Overview
Chaos Labs supports listing eBTC on Aave V3’s Ethereum Main instance. Below is our analysis and initial risk parameter recommendations.
Technical Overview
eBTC is Ether.fi’s BTC-backed LRT, intended to generate dual yield through LBTC’s staking in Babylon, and further restaking in Eigen Layer, Symbiotic, and Karak. Currently, users are able to deposit LBTC, cbBTC, and WBTC, though WBTC carries a 0.4% deposit fee. The token, like LBTC, does not currently generate staking or restaking yield; instead, it receives a variety of points from associated protocols.
The token utilizes Veda’s BoringVault, which has previously been audited by 0xMacro and Cantina. One of the most critical factors to the asset’s listing on Aave is its withdrawal procedure; as stated in eBTC’s documentation, there is a 7-day withdrawal period, though “most withdrawals will complete well before this maximum window.”
As explained in Veda’s documentation, its Atomic Queue allows “users to request swaps between an ERC20 offer asset and an ERC20 want asset. Then, at any point in time until a deadline specified by the user, a solver can fulfill a batch of requests to take offer assets in exchange for want assets.” In other words, users who wish to withdraw are submitting limit asks that can be filled by a user entering the vault, meaning that withdrawals usually do not take the full withdrawal period.
The data below shows the duration for withdrawals to be processed after request, with the size of the circle representing the summed amount and the y-axis representing the number of withdrawals at each given hour interval.
The eBTC token contract currently holds 1,666 LBTC, 22 WBTC, 6 cbBTC, and tokens representing 4,250 LBTC deposited in Karak and 620 LBTC deposited in Symbiotic. Etherfi recently removed FBTC from the whitelisted collateral list. Hence, eBTC is not mintable against it anymore.
Market Cap and Liquidity
eBTC’s market cap has grown rapidly, reaching over $650M.
However, relative to this market cap, its on-chain liquidity is scarce. It has three main pools on Curve, paired with WBTC/LBTC, WBTC, and tBTC, respectively. The chart below shows the total BTC wrapper liquidity paired with eBTC on DEXes.
Given the withdrawal setup described in the technical section, this lack of DEX liquidity will limit our recommended supply cap and potential cap increases.
Volatility
The asset has demonstrated a somewhat unstable peg against WBTC, with a multi-day depeg at the end of November in both of its Curve pools. The asset fell to 0.989 WBTC in its eBTC/WBTC pool and in the BTC Fi pool, representing a 1.11% deviation from the underlying value. It has also previously demonstrated a slight upward deviation during the second half of October reaching 1.004 WBTC. While eBTC displayed peg instability, the pool quickly reverted to 1, showing mean reversion tendencies.
Relative to BTC, it has displayed a 30-day annualized volatility of 19.66%, up from its 14.71% since launch.
LTV, Liquidation Threshold, and Liquidation Bonus
Given the novelty of the asset coupled with the aggregated Oracle implementation assumptions described below, we recommend a 10% liquidation bonus, an LTV of 67%, and an LT of 72%, the former slightly higher and the latter two lower than other BTC wrappers listed on Aave.
Supply and Borrow Cap
Chaos Labs’ typical approach to setting initial supply caps involves setting the supply cap to 2x the liquidity available under the Liquidation Bonus. Following this approach, we recommend setting the supply cap to 80 eBTC. Given limited likely borrow use cases, we recommend setting the borrow cap to 10% of this value.
Interest Rate Curve
We anticipate limited initial demand for eBTC. As such, we recommend setting the UOptimal at 45% to reflect expected utilization rates. We recommend aligning its IR curve with cbBTC, ensuring the asset can be borrowed at lower utilization levels, but discouraging borrowing above UOptimal.
Oracle Configuration/Pricing
As displayed in the token’s AccountantWithRateProviders contract, eBTC’s current exchange rate relative to LBTC (set as the base asset) is 1. This is as expected; the underlying assets and various deposits do not yet earn yield. However, when yield is activated, it will be critical to use eBTC’s exchange rate to augment the oracle used for LBTC. The exchange rate of eBTC to LBTC can be obtained through the function getRateInQuote by providing the contract address of LBTC as quote. As such, this listing follows the conditions posed in the LBTC listing. We recommend using temporarily conservative parameters for the eBTC E-mode until an LBTC Proof of Reserves feed from Chainlink is available in q1 2025.
E-Mode
As displayed above, eBTC has, at times, traded at a slight discount relative to WBTC. However, with the pricing mechanism described in detail in the LBTC proposal, it is possible to mitigate liquidations of eBTC-collateralized WBTC debt positions that would otherwise occur because of these secondary market deviations. As previously mentioned, the lack of a Chainlink Proof of Reserve feed leads us to recommend conservative E-Mode parameters. Specifically, an LB of 3%, with an LTV and LT set to 83% and 85%, respectively.
Specification
Following the above analysis, we recommend the following parameter settings with the proposed oracle configuration:
| Parameter | Value |
|---|---|
| Network | Ethereum |
| Isolation Mode | No |
| Borrowable | Yes |
| Collateral Enabled | Yes |
| Supply Cap | 80 |
| Borrow Cap | 8 |
| Debt Ceiling | - |
| LTV | 67% |
| LT | 72% |
| Liquidation Bonus | 10% |
| Liquidation Protocol Fee | 10% |
| Variable Base | 0.0% |
| Variable Slope1 | 4.0% |
| Variable Slope2 | 300% |
| Uoptimal | 45% |
| Reserve Factor | 50% |
| Stable Borrowing | Disabled |
| Flashloanable | Yes |
| Siloed Borrowing | No |
| Borrowable in Isolation | No |
E-mode
| Parameter | Value | Value |
|---|---|---|
| Asset | eBTC | WBTC |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| Max LTV | 83% | - |
| Liquidation Threshold | 85% | - |
| Liquidation Bonus | 3.0% | - |
CAPO Configuration
While EBTC does not currently generate yield, we recommend a somewhat conservative CAPO that can be adjusted once we are able to analyze its rewards distributions.
| maxYearlyRatioGrowthPercent | ratioReferenceTime | MINIMUM_SNAPSHOT_DELAY |
|---|---|---|
| 7.50% | monthly | 14 days |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
Copyright and related rights waived via CC0