTC. It is already possible to leverage the cbBTC asset but subject to a lower total leverage due to a lower LTV threshold of 73%. The maximum possible leverage for cbBTC on Mainnet, assuming an infinite number of loops, is currently:

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With a proposed liquid e-Mode max LTV of 93%, the highest possible leverage would be ~14x. While this is a large increase, the risk is limited by the pricing setup used.

Moreover, even though only 13 large wallets have borrowed WBTC using cbBTC, the average health of this sample is 1.52. This means that users currently borrow WBTC (and possibly other assets) using cbBTC collateral tend not to borrow at the maximum possible LTV.

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Source: LlamaRisk, 12th November, 2024

The supply and borrow caps would also limit the overall possibility of leverage. Risk providers will continuously monitor loan composition and overall market health changes, especially in light of the introduction of such new liquid 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.