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

[ACI]

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

Author: ACI ( Aave Chan Initiative)

Date: 2024-11-06

---

Risk Parameters have been updated 2024-11-20 as per latest feedback provided by Risk Service Providers.

Summary

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

Motivation

The motivation behind this proposal stems from several key factors:

• High Utilization: tBTC/WBTC has demonstrated significant usage as collateral for borrowing stablecoins on the platform.
• Capital Efficiency: Enabling liquid E-Mode for tBTC/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 tBTC/WBTC collateral, potentially increasing platform utilization and revenue.

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

Specification

This proposal will add tBTC/WBTC liquid E-Mode

Risk Parameters have been updated 2024-11-20 as per latest feedback provided by Risk Service Providers.

tBTC/WBTC E-Mode

Parameter	Value	Value
Asset	tBTC	WBTC
Collateral	Yes	No
Borrowable	No	Yes
Max LTV	93%	-
Liquidation Threshold	95%	-
Liquidation Bonus	1.50%	-

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.

[stani]

Whats the use-case having tBTC/WBTC as eMode? Same question for cbBTC/WBTC emode.

[LlamaRisk]

Summary

LlamaRisk supports enabling a new tBTC/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:

• tBTC 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 tBTC 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 rates are>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 negligible number of users are currently leveraging tBTC using WBTC. This amounts to 0.3% of the total loan amount backed by tBTC and indicates that the interest of such leveraging is almost non-existent. Nonetheless, introducing a proposed liquid e-Mode would increase the utility of this borrow setup.

Source: ChaosLabs Community Dashboard, 12th November, 2024

Estimated Increase in Leverage

The new liquid e-Mode would enable more leverage for tBTC. It is already possible to leverage tBTC assets but subject to a lower total leverage due to a lower LTV threshold of 73%. The maximum possible leverage for tBTC 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, while there are currently only 4 wallets that borrow WBTC using tBTC, the mean health ratio of these loans is 1.49. It indicates higher risk-aversion among the borrowers; therefore, we can expect a lower actual leverage even if this liquid e-Mode is introduced.

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 tBTC/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 tBTC 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 tBTC.

E-Mode Liquidation Bonus, LT, and LTV

As described by LlamaRisk, the oracle setup for each asset means that users who borrow WBTC using tBTC 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 tBTC 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. The chart below shows tBTC’s price relative to WBTC on its most liquid Curve pool. On September 25, it fell to a nearly 3% discount, reverting to a 0.5% discount after six hours.

Given the asset’s tendency to face discounts relative to WBTC, we recommend setting its LB 50 bps higher than the proposed value. While this does not exceed the maximum observed discount, we note that the risks of liquidations are mitigated by the correlation between the asset’s oracles, making it so liquidations will only occur through debt accrual or WBTC’s exchange rate increasing relative to BTC’s price.

Supply and Borrow Caps

It is not currently necessary to increase WBTC’s borrow cap, 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	tBTC	WBTC
Collateral	Yes	No
Borrowable	No	Yes
Max LTV	93%	-
Liquidation Threshold	95%	-
Liquidation Bonus	1.50%	-

Disclaimer

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

[ACI]

Proposal has been escalated to ARFC Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

[EzR3aL]

I would also like to know that. Are there incentives from other protocols to do this?
Why wouldn’t a user simply swap their btc asset to another wrapped version?

[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 tBTC/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.