[ARFC] Onboard tBTC to Aave v3 on Arbitrum

Governance New Asset
1

[ARFC] Onboard tBTC to Aave v3 on Arbitrum.

Authors: @Ethan - Threshold Network Growth Coordinator & @mcitizen42 - Contributor to Threshold Network

Date: 2024-11-11

ARFC has been edited by ACI to reflect latest risk parameters provided by Risk Service Providers 2025-02-27

Summary

This proposal seeks to onboard tBTC to Aave v3 on Arbitrum following a successful launch on Mainnet (Aave - Open Source Liquidity Protocol).

Motivation/Background

tBTC is Threshold’s decentralized and permissionless bridge to bring BTC to Ethereum, Arbitrum and 6 other chains. Users wishing to utilize their Bitcoin on Ethereum & Arbitrum can use the tBTC decentralized bridge to deposit their Bitcoin into the system and get a minted tBTC token in their EVM wallet.

Threshold Network has brought native minting of tBTC to Arbitrum, is live on GMX and has strong, sticky liquidity to support liquidations.

Following its approval on AAVE V3 Ethereum, tBTC’s initial supply cap was reached within 72 hours, prompting an increase to meet the overwhelming demand and now sits at over 1,000 BTC TVL. This rapid adoption underscores the market’s appetite for trust-minimized BTC solutions in DeFi.

Benefits for Aave

  • High User Demand, since its initial deployment on Aave’s Ethereum market, tBTC reached its initial 500 BTC supply cap within the first week. The cap has been increased multiple times, now sitting at 2200 BTC, highlighting strong user interest. Something we hope to replicate on Arbitrum.
  • Easy, direct onboarding of BTC capital via Threshold’s Arbitrum native minting.
  • A range of lending options for those who wish to earn yield on their BTC.
  • Preferable yields on tBTC through active incentive participation, boosting Aave protocol use, fees and TVL.

Specification

Ticker: TBTC

Contract Address:

Arbitrum: 0x6c84a8f1c29108f47a79964b5fe888d4f4d0de40

Chainlink Oracle:

Arbitrum: 0xE808488e8627F6531bA79a13A9E0271B39abEb1C

ARFC has been edited by ACI to reflect latest risk parameters provided by Risk Service Providers 2025-02-27

Parameter Value
Isolation Mode No
Borrowable No
Collateral Enabled Yes
Supply Cap 50
Borrow Cap 25
Debt Ceiling -
LTV 73%
LT 78%
Liquidation Bonus 7.5%
Liquidation Protocol Fee 10%
Variable Base 0%
Variable Slope1 4%
Variable Slope2 300%
Uoptimal 45%
Reserve Factor 20%
Stable Borrowing Disabled
Flashloanable No
Siloed Borrowing No
Borrowable in Isolation No

Useful Links:

Project: https://www.threshold.network/

Minting dashboard: https://dashboard.threshold.network/tBTC/mint

GitHub: GitHub - keep-network/tbtc-v2: Trustlessly tokenized Bitcoin everywhere, version 2

Docs: tBTC Bitcoin Bridge | Threshold Docs

Audit: About

Immunfi Bug Bounty: Threshold Network Bug Bounties | Immunefi

Llama Risk Report: Collateral Risk Assessment: Threshold BTC (tBTC) - HackMD 4

Twitter: https://twitter.com/thetnetwork

Discord: Threshold Network ✜

Dune: https://dune.com/threshold/tbtc,
https://dune.com/sensecapital/tbtc-liquidity &
https://dune.com/lrsaturnino/tbtc-on-arbitrum

What is the link between the author of the AIP and the Asset?

Threshold Network has no link and is not compensated to present this ARFC proposal.

Provide a brief high-level overview of the project and the token.

tBTC is a decentralized wrapped Bitcoin that is 1:1 backed by native BTC. Unlike other wrapped Bitcoins, the BTC that backs tBTC is not held by a central intermediary, but is instead held by a decentralized network of nodes using threshold cryptography.

tBTC is trust minimized and redeemable for native BTC without a centralized custodian. It can be used across the entire DeFi ecosystem.

tBTC can be used as collateral, liquidity, a store of value, and can be integrated with DeFi apps across all supported blockchains.

As with other BTC wrappers, tBTC provides cryptocurrency traders and general users with a BTC-pegged token, that can be used to generate yield whilst holding native BTC.

Explain the positioning of the token in the AAVE ecosystem. Why would it be a good borrow or collateral asset?

Adding support for tBTC on Aave v3 (Arbitrum) as an asset would allow tBTC holders to obtain a yield on their tBTC holdings.

tBTC is the only way to permissionlessly borrow and lend BTC in a decentralized manner. This gives Aave direct access to the 1.7 trillion market of BTC, for which centralised competitors provide limited access to.

Provide a brief history of the project and the different components: DAO (is it live?), products (are they live?). How did it overcome some of the challenges it faced?

tBTC was created by a decentralized effort of contributors at the Threshold Network DAO, and extensively utilizes the Threshold Network’s threshold cryptography to create a secure BTC asset. tBTC is a product launched on Threshold Network, on which many other decentralized applications are being built.

Threshold Network DAO was born out of the first on-chain merger between two decentralized protocols, Keep Network and NuCypher early in 2022. The DAO has successfully operated since that time, and supports an active community of contributors that work towards building tBTC liquidity and usability.

How is tBTC currently used?

tBTC is used across a variety of chains and use cases. Some key utlities include Aave, GMX, EigenLayer, Synthetix, Morpho, Symbiotic, collateral asset for crvUSD, thUSD and solvBTC.

A comprehensible list can be found here:

https://defillama.com/yields?token=TBTC 4 & Earn yield on your Bitcoin | Linktree

Emission schedule

tBTC is one-to-one backed with real Bitcoin, meaning that there isn’t an emissions schedule, but a mint and redeem function that adjusts the supply of tBTC based on native BTC coming into and out of the system.

Token (& Protocol) permissions (minting) and upgradability. Is there a multisig? What can it do? Who are the signers?

For tBTC, wallets are created periodically based on governance. In order for the wallet to move funds, it produces signatures using a Threshold Elliptic Curve Digital Signature Algorithm, requiring 51-of-100 Signers to cooperate. The 100 signers on each wallet are chosen with our Sortition Pool, and the randomness is provided by the Random Beacon. More can be found here - Wallet Generation | Threshold Docs 2

The Threshold Council multisig is a 6/9 Gnosis Safe multisig with 9 unique signers that form the Threshold Network Council. The Council has limited upgrade privileges over the smart contracts. However, those privileges do not include any custodial power over deposited BTC:

Council Multisig Ethereum Address: 0x9F6e831c8F8939DC0C830C6e492e7cEf4f9C2F5f

Market data (Market Cap, 24h Volume, Volatility, Exchanges, Maturity)

Market capitalisation: $350m USD / 4,286 BTC

Decentralized exchange liquidity pools: https://defillama.com/yields?token=TBTC

Dashboard on Decentralized LP liquidity: https://dune.com/sensecapital/tbtc-liquidity
&

https://dune.com/lrsaturnino/tbtc-on-arbitrum

Social channels data (Size of communities, activity on Github)

Discord: 9,191

Twitter: 37,900

Github: 4,596 commits

Contracts date of deployments, number of transactions, number of holders for tokens

Date of Deployment: February 2023

Number of transactions: 74,721

Number of token holders: 1,665

Risk parameters

We suggest waiting for the feedback from risk teams for suggested parameters.

Symbol: TBTC

Arbitrum Contract Address: 0x6c84a8f1c29108f47a79964b5fe888d4f4d0de40

Disclaimer:

This proposal is powered by Threshold Network. The authors are @Ethan (Growth Coordinator for Threshold Network) and @mcitizen42 (Contributor to Threshold Network).

Next Steps:

  1. If consensus is reached on this [ARFC], escalate this proposal to the Snapshot stage.
  2. If the Snapshot outcome is positive, this proposal will be escalated to the Aave AIP stage for final confirmation and enforcement of the proposal.

Copyright:

Copyright and related rights waived under CC0.

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I came to create a topic for the exactly same subject and found this has been already done a few days ago. Great thing ! Well done @Ethan and @mcitizen42

tBTC is already available only for Aave’s Ethereum market, but it exists also on several other Ethereum blockchain ecosystem such as Arbitrum, Polygon, Base, Optimism and Solana.

For Arbitrum in special, it has been made available recently the possibility to mint tBTC directly on Arbitrum as well (https://arbitrum.threshold.network/) whici improved liquidity further and soon it will follow for other blockchains.

As for the Market data, to upgrade the numbers it has a supply of 4,975 tBTC and market cap of 467M USD.

Ethereum transaction fees remain high most of the time and having this available on more trustable Layer 2 EVM blockchains is very welcome in order to avoid spending too much gas on the mainnet.

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I made an account just to support this. tbtc is already on eth so just c’mon. wbtc getting delisted from coinbase even. so you know, c’mon already. please and thank you

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@ChaosLabs you guys ultimately recommended tbtc for arbitrum on a previous thread, can you help progress this?

1 Like
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Hello, Proposals for onboarding assets already onboarded in other Aave instance does not require the TEMP CHECK stage.

This proposal has been updated and edited to become an ARFC

Risk service providers and @bgdlabs are invited to provide feedback before escalation.

5 Likes
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thank you Marc, was frustrated seeing this stalled out for so long

1 Like
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no issue, this proposal flew below our radar, this is now fixed.

Kind reminder, anyone can ping the ACI to craft a compliant proposal for governance on their behalf at no cost. service is universal and part of our service provider engagement.

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Summary

LlamaRisk supports onboarding tBTC to Aave V3 on Arbitrum. Since our last analysis, the tBTC supply and liquidity on Arbitrum have improved significantly—a welcome change. However, the tBTC exchange rate on secondary markets (Uniswap pools) has occasionally deviated from the BTC price by a few percent, emphasizing the importance of using the BTC/USD Chainlink feed, as is done on mainnet. Although tBTC-V2 contracts have undergone multiple audits, the Arbitrum cross-chain contracts have not been publicly audited, and reliance on permissioned Beta Stakers, Minters, and Guardians introduces risks of malicious behavior that could disrupt the minting and deposit process and have knock-on effects in lending markets. Furthermore, the Threshold Network’s Bug Bounty program with ImmuneFi offers rewards of up to $500,000 for identifying vulnerabilities, reinforcing the network’s commitment to security.

Collateral Risk Assessment

Collateral Risk Assessment

1. Asset Fundamental Characteristics

1.1 Asset

tBTC (Threshold Bitcoin) is an ERC-20 token backed by Bitcoin 1:1 and pegged to its price. Unlike wBTC, which relies on a centralized custodian, tBTC uses a permissioned signer group that participates in a consensus mechanism to custody the Bitcoin backing it, reducing dependence on centralized third-party custodians.

Contract Address: 0x6c84a8f1c29108F47a79964b5Fe888D4f4D0dE40

As of February 13th, 2025, tBTC has a circulating supply of 94.5 tBTC, with a market capitalization of $9.05 million. The asset does not currently offer a yield. It was launched on March 31st, 2023.

tBTC is an open-source project from Thesis operated by the Threshold Network. It is secured by threshold cryptography and rotates node operators weekly to prevent collusion. tBTC can be minted directly via the Arbitrum Dashboard. Deposits typically take 1-3 hours to be processed and credited. Withdrawals follow a similar process: the tBTC token contract burns the tBTC, and the DepositBridge transfers BTC to the user’s specified Bitcoin address. This process includes a 3-5 hour processing delay.

The platform fees are action-based, with no fee for minting and a 0.2% redemption fee. The accrued tBTC fees are periodically deposited into Threshold-owned Governor Bravo Timelock Controller on the mainnet.

1.2 Architecture

tBTC is a more distributed and decentralized version of existing wrapped Bitcoin tokens as the BTC is not held in custody by private entities but by a decentralized network of node operators. Since the whole process is permissionless, anyone can mint tBTC. The process is as follows: users send their Bitcoin to a one-time-use deposit address → bridge operators move funds to Threshold Wallet and await block confirmation → post confirmation, tBTC is sent to the depositor’s Ethereum address. The list of Threshold operators is publicly available on tBTCscan. Currently, 260 registered node operators are present.

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Source: tBTC Flow of Funds, Threshold.

Once the Bitcoin is moved from the deposit address, it goes to a randomly generated wallet by Threshold stakers in Bitcoin wallets controlled by signers participating in the Threshold Elliptic Curve Digital Signature Algorithm (ECDSA), which requires 51% of 100 signers to cooperate and sign the transaction. Though the Network operates on Ethereum, signers use an off-chain communication protocol called “libp2p” to coordinate signing events. On each wallet, 100 signers are selected randomly from Keep Network’s Sortition Pool. Random Beacon securely generates random numbers and is used with Threshold Cryptography to impart bias-resistant randomness and thus distribute trust across multiple nodes.

The eligible operators are weighted by their stakes in the Sortition Pool and in the Threshold Network stakers of the “T” token in the Threshold Network are eligible to become signers. The probability of a staker becoming a signer is directly proportional to their share of the total tBTC stake. Each signer is selected independently, meaning the selection of one signer does not influence the chances of another staker being chosen for the same or different wallets. A staker with a higher percentage of the total stake has a correspondingly higher likelihood of being chosen as a signer, and the same staker can be selected multiple times for the same wallet or simultaneously across multiple wallets.

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Source: Optimistic Minting Process, Threshold Docs.

The Optimistic minting process is not permissionless, as the 100 signers for each wallet are selected from a restricted list of Beta Stakers rather than the entire pool of Stakers. While this approach was implemented to exclude misbehaving signers and fasten the minting process, Threshold is developing an alternative to allow any staker meeting the required criteria to participate in custodianship.

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Source: List of tBTC Guardians and Minters, Threshold.

Guardians and Minters are a permissioned set of high-trust public operators who can be removed through a Threshold DAO vote. Minters approve BTC deposits required for tBTC minting, while Guardians can veto the process, potentially halting growth if a malicious Guardian intervenes. Additionally, a “Sweeping” mechanism (not yet implemented) is designed to allow signers to consolidate unapproved deposits from Guardians every 8 hours, enabling tBTC minting without direct Guardian approval.

Minting on Arbitrum involves depositing BTC into Threshold’s custody on Bitcoin L1, which authorizes tBTC minting on Arbitrum through the tBTC token contract and L2BitcoinDepositor. Redemption requires burning tBTC via the tBTC token contract, after which the BridgeRouter facilitates BTC transfer from a redemption wallet to the user’s provided Bitcoin address. Redemptions have a size limit (based on wallet capacity) and a processing delay of 3-5 hours.

1.3 Tokenomics

Threshold Network’s native token, T, is an ERC-20 token used for staking and governance participation. The total supply is 11.15 billion, with 10.1 billion currently in circulation. Initially, 10 billion tokens were issued, with 4.5 billion allocated to NU and KEEP holders each and 1 billion set aside for the DAO Treasury. The token is inflationary, distributing 15% annual staking rewards to stakers. At network genesis, the minimum stake size was set at 40,000 T. Currently ~3B T tokens ($63M) are staked, representing 27% of the total supply.

1.3.1 Token Holder Concentration

tBTC represents 3.6% of the total BTC on Ethereum. Similarly, tBTC on Arbitrum is an extension of this product, with a total supply of ~95 tBTC, representing 2.17% of tBTC’s total supply (4637 tBTC). Among L2s, Arbitrum has a share of 22.7% tBTC and is second only to Base (262 tBTC) in adoption.

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Source: Top 100 tBTC Holders on Arbitrum, Arbiscan, February 13th, 2025.

The top 5 holders of tBTC are:

The top 10 holders own 77.54% of the total supply. When considering the top 100 holders, this concentration increases to 99.35%.

2. Market Risk

2.1 Liquidity

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Source: tBTC/USDC Swap Slippage, DeFiLlama, February 13th, 2025.

Users can swap up 41 tBTC ($3.95M) for USDC on Arbitrum within a 7.5% price impact.

2.1.1 Liquidity Venue Concentration

Top 5 tBTC DEX liquidity pools by TVL (as of February 13th, 2025):

2.1.2 DEX LP Concentration

LP concentration is moderate; however, Beefy provides significant liquidity. This poses a risk, as liquidity could decline if it’s boosted yields come to an end. Here is the breakdown for the top 5 tBTC pools by TVL (as of February 13th, 2025):

2.2 Volatility

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Source: tBTC/BTC Secondary Market Rate, TradingView, February 13th, 2025.

tBTC is trading at a 1.6% discount in secondary markets (Uniswap V3 pools) after trading at a ~2% premium. On multiple occasions, the tBTC/BTC ratio has deviated by over 5%, highlighting volatility driven primarily by low liquidity in secondary markets.

2.3 Exchanges

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Source: tBTC CEX Markets, CoinMarketCap, February 13th, 2025.

Kraken is the only centralized exchange listing tBTC, offering three trading pairs. As a result, its trading volume and liquidity remain significantly lower than that of decentralized exchanges, which could pose challenges for large-scale OTC trades or CEX-DEX arbitrage.

2.4 Growth

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Source: tBTC Arbitrum Supply, Dune, February 13th, 2025.

Since October 19th, 2024, tBTC supply on Arbitrum (95 tBTC currently) has been in steady decline, with a noticeable liquidity shift away from the network. This coincided with a surge in tBTC growth on Base (262 tBTC), driven by factors like boosted yields from Beefy, a governance proposal to expand tBTC on Base, and SolvBTC minting. These factors, along with the expiration of the 3-month GMX incentives aimed at boosting tBTC DEX liquidity on Arbitrum, further accelerated the decline.

A 30-week loyalty program (September 9th, 2024 - April 7th, 2025) rewarding liquidity providers on Curve and Uniswap pools on Arbitrum is live with a share of 50,000 ARB and a 25% boost in T.

3. Technological Risk

3.1 Smart Contract Risk

The tBTC Bridge V2 contracts have been audited by Least Authority (September 29th, 2022), CertiK (November 19th, 2021) and ChainSecurity (November 9th, 2021).

The audit by Least Authority, dated September 29th, 2022, delved into the security and functionality of the tBTC Bridge v2 with key findings concerned with Bitcoin SPV Merkle Proofs and updates between non-zero allowances. Several suggestions for improvements were also given, most of which were resolved.

Though the smart contracts are verified, the absence of public audits for tBTC contracts on Arbitrum introduces potential security risks.

3.2 Bug bounty program

Threshold Network has a Bug Bounty program with ImmuneFi where anyone can get rewards up to $500,000, depending on the severity of the threat. The contracts in the scope can be found here.

3.3 Price Feed Risk

tBTC on Arbitrum has a TBTC/USD Chainlink price feed with a 24-hour heartbeat and a 0.5% deviation threshold. However, due to limited on-chain liquidity on Arbitrum, as highlighted in the volatility section, the tBTC price feed remains vulnerable to manipulation. The Chainlink’s BTC/USD feed should be used instead to mitigate this risk.

While Threshold Network’s design allows all deposits to be publicly viewable on tBTCscan 24/7, a Chainlink proof-of-reserve (PoR) feed for Bitcoin reserves would enhance reliability and safeguard against potential downtime. As previously discussed for Ethereum markets, we recommend using PoR feeds as a trigger switch for tBTC/USD market pricing on Arbitrum to prevent unnecessary bad debt in the event of insolvency.

3.4 Dependency Risk

Wormhole Dependence
After the recent upgrade launched by Threshold DAO, which launched its first cross-chain native minting experience for tBTC users on Arbitrum, the dependency risk of bridges to transfer tBTC has been eliminated, the native minting on Arbitrum is powered by an off-chain relayer and tBTC SDK extension to Arbitrum. The relayer is powered by Wormhole, a long-standing Threshold DAO member, and it coordinates transactions between chains to allow minting. Threshold DAO members maintain it through governance.

Honest Majority Assumption
The honest majority assumption introduces risks inherent to relying on a randomly selected group of operators to secure deposits. If most of these operators act dishonestly or collude, they could compromise the security of the underlying Bitcoin. While the weekly rotation of operators reduces the risk of sustained collusion, it does not eliminate the possibility of a quorum of dishonest operators being selected in any given round. This makes the system’s security dependent on maintaining a robust and sufficiently decentralized network of trustworthy operators.

Permissioned Stakers
The risk of signers gaining over 51% control of a wallet is limited to the wallets they manage. Measures like permissioned beta stakers help tBTC to mitigate risks, but as the protocol becomes permissionless, a centralized stake could increase the chances of collusion. Decentralized stake distribution remains crucial to minimize the likelihood of majority control by a single party. tBTC operates as a distributed, permissioned protocol, relying on the signer’s reputation to ensure security while avoiding reliance on a single custodian. Transitioning to a permissionless model in the future will add some of these risks that require careful consideration.

4. Counterparty Risk

4.1 Governance and Regulatory Risk

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Source: Threshold DAO Governance Proposal Life Cycle, Threshold.

Threshold’s governance includes a Token Holder DAO and an Elected Council, ensuring mutual accountability. All governance votes are publicly viewable on Snapshot. A community member must hold at least 0.25% of the T supply to submit an on-chain proposal, with a quorum set at 1.5% of the total supply. The voting power is evenly distributed, with the combined votes of the top 7 delegates reaching the 50% threshold.

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Source: Threshold Governance, Threshold Docs.

Threshold Council Veto Power
The Threshold DAO governs the Threshold Network, encompassing the Token Holder DAO and an Elected Council multi-sig. Though the governance is decentralized, an Elected group of Threshold Council multi-sig holders can veto any proposal. Though the Threshold Council (the multi-sig signature policity threshold is set to 6 of 9) is a trusted constituent of DAO and nine elected individuals are voted once every year, they can censor the network if the threshold is reached on the multi-sig. In terms of software, the Council has control over upgradeable application contracts. Originally, the 9-member Council consisted of 4 elected representatives from the Keep community, 4 from the NuCypher community, and 1 mutually appointed member. In the current third epoch, the elected members are:

Candidate Signer Address
@Eastban 0x2844a0d6442034D3027A05635F4224d966C54fD7
@Figue 0xf35dEE924F483Bc234F09cbfbc8B4488fD06be20
@MrsNuBooty 0x739730cCb2a34cc83D3e30645002C52bA4B06167
@ZeroInFo56 0xe989805835093e37E6b12dCddF718e0481024573
@Vict0r 0x1Ba899530A89fAb245De9ff6cc23534F4a8A4e58
@JohnPackel 0x12107242e2FbEd0a503e102751fa6Aa8cB7446eC
@nico186 0x35B46702C5d1CD36194217Fb92F72B563eFf851A
@sap 0xcE3778528fC73D46685069D455bbCcE16A6e22Af
@shoegazer69 0xf791EfdF778a3Ca9cc193fFbe57Da33d1596E854

4.2 Access Control Risk

4.2.1 Contract Modification Options

Threshold contracts on Arbitrum:

  • ArbitrumTBTC: The tBTC ERC-20 contract with role-based minting, burning, token spending, and permissioned recovery functions. The owner can manage addresses authorized to mint tBTC, control Guardian roles, halt the transfers and minting, and withdraw mistakenly sent tokens.
  • ArbitrumWormholeGateway:
    Regulates minting and burning canonical tBTC via the Wormhole bridge, ensuring only authorized cross-chain transfers modify token supply. Key functions include sendTbtc (burn & transfer), receiveTbtc (mint on verification), and the owner permissions like updateGatewayAddress and setMintingLimit.
  • L2BitcoinDepositor:
    It interacts with ArbitrumWormholeGateway to facilitate the initialization of cross-chain deposits using initializeDeposit. The owner has the authority over contract initialization (initialize) and linking the L1BitcoinDepositor (attachL1BitcoinDepositor).

In addition to the listed privileges for each contract, the owner, i.e., Threshold Council’s 6/9 multisig, can transfer or revoke ownership for all the listed contracts using transferOwnership or renounceOwnership.

4.2.2 Timelock Duration and Function

Threshold Network has not configured any timelock on tBTC Arbitrum contract upgrades.

4.2.3 Multisig Threshold / Signer Identity

All tBTC contracts on Ethereum and Arbitrum are owned by Threshold Council’s 6/9 Safe multisig, composed of the elected members we listed above.

Note: This assessment follows the LLR-Aave Framework, a comprehensive methodology for asset onboarding and parameterization in Aave V3. This framework is continuously updated and available here.

5. Aave V3 Specific Parameters

Parameters will be presented jointly with @ChaosLabs

6. Price feed

The BTC/USD Chainlink price feed should be used instead of the tBTC/USD feed to price the asset on Aave V3 Arbitrum market, as low liquidity in secondary markets makes the latter susceptible to manipulation. Additionally, we recommend implementing a trigger switch mechanism, combined with a proof-of-reserve (PoR) feed (currently unavailable), to prevent bad debt, as previously discussed during tBTC’s Ethereum onboarding.

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.

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Overview

Chaos Labs supports the listing of tBTC on the Aave Arbitrum deployment. Below is our analysis and initial recommendations.

Technical Overview

tBTC is a decentralized bridging solution that allows Bitcoin holders to mint tBTC tokens on the Ethereum network and participate in the DeFi ecosystem while maintaining exposure to their original BTC. Built on threshold cryptography and an honest-majority assumption, tBTC eliminates the need for centralized custodians by distributing key shares across a wide network of nodes.

At the heart of tBTC’s security lies a threshold cryptography model that distributes key generation and signing responsibilities among 100-node signer groups, each required to stake T tokens to become eligible. tBTC employs a (51,100) threshold ECDSA scheme where wallet operations require collaboration between 51 signers. This design ensures that no single entity can control private keys outright, significantly reducing custodial risk. However, an attacker who accumulates enough T stake to influence the random selection process could theoretically disrupt or commandeer wallets. To mitigate such threats, the network rotates signer groups regularly, imposes strict staking requirements, and employs slashing rules for misbehavior.

The T token underpins the system’s security budget, with each node operator staking at least 40,000 T to participate in signing groups. Historically, the staked amount has surpassed two billion T, creating a robust economic deterrent for attackers. Nodes gain yield for their service but risk significant slashing for dishonest behavior, aligning operator incentives with network integrity. For instance, nodes face a 10% stake loss for late responses, ensuring active participation in network operations. More severe penalties apply for fraudulent activity, with a 100% stake loss enforced for signature fraud. Despite this substantial protection, fluctuations in T’s market price could undermine the security budget if rapid devaluations occur.

Decentralization Model and Economics

The Threshold Network’s wallet generation protocol deploys a new Bitcoin wallet every 14 days or whenever the previous wallet’s balance crosses 100 BTC. The deployment of a new Bitcoin wallet is done through the updateWalletParameters governance function. As explained previously, the signers’ group, composed of 100 nodes, is selected randomly with a probability equal to their proportional T stake, with 51 signers required to control the wallet’s operation and the possibility of a single staker being chosen as a signer multiple times. Thanks to this information, we can calculate the likelihood of controlling a new wallet over a variable time period depending on the % of the total stake controlled:

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Where p linearly represents nominal stake control. Given the creation of a new wallet every 14 days, deriving the probability of controlling at least one of those wallets over a variable timeframe under some static relative stake assumption with the singular entity:

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where T represents the associated number of wallet creations within some timeframe. The relative T stake required to probabilistically control a new wallet created under specified duration assumptions can be visually observed below.

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We observe that a range of 40% to 55% of the total T stake controlled by a singular entity starts to become problematic, assuming the staker maintains his share of the pool for a time window between 2 weeks to 2 years. To quantify whether such an action is economically feasible to perform under historical market valuations of the asset (which can be considered a general heuristic given the practical implications of such a scenario), the total dollar value of T stake and the associated 40% relative share representation is portrayed below, alongside the historical dollar value of 100 BTC, aiming to reflect the worst-case outcome of a new wallet generation and its comparative value to a scenario whereby malicious behavior is a rational outcome.

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While the stakers can be observed to be significantly decentralized, currently, only 35 operators are whitelisted to stake T tokens, as can be found through the OperatorsInPool function on the SortitionPoolcontract. New operators can be added through governance, and some of the biggest stakers appear to be institutional Staking providers.

SPV Proofs

Verifying the Bitcoin blockchain’s state on Ethereum requires cross-chain communication. tBTC achieves this through SPV proofs, utilizing an open-source relay. The verification process involves relay nodes submitting Bitcoin block headers to Ethereum smart contracts, maintaining an up-to-date representation of Bitcoin’s blockchain state. This model still operates under “SPV assumptions,” which provide a weaker security model compared to the full verification performed by a Bitcoin full node. The proofs don’t rely on an honest federation, as the Bitcoin state is verified in the smart contract itself.

Currently, the protocol safeguards roughly $435M in bridged BTC, having peaked at higher levels in the past. However, tBTC’s Arbitrum supply has shown a market share drop and a nominal supply stagnation.

tbtc_historic_supply_filtered
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Mint and Redeem

Minting tBTC begins when users send BTC to a monitored wallet address associated with a randomly selected signing group. The Optimistic Minting System enables accelerated issuance through Trusted Accelerators. These entities detect deposits via SPV proofs and trigger rapid mint requests, subject to a three-hour dispute window where Guardians validate transaction finality and system integrity. Uncontested mints auto-finalize, minting tBTC while accruing debt until wallet sweeps reconcile balances. A 0.2% fee is applied, with proceeds funding the Treasury and Coverage Pool. Withdrawing tBTC back to Bitcoin follows a similar process, requiring proof of signer control over the original address before redemption occurs.

The primary Minters authorized for optimistic minting include Curve DAO, Synthetix, and ACI.

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Bridging

tBTC leverages Wormhole’s cross-chain messaging protocol for asset transfers through Verified Action Approvals (VAAs). When users initiate transfers, the L2WormholeGateway contract on Ethereum locks tBTC and emits a VAA containing transfer details. Wormhole’s guardian network signs these VAAs, which Arbitrum’s L2WormholeGateway then verifies to mint equivalent tBTC on the destination chain.

Additionally, the Threshold Network enables native minting of tBTC on Arbitrum through its relayer system, bypassing Ethereum gas costs. Users deposit BTC into Threshold-controlled wallets, triggering SPV proof generation, coordinated threshold signature collection, and atomic minting of tBTC on Arbitrum. However, this method does not appear to have received any adoption so far, as the majority of the minting transactions on Arbitrum are performed through bridging.

Bridging tBTC from Arbitrum to Ethereum using Wormhole is estimated to take around 20-30 minutes, making dex arbitrage between the chains feasible and efficient. This ensures that the DEX liquidity on Arbitrum will better reflect that of Ethereum during market volatility.

Market Cap and Liquidity

tBTC’s market cap on Arbitrum has been stagnant over the last year, with its current supply on the chain being roughly 91 BTC or $8.8M. However, its Transaction Volume and Count have picked up considerably since September 2024. We further expect Aave’s listing to drive additional demand for the asset on Arbitrum.

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tBTC’s DEX Liquidity has remained stable over the last 6 months, with the majority of it concentrated in WBTC pairs on Curve, Uniswap, and Balancer DEXs. A minor portion of the liquidity is within WETH pairs. The total buy liquidity for tBTC at the current time is $3.2M.

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Volatility

tBTC’s volatility relative to BTC has remained very stable over the last 180 days, recording an average Daily Annualized Volatility of 6.56%, which is further improving in recent weeks, reaching 5.58 over the last 30 days.

Its biggest recorded price drop against BTC has been 1.95%. However, the asset tends to revert to its peg, allowing us to recommend less conservative parameters.

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LTV, Liquidation Threshold, and Liquidation Bonus

As with the tBTC currently listed on the Aave Ethereum Instance, we recommend aligning its parameters to WBTC on the same chain. As such, we recommend an LTV and LT of 73% and 78%, respectively, with the Liquidation Penalty set to 7.50%.

Supply Cap and Borrow Cap

We recommend utilizing our normal methodology, in which the asset’s supply cap is set to 2x the amount of liquidity available at a price slippage equivalent to the Liquidation Penalty. This leads to a recommendation of 50 tBTC. Given the limited demand for borrowing BTC-related assets in the lack of an E-Mode involving a yield-bearing BTC, we recommend limiting the UOptimal of the asset to 45% in order to improve the withdraw liquidity available.

Pricing

Given tBTC’s higher-than-usual volatility but its consistent tendency to revert quickly to its underlying value, Similar to the mainnet implementation, we recommend using the BTC/USD feed to price tBTC on Arbitrum. This setup mitigates risks of price manipulation and protects against liquidation cascades caused by significant price fluctuations.

With a deviation threshold of just 5 bps due to minimal network transaction costs, this feed ensures accurate pricing while maintaining alignment with broader market conditions in real-time.

Recommendation

Following the above analysis, we recommend the following parameter settings:

Parameter Value
Isolation Mode No
Borrowable No
Collateral Enabled Yes
Supply Cap 50
Borrow Cap 25
Debt Ceiling -
LTV 73%
LT 78%
Liquidation Bonus 7.5%
Liquidation Protocol Fee 10%
Variable Base 0%
Variable Slope1 4%
Variable Slope2 300%
Uoptimal 45%
Reserve Factor 20%
Stable Borrowing Disabled
Flashloanable No
Siloed Borrowing No
Borrowable in Isolation No

Disclaimer

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

Copyright

Copyright and related rights waived via CC0

2 Likes
10

We’re looking forward to this addition. Looking at the fluctuation in prices of tBTC on secondary markets, as both risk providers have pointed out, it seems prudent to use the mainnet BTC/USD feed to avoid unnecessary liquidations. It seems like this should be the method employed across the board to protect users.

1 Like
11

The current proposal has been escalated to ARFC Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

12

As Michigan Blockchain, we support onboarding tBTC on Aave V3 on Arbitrum. Adding support for tBTC on Aave v3 (Arbitrum) as an asset would allow tBTC holders to obtain a yield on their tBTC holdings. tBTC is a better alternative for DeFi users than other forms of wrapped Bitcoin like WBTC (which is heavily centralized), as holding tBTC is a way to permissionlessly borrow and lend BTC in a decentralized way. Currently, the tBTC supply on Arbitrum is only 83.8, however, since WBTC is currently the only form of wrapped BTC on the Aave V3 Arbitrum instance, tBTC does not have competition outside WBTC which certain users don’t prefer using because of its centralized nature, which means tBTC supply on the Arbitrum instance is expected to increase as there is increased demand for it as a result of Aave integration.

DEX liquidity is sufficient, and liquidity is not heavily concentrated in a single pool, which is ideal.


Top tBTC pools on Arbitrum, DefiLlama

With tBTC’s proven success on Aave Prime instance (surpassing 2,200 BTC TVL rapidly), this integration would offer a low-risk and high impact upside for Arbitrum’s ecosystem. By onboarding tBTC on Arbitrum, Aave can attract Bitcoin-native capital and also cement its role as a leader in decentralized cross-chain finance.

After a steady decline since October, the supply has plateaued on Arbitrum for the last one month.This is proof that there is still user interest in holding tBTC on Arbitrum. Again, we think that Aave integration will drive DeFi demand for tBTC which will increase its supply.


tBTC Arbitrum Supply as of 6 March 2025, Dune

tBTC on Arbitrum is only about 2% of the total tBTC supply across all chains. Considering Arbitrum TVL is 5% of the Ethereum TVL, tBTC market share on Arbitrum is expected to grow more when there is Aave integration.

We recommend to use a BTC/USD Chainlink feed, as there has been significant deviations in price from BTC on DEXs.

-Kerem Dillice and nsks

13

After Snapshot monitoring, the current ARFC Snapshot recently ended, reaching out both Quorum and YAE as winning option, with 836.2K votes.

Therefore [ARFC] Onboard tBTC to Aave v3 on Arbitrum has PASSED.

Next step will be the publication of an AIP for final enforcement and confirmation of the proposal.