[ARFC] Onboard tBTC to Aave v3 on Ethereum, Arbitrum and Optimism

[ARFC] Onboard tBTC to Aave v3 on Ethereum, Arbitrum and Optimism.

Author: ACI (Aave Chan Initiative)

Date: 2024-05-13

Proposal updated with Risk Parameters provided by Risk Service Providers to just onboard tBTC to Aave v3 on Ethereum.


Summary:

The proposal aims to onboard Threshold Network’s tBTC, to the Aave v3 protocol on Ethereum, Arbitrum and Optimism. tBTC is backed one-to-one with Bitcoin.

Motivation/Background:

tBTC is Threshold’s decentralized and permissionless bridge to bring BTC to the Ethereum network. tBTC has been designed to allow Bitcoin holders to participate in Ethereum’s Decentralized Finance (DeFi) applications. Users wishing to utilize their Bitcoin on Ethereum can use the tBTC decentralized bridge to deposit their Bitcoin into the system and get a minted tBTC token in their Ethereum wallet.

Having recently acquired a Chainlink oracle, tBTC enables Aave users to have access to the only wrapped Bitcoin, which can be permissionlessly minted and redeemed, where the BTC that backs it is not held by a central intermediary, but is instead held by a decentralized network of nodes using threshold cryptography. This implies a fully decentralized and permissionless lending and borrowing experience for BTC (i.e. bridge native BTC to tBTC and borrow via Aave).

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.

Benefits for Aave:

  • Further decentralization and trust minimisation in the Aave stack.
  • A range of lending options for those who wish to earn yield on their BTC.
  • Collaboration with the Threshold Network DAO, opening up the opportunity to incorporate other Threshold products (such as Threshold Access Control and thUSD) into the Aave offering.
  • Preferable yields on tBTC through active incentive participation, boosting Aave protocol use, fees and TVL.
  • Additional incentive allocation originating from Arbitrium’s LTIPP.

Specification

Ticker: TBTC

Contract Addresses:

Ethereum: 0x18084fba666a33d37592fa2633fd49a74dd93a88

Arbitrum: 0x6c84a8f1c29108f47a79964b5fe888d4f4d0de40

Optimism: 0x6c84a8f1c29108F47a79964b5Fe888D4f4D0dE40

Chainlink Oracle:

Ethereum: 0x8350b7De6a6a2C1368E7D4Bd968190e13E354297

Arbitrum: 0xE808488e8627F6531bA79a13A9E0271B39abEb1C

Optimism: 0x5a61374950D4BFa5a3D4f2CA36FC1d23A92b6f21

Risk parameters

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (tBTC) 550
Borrow Cap (tBTC) 275
Debt Ceiling -
LTV 73.00%
LT 78.00%
Liquidation Bonus 7.50%
Liquidation Protocol Fee 10.00%
Variable Base 0.0%
Variable Slope1 4.00%
Variable Slope2 300.00%
Uoptimal 45.00%
Reserve Factor 20.00%
Stable Borrowing Disabled
Flashloanable Yes
Siloed Borrowing No
Borrowed in Isolation No

CAPO

Price Cap
4%

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.

Risks

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 1

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

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 | Immunefi

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

Twitter: x.com

Discord: Threshold Network ✜

Dune: https://dune.com/threshold/tbtc & https://dune.com/sensecapital/tbtc-liquidity

Disclaimer:

This proposal is powered by Skywards. The Aave Chan Initiative is not directly affiliated with Threshold Network and did not receive compensation for creation this proposal.

Next Steps:

  1. Publication of a standard ARFC, collect community and service providers feedback before escalating the proposal to the ARFC Snapshot stage.
  2. If the ARFC Snapshot outcome is positive, publish an AIP vote for final confirmation and enforcement of the proposal.

Copyright:

Copyright and related rights waived under CC0.

Overview

Chaos Labs supports listing tBTC on Aave V3 Ethereum. Following is our analysis and risk parameter recommendations for the initial listing.

Note: The following analysis is conducted solely from a market risk viewpoint, excluding centralization and third-party risk considerations. If the community aims to reduce exposure to tBTC, adopting more conservative supply and borrow caps should be considered.

Liquidity and Market Cap

tBTC is a wrapped version of BTC that is available on Ethereum, as well as on other chains via the Wormhole bridge. Note that we do not generally recommend listing bridged assets; this, combined with limited liquidity on other networks, leads us to only recommend an Ethereum listing at this time.

Over the past 180 days, its average market cap is $97.24M and its average daily trading volume is $3.04M, including both centralized and decentralized exchanges. However, it has undergone rapid growth in recent weeks, and its current market cap stands at over $200M.

Untitled - 2024-05-16T170400.949

tBTC Volatility

Relative to BTC, we find that tBTC has a 30-day annualized volatility of 4.85%.

Untitled - 2024-05-16T170402.524

Relative to USD, we find it has a 30-day annualized volatility of 47.62% and a largest single-day price drop of 8.28%.

Untitled - 2024-05-16T170403.993

Liquidation Threshold

Considering the volatility of the asset, we recommend setting the LT to 78% and the LTV to 73%, mirroring similar assets on Ethereum V3.

Supply Cap, Borrow Cap, and Liquidation Bonus

Chaos Labs’ approach to initial supply caps is generally proposed through setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty price impact, which leads to a recommendation of 550 tBTC. Based on this, we recommend a borrow cap of 275 tBTC.

IR Curve Parameters

We recommend aligning the interest rate parameters with those of similar assets on Ethereum to ensure consistency across similar assets on Aave v3.

CAPO recommendations:

Given tBTC’s capability to be redeemed 1:1 for BTC in a permissionless manner within a matter of hours, we recommend aligning our price cap recommendations with those of traditional stablecoins.

Price Cap
4%

Specification

Following the above analysis, we recommend listing tBTC with the following parameter settings:

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (tBTC) 550
Borrow Cap (tBTC) 275
Debt Ceiling -
LTV 73.00%
LT 78.00%
Liquidation Bonus 7.50%
Liquidation Protocol Fee 10.00%
Variable Base 0.0%
Variable Slope1 4.00%
Variable Slope2 300.00%
Uoptimal 45.00%
Reserve Factor 20.00%
Stable Borrowing Disabled
Flashloanable Yes
Siloed Borrowing No
Borrowed in Isolation No
2 Likes

Summary

LlamaRisk is supportive of @ChaosLabs’s recommendation to onboard tBTC on Ethereum mainnet. We’ve prepared an updated report referencing LlamaRisk’s initial assessment of tBTC published on November 1st, 2023. We are also of the opinion that tBTC does not have sufficient liquidity to be onboarded on Optimism and Arbitrum networks.

Asset rating

In updating our assessment of tBTC, we are revising our risk rating. Based on the risks identified for each category, the following chart summarizes a risk rating for tBTC as collateral. The rating for each category is ranked from excellent, good, ok, and poor.

  • We rank tBTC ok on liquidity (unchanged) since it remains a minor tokenized BTC asset. Its liquidity provision on DEX appears adequate, although listing on CEX (Kraken) needs more volume. The introduction of the Wormhole bridge has increased tBTC’s availability across multiple chains, but Curve still holds the majority of liquidity and volume, albeit to a lesser extent since the initial analysis.
  • We rank tBTC good in volatility (unchanged) due to the permissionless ease of mints/redemptions that facilitate arbitrage, with a small fee on each action. tBTC has exhibited strong peg strength since redemptions were activated in July 2023.
  • We rank tBTC ok in smart contracts (unchanged) since there has been no change to its system architecture since deployment. The $500,000 ImmuneFi bug bounty program remains.
  • We rank tBTC good in dependencies as it has recently added a Chainlink oracle, reducing reliance on Curve EMA and permitting further DeFi integration. Significant off-chain processes that introduce complexity to the system remain a risk vector.
    *We rank tBTC good in decentralization (unchanged) for prioritizing permissionless access, a decentralized bridge network, and a reasonably convincing pathway to on-chain governance.
  • We rank tBTC ok in legal (unchanged) as the legal structure(s) are domiciled in a prominent jurisdiction, while no enforcement actions against Threshold are evident. Clarifying the legal status of cross-chain bridges and fortifying the protocol’s defenses could be better implemented.

Specific Consideration for Ethereum mainnet

Our previous assessment reviewed tBTC favorably, with moderate concerns about liquidity provisions and the lack of a dependable oracle. Considering liquidity provisions, holder distribution, and DeFi integration, tBTC is suitable for listing on Aave V3. The newly launched Chainlink price feed addresses the primary concern raised in the previous assessment by providing a dependable Oracle source.

The Ethereum mainnet remains the primary network for tBTC, holding the most significant share of the token’s activity, despite the Wormhole bridge expanding tBTC’s availability across multiple chains.

tBTC’s liquidity on Ethereum is sufficient for listing on Aave V3, with a diverse set of liquidity providers. The token’s volatility remains low due to the permissionless nature of mints and redemptions, which facilitates efficient arbitrage.

Although risks associated with the significant off-chain processes in the tBTC system persist, the overall risk profile has improved since the initial analysis. The Chainlink oracle, ongoing bug bounty program, and strong peg strength since July 2023 contribute to a favorable outlook for tBTC on the Ethereum mainnet.

In conclusion, we recommend listing tBTC on Aave V3 for the Ethereum mainnet, with appropriate risk parameters based on the token’s liquidity, volatility, and overall market conditions.

Specific Consideration for Optimism and Arbitrum

Despite the recent growth in tBTC availability across multiple chains through the Wormhole integration, liquidity on Optimism and Arbitrum still needs to be increased to recommend onboarding. The main liquidity pool (Curve) holds significantly less TVL than Ethereum mainnet, with an important price impact for trades as small as five tBTC.

While tBTC has seen some volume on L2s, the overall liquidity profile is unimpressive and does not show strengthening growth trends. Positive trends in liquidity depth and utilization are necessary to minimize the creation of bad debt due to missed liquidations.

We do not recommend onboarding tBTC on Aave V3 for Optimism and Arbitrum networks.

2 Likes

In light of both Risk Service Providers feedback, the current ARFC to Onboard tBTC will be only submitted/escalated to Aave v3 on Ethereum.

2 Likes

Threshold Network would like to thank both @ChaosLabs and @LlamaRisk for their recommendations.

We are happy to delay the onboarding of tBTC to Arbitrum and Optimism at this point in time, we are looking to make a concerted effort to boost TVL and liquidity on both these L2’s over the coming months, so hopefully we can revisit these markets at a later stage.

1 Like

Following feedback and Risk Service Providers recommendations, the current proposal has been escalated to ARFC Snapshot, to Onboard tBTC to Aave v3 only on Ethereum at this moment.

Vote will start tomorrow, we encourage everyone to participate.