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.