Recommendation
LlamaRisk recommends holding off on onboarding WBTC on Scroll until liquidity provision improves. Despite various DEX integrations, the overall liquidity profile is unimpressive and does not show strengthening growth trends. Positive liquidity trends are necessary to minimize the creation of bad debt due to missed liquidations.
Background - Aave on Scroll
To explore the possibility of adding WBTC Scroll to Aave, we will first provide some context and background information on Aave’s current integration with the Scroll network. On January 9, an ARCF proposal was made to deploy Aave V3 on the Scroll mainnet. This proposal was officially approved and executed through an on-chain vote on February 9. The Scroll implementation was instantiated with 3 markets: WETH, wsETH, and USDC. The markets were established with the following parameters:
| Parameter |
WETH |
USDC |
wstETH |
| Isolation Mode |
FALSE |
TRUE |
TRUE |
| Borrowable |
ENABLED |
ENABLED |
ENABLED |
| Collateral Enabled |
TRUE |
TRUE |
TRUE |
| Supply Cap |
240 |
1,000,000 |
130 |
| Borrow Cap |
200 |
900,000 |
45 |
| Debt Ceiling |
USD 0 |
USD 0 |
USD 0 |
| LTV |
75 % |
77 % |
75 % |
| LT |
78 % |
80 % |
78 % |
| Liquidation Bonus |
6 % |
5 % |
7 % |
| Liquidation Protocol Fee |
10 % |
10 % |
10 % |
| Reserve Factor |
15 % |
10 % |
15 % |
| Base Variable Borrow Rate |
0 % |
0 % |
0 % |
| Variable Slope 1 |
3.3 % |
6 % |
7 % |
| Variable Slope 2 |
8 % |
60 % |
300 % |
| Uoptimal |
80 % |
90 % |
45 % |
| Stable Borrowing |
DISABLED |
DISABLED |
DISABLED |
| Stable Slope1 |
3.3 % |
6 % |
7 % |
| Stable Slope2 |
8 % |
60 % |
300 % |
| Base Stable Rate Offset |
2 % |
1 % |
2 % |
| Stable Rate Excess Offset |
8 % |
8 % |
8 % |
| Optimal Stable To Total Debt Ratio |
20 % |
20 % |
20 % |
| Flashloanable |
ENABLED |
ENABLED |
ENABLED |
| Siloed Borrowing |
DISABLED |
DISABLED |
DISABLED |
| Borrowable in Isolation |
DISABLED |
ENABLED |
DISABLED |
| Oracle |
ETH/USD |
USDC/USD |
wstETH/USD |
On April 18, an Aave Improvement Proposal (AIP) was approved to set the Liquidity Observation Labs wallet address (0xC18F11735C6a1941431cCC5BcF13AF0a052A5022) as the Scroll wstETH Emissions Manager. This change makes the Liquidity Observation Labs wallet the emission admin for the wstETH token on the Scroll network, in addition to the existing Ethereum, Base, Arbitrum, Optimism, Polygon, and Gnosis V3 markets, where it already serves as the emission admin.
Scroll Bridge
ETH and tokens (including WBTC and the previously onboarded tokens) can be bridged between Ethereum and Scroll via the Scroll Bridge and an arbitrary messaging bridge. Bridging from L1->L2 involves a ~10-minute wait time, and bridging from L2->L1 involves a ~1-hour wait time. See the bidirectional flow logic below:
Source: Scroll Bridge Docs
Looking historically at tokens bridged, we can see a trend that a marked uptick in bridge TVL occurs for assets onboarded to Aave after February 9 (WETH, wstETH, USDC).
Source: DefiLlama
Source: Arkham Intelligence - Scroll wstETH Gateway
WBTC has historically made up a relatively small portion of value bridged to Scroll and has not shown any growth trend, indicating that demand for WBTC integrations on Scroll has been relatively stable but may not be experiencing a growth in opportunities or interest to integrate it into newly launched protocols. Since inception, it has waned at ~40 WBTC bridged or ~$2m.
Source: DefiLlama
WBTC Integrations on Scroll
To determine whether WBTC is a suitable collateral type on the Scroll network, it is essential to understand the background information on the Scroll bridge and the interest in bridging assets. This context will help assess how WBTC is currently being utilized on Scroll and whether the market for WBTC on this network is sufficiently stable and resilient. The ease of bridging is important in ensuring an efficient arbitrage market and sourcing liquidity for liquidation. However, on-chain liquidity provides a stronger assurance of timely liquidation and merits observing the usage of WBTC on Scroll.
WBTC on Scroll, as described above, has not experienced significant demand growth. Here is an overview of how WBTC is being utilized today (May 11, 2024):
Source: ScrollScan - May 11, 2024
WBTC in contracts make up ~55% of WBTC on Scroll; of those, WBTC is exclusively utilized in DEX venues. The vast majority of WBTC on DEX is paired with WETH.
The most liquid venue is the Ambient Finance ETH/WBTC market. Ambient is a DEX protocol that allows for two-sided AMMs combining concentrated and ambient constant-product liquidity on any arbitrary pair of blockchain assets. At this time (May 11), a swap size of just 2.75 WBTC triggers a price impact warning of >2% price impact.
While it is encouraging to see a diversity of DEX pools having integrated WBTC, the overall adoption of these markets remains low, and WBTC is not a reasonably liquid asset on Scroll.
This does not preclude liquidators from bridging WBTC off Scroll to complete an arbitrage loop, but the bridge process can take ~1 hour, substantially increasing the risk assumed by the liquidator and/or complexity involved with managing hedged positions across networks or exchanges.
wstETH Cross-comparison
wstETH will likely face similar challenges as WBTC for use as collateral, so we cross-compare how wstETH is utilized on Scroll.
Source: ScrollScan - May 11, 2024
By contrast, wstETH is concentrated much more heavily in EOA addresses. The top 3 wstETH holders on Scroll are EOAs with generally low activity, i.e., do not appear to be market makers but instead generally passive holders. Aside from the Aave integration, wstETH is typically integrated into DEXs, and generally, the wstETH/ETH pair is represented. Ambient and SyncSwap also appear to be the dominant DEX venues.
wstETH may retain a notable advantage over WBTC arbitrage in that it is a stableswap- arbitrageurs may be more inclined to assume prolonged exposure to wstETH in case of a depeg, with the promise that wstETH can be redeemed from Lido directly for a proportional share of its underlying ETH. Given that ETH is available in ample supply on Scroll - a reasonable assumption for an L2 network - wstETH may be more likely to attract market makers without hesitation. In the case of WBTC, arbs must assume exposure to a secondary asset (BTC), which may be undesirable, and a commensurate premium may be expected to restore its peg, i.e., market makers may be less likely to exhibit the necessary demand to absorb liquidation events.
