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

[ACI]

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

Author: ACI ( Aave Chan Initiative)

Date: 2024-11-06

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Risk Parameters have been updated accordingly with Risk Service Providers feedback 2024-11-20

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

Risk Parameters have been updated accordingly with Risk Service Providers feedback 2024-11-20

cbBTC/WBTC E-Mode

Parameter	Value	Value
Asset	cbBTC	WBTC
Collateral	Yes	No
Borrowable	No	Yes
Max LTV	93%	-
Liquidation Threshold	95%	-
Liquidation Penalty	1%	-

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.

[LlamaRisk]

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:

• cbBTC uses a Chainlink’s BTC/USD market price feed with a deviation threshold of 0.5% and a heartbeat of 1 hour.
• WBTC uses a Chainlink’s WBTC/BTC exchange rate feed with a deviation threshold of 2% and a heartbeat of 24 hours in conjunction with the same aforementioned Chainlink’s BTC/USD market price feed.

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.

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.

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:

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.

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.

[ChaosLabs]

Summary

Chaos Labs provides a recommendation for a new cbBTC/WBTC Liquid E-Mode.

Motivation

Before Aave v3.2, E-Mode configurations were constrained to the least liquid and stable asset within each E-Mode pool, limiting capital efficiency. Liquid E-Modes now enable more tailored E-Mode configurations, allowing for optimization across different asset pairs. In this case, we recommend a cbBTC E-Mode with WBTC as a borrowable asset.

Collateral and Borrowable

As described by ACI, this instance intends to allow users to borrow WBTC with cbBTC.

E-Mode Liquidation Bonus, LT, and LTV

As described by LlamaRisk, the oracle setup for each asset means that users who borrow WBTC using cbBTC will only be exposed to changes in WBTC’s exchange rate. Similar to their observations, we find the largest deviation to be 31 bps.

While cbBTC is priced according to BTC/USD’s price, it is important to consider its deviations, as these can eat into the liquidation bonus; if the deviation is larger than the LB, liquidating may not be profitable. Below is charted cbBTC’s premium relative to WBTC on the most liquid Uniswap V3 cbBTC/WBTC pool (0.05% fee), indicating that this is not an issue at this point in time.

Given this, we concur with the recommended LB of 1%. This LB implies a bad debt point of 99%, a sufficient buffer between the proposed parameters of 93% LTV and 95% LT.

Supply and Borrow Caps

It is not currently necessary to change WBTC’s borrow caps, as there are over 25.32K WBTC available before the cap on Ethereum is reached.

Specification

Based on the considerations outlined above, we recommend implementing the following E-Mode configuration:

Parameter	Value	Value
Asset	cbBTC	WBTC
Collateral	Yes	No
Borrowable	No	Yes
Max LTV	93%	-
Liquidation Threshold	95%	-
Liquidation Penalty	1%	-

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this post.

[ACI]

Thank you @ChaosLabs and @LlamaRisk as always for your feedback and support.

Proposal has been escalated to ARFC Snapshot, vote will start tomorrow.

We encourage everyone to participate.

[ACI]

After Snapshot monitoring, the current ARFC Snapshot has recently ended, reaching both Quorum and YAE as winning option with 437K votes.

Therefore, the [ARFC] Enable cbBTC/WBTC liquid E-Mode on Aave v3 Mainnet has PASSED.

Next step will be the publication of an AIP for final enforcement and confirmation of the proposal.

[ACI]

After discussing about implementation with several service providers and delegates, the ACI is no longer supportive of it’s implementation. strategies around BTC-correlated leverage will be reworked and new proposals will be published for governance consideration soon.