[ARFC] Onboard cbBTC to Arbitrum Instance

[ACI]

[ARFC] Onboard cbBTC to Arbitrum Instance

Author: ACI

Date: 2024-11-25

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Summary

This is an ARFC to gauge community sentiment for adding borrow/lend support for cbBTC on AAVE V3 Arbitrum Instance.

Motivation

Following the success of cbBTC on Mainnet and Base instances, we propose onboarding cbBTC to the Arbitrum instance. This aligns with Aave’s work towards providing a diversity of wrapped Bitcoin assets and increasing collateral and borrow options on Layer 2 networks.

Chain to be deployed/listed

Aave v3 instance on Arbitrum.

Specification

Ticker: cbBTC

Contract Address on Arbitrum: 0xcbb7c0000ab88b473b1f5afd9ef808440eed33bf

Risk Parameters:

These will be provided by risk service providers and this ARFC updated with parameters accordingly.

Useful Links

[TEMP CHECK] Onboard cbBTC to Aave v3 on Base

[TEMP CHECK] Onboard cbBTC to Aave v3 on Base Author: @ACI (Aave Chan Initiative) Date: 2024-08-28 Summary The proposal aims to onboard Coinbase’s cbBTC, to the Aave v3 protocol on Base. Motivation/Background cbBTC, a new Bitcoin wrapper offering from Coinbase, is set to launch in the coming weeks. As a centralized and trusted entity in the cryptocurrency space, Coinbase’s entry into the wrapped Bitcoin market with cbBTC brings a unique value proposition to the Aave ecosystem. This new asset w…

[ARFC] Onboard cbBTC to Aave v3 on Base and Mainnet

[ARFC] Onboard cbBTC to Aave v3 on Base and Mainnet Author: @ACI (Aave Chan Initiative) Date: 2024-09-10 Summary The proposal aims to onboard Coinbase’s cbBTC, to the Aave v3 protocol on Mainnet main instance & Base. Motivation cbBTC, a new Bitcoin wrapper offering from Coinbase, is set to launch in the coming weeks. As a centralized and trusted entity in the cryptocurrency space, Coinbase’s entry into the wrapped Bitcoin market with cbBTC brings a unique value proposition to the Aave ecosystem…

Disclaimer

This proposal is powered by Skywards. ACI is not directly affiliated with Coinbase and did not receive compensation for creation this proposal.

Next Steps

1. Publication of a standard ARFC, collect community & service providers feedback before escalating proposal to ARFC 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 under CC0.

[ChaosLabs]

Overview

Chaos Labs recommends against the listing of cbBTC on Aave V3’s Arbitrum deployment at this time. While cbBTC has demonstrated considerable success on Ethereum and Base, its current state on Arbitrum does not meet the criteria for a safe and effective integration. At present, the token’s limited supply, shallow liquidity, and minimal organic growth render it unsuitable for deployment. Proceeding with a listing under these conditions would necessitate overly restrictive risk parameters that would compromise both the utility of cbBTC and the safety of the Aave protocol.

cbBTC

cbBTC is a token backed 1:1 by native BTC held by Coinbase. We have previously provided recommendations on listing the asset on Ethereum and Base, finding that it was appropriate to list as a collateral asset on Aave. Since then, its supply on Aave has grown rapidly, particularly on Ethereum.

Ethereum

Base

We have found that our recommended parameters are functioning well, giving users significant borrowing power while also mitigating risk to the protocol.

Current Supply and Adoption

The asset is nascent on Arbitrum, with the first transaction occurring seven days ago. As such, its on-chain is still small, at just 54.9 cbBTC, with 90% of this held by Coinbase itself. As of this writing, there are only 52 holders with cbBTC balances greater than $100.

Additionally, there has been limited organic growth on the network, with all major increases in supply coinciding with Coinbase transactions.

Liquidity

cbBTC’s liquidity on Arbitrum is currently insufficient to support its role as a collateral asset. Despite being paired with WBTC and other tokens like tBTC, USDT, WETH, and USDC, market depth remains shallow. A simulated trade of 1 cbBTC to USDC results in approximately 10% slippage, highlighting the significant risk of price impact during liquidations or large trades. This lack of liquidity increases systemic risk and compromises the protocol’s ability to manage collateral liquidations effectively.

Simulated 1.75 cbBTC for ETH swap; Odos.

Recommendation

Chaos Labs advises against listing cbBTC on Aave V3’s Arbitrum deployment at this time. Instead, we recommend revisiting the proposal once the following conditions are met:

• A significant increase in cbBTC’s total supply and decentralization of ownership.
• Improved liquidity depth to reduce slippage and market inefficiencies.
• Demonstrated organic growth and adoption on Arbitrum, independent of Coinbase-driven activity.

Disclaimer

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

Copyright

Copyright and related rights waived via CC0

[LlamaRisk]

Summary

LlamaRisk concurs with @ChaosLabs’ recommendation to postpone onboarding until liquidity depth and distribution improve.

Contract analysis reveals identical asset infrastructure across networks, with Coinbase implementing complete consistency for cbBTC, including:

• Same contract address across Ethereum, Base, and Arbitrum: 0xcbb7c0000ab88b473b1f5afd9ef808440eed33bf
• Same contract owner address: 0xCe56D20689D836EC7A728CEb94A15746696c16e6

Given this uniformity, all risk factors are identical across deployments: asset risk, technical risk, counterparty risk, price feed risk, and governance risk. The only distinction lies in Arbitrum’s network-specific characteristics, which apply universally to all assets deployed on Arbitrum, not just cbBTC.

Primary consideration: Market risk

Market risk remains significantly higher on Arbitrum, as identified by @ChaosLabs. The Arbitrum network shows markedly lower cbBTC liquidity compared to Mainnet or Base. This creates elevated risk since liquidators must access liquidity on other chains to conduct profitable liquidations.

Source: Chaos Labs Liquidations Dashboard, November 27th, 2024

Although cbBTC liquidations occur across these networks, a higher liquidation penalty may be necessary to ensure liquidators can profitably acquire and exchange collateral on other venues.

While some risk mitigation exists through:

1. Cross-chain liquidity (notably strong on Mainnet and Base), though non-atomic
2. Off-chain liquidation options (Coinbase CEX access with KYC for underlying BTC)

The multiple steps required in either liquidation path could create short-term protocol capitalization challenges.

Therefore, we fully endorse @ChaosLabs’ recommendation to defer asset onboarding until liquidity becomes more established and distributed.

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.

[ACI]

After Risk Service Providers feedback, ACI stands and supports holding the onboarding of cbBTC to Arbitrum Instance, until more suitable conditions are met.