Summary
Given the recent demand for cbBTC and a significant portion of the supply being deposited into competing lending markets, Chaos Labs recommends increasing the supply caps of the cbBTC on Aave V3 Ethereum and Base deployments. This aims to capture the strong demand for the asset more effectively.
Motivation
Since the majority of cbBTC’s on-chain liquidity on Ethereum is paired with BTC-correlated assets, cbBTC maintains its peg to BTC and effectively inherits WBTC’s liquidity through arbitrage and redemption processes conducted by observed on-chain actors.
We expect cbBTC’s liquidity risk profile to be equivalent to or lower than that of WBTC on Ethereum for the following reasons:
- Shared Liquidity Pools: cbBTC is predominantly paired with WBTC and other related assets in liquidity pools. During cbBTC liquidations, especially as stablecoins are the predominant borrowed asset, the asset is routed through WBTC before converting to USDC or another asset used for liquidation, leveraging WBTC’s deeper liquidity.
- Arbitrage Aligning Prices: Liquidation events may cause temporary price discrepancies between cbBTC and WBTC. However, the ease of redeeming cbBTC through Coinbase ensures these differences are short-lived. On-chain actors exploit these discrepancies, profiting from arbitrage and realigning the prices of the two tokens.
- Liquidity Replenishment: After the redemption and arbitrage processes, cbBTC’s on-chain liquidity is replenished and remains sufficient.
Given the predominance of WETH and stablecoin liquidity on the Base network, the fast off-chain redemption process via Coinbase is crucial to support cbBTC’s price stability. This process provides strong BTC liquidity, which is accessible via Coinbase. This off-chain liquidity can effectively facilitate liquidations should DEX liquidity be insufficient, particularly for positions where stablecoins are borrowed against cbBTC.
On-Chain Growth
As was shown in our recent cbBTC supply cap increase post, cbBTC boosts a quickly growing on-chain supply and transaction value. We expect these values to increase significantly in the coming weeks following the increase in the Aave supply cap. Coupled with this growth, we have observed significant competition for cbBTC deposits.
While Aave has successfully attracted over 47% of the cbBTC supply between Ethereum and Base, the restricting supply caps may have caused over 850 cbBTC to be deposited in competing lending markets.
cbBTC (Ethereum)
cbBTC has reached 100% supply cap utilization on Ethereum, and its borrow cap is at 39% capacity.
The previous cap increase was filled within one day as demand was extremely high.
Supply Distribution
An analysis of the top cbBTC suppliers indicates that most suppliers leverage their holdings to borrow stablecoins such as USDT, GHO, and USDC. The supply is notably concentrated, with the largest supplier holding nearly 70% of the total supply and maintaining a supply-only position. The remaining suppliers exhibit a range of health scores; for instance, the third-largest supplier currently has a health score of 1.05. While this is a risky health score, the user has been actively managing their position, reducing the risk of liquidation.
Overall, USDC represents 60.75% and USDT 33% of the value borrowed against cbBTC collateral.
Liquidity
The majority of the asset’s DEX liquidity is paired with WBTC. Despite a drop of roughly 25%, the liquidity remains deep and sufficient to handle the most likely liquidations. The current buy-side liquidity for cbBTC is $35 million.
Recommendation
Given the previously discussed correlation to and liquidity against WBTC, as well as the efficiency of cbBTC redemption through Coinbase, Chaos Labs considers cbBTC’s liquidity sufficient to recommend a supply cap increase to 10,000 cbBTC. This cap will facilitate an increase in cbBTC supply over the next two months under the assumption of continued growth at the current monthly rate.
cbBTC (Base)
The cbBTC supply cap utilization on Base is at 21%, with its borrow cap at 17%, primarily because a single user transferred a substantial portion of their position to the Ethereum market.
We expect significant demand growth in the coming week, enough to warrant a preemptive supply cap increase.
Supply Distribution
While most of the top cbBTC suppliers borrow USDC, the largest wallet holds a supply-only position, accounting for a significant portion of the total market supply. Although the remaining positions are small, they maintain very safe health scores, posing no significant liquidation risk.
Overall, WETH represents 64% and USDC 32% of the value borrowed against cbBTC collateral.
Liquidity
DEX liquidity on Base shows a similar situation to the Ethereum DEX liquidity, with a recent drop in liquidity following the asset’s price drop. The most recent value for the DEX liquidity of cbBTC is $24M.
Recommendation
Given user behavior and the previously described properties of cbBTC, Chaos Labs recommends increasing the supply cap to 5,000 cbBTC. This cap will facilitate an increase in cbBTC supply over the next two months under the assumption of continued growth at the current monthly rate.
Specification
| Chain |
Asset |
Current Supply Cap |
Recommended Supply Cap |
| Ethereum |
cbBTC |
2,400 |
10,000 |
| Base |
cbBTC |
1,600 |
5,000 |