Overview
This proposal recommends increasing the E-mode parameters for LBTC on both Ethereum and Base, and for eBTC on Ethereum. These changes are justified by our in-depth risk analysis of the Babylon Bitcoin Staking Protocol, which underpins the Bitcoin collateralization of both LBTC (a Bitcoin LST) and eBTC (a Bitcoin LRT). The analysis evaluates the protocol’s slashing architecture and the worst case economic impact of a slashing event. Based on these findings, the proposed updates aim to reflect the low collateral impairment risk inherent to Babylon’s design, while aligning LBTC and eBTC risk parameters more closely with those of comparable Bitcoin wrappers (e.g., WBTC, tBTC) and improving capital efficiency for users interacting with these assets on Aave.
Motivation
LBTC and eBTC represent staked Bitcoin within the Babylon ecosystem. Since the initial listing of this Bitcoin LST and LRT on Aave, Babylon has undergone an upgrade with the launch of Phase 2 of its staking protocol. A key design change in this upgrade was a reduction in the slashing rate from 10% to 0.1%, significantly altering the downside risk profile for stakers and their corresponding token representations.
The original slashing rate of 10% can be seen in this archived Babylon branch, while the updated slashing cap of 0.1% was introduced in this parameter upgrade PR.
A comprehensive risk analysis was conducted by Chaos Labs following this change, including simulations of worst case slashing events. The analysis concludes that the maximum potential loss to backing collateral is strictly capped at 0.1% due to Babylon’s cryptographic enforcement model and fixed penalty logic. This model differs substantially from Ethereum’s correlated slashing system and does not propagate losses across delegators.
eBTC, as a restaked LRT, may be subject to additional slashing conditions from restaking platforms. However, because Babylon’s base-level slashing is both minimal and deterministic, the associated risk remains low. Therefore, we find it reasonable to extend a moderate risk parameter uplift to eBTC as well.
E-mode
LBTC currently participates in the BTC-correlated E-mode category on both Ethereum and Base.
On Ethereum, LBTC’s current E-mode parameters are 84% LTV and 86% LT. We propose increasing them to 86% LTV and 88% LT.
On Base, LBTC is currently configured with 82% LTV and 84% LT in E-mode. We propose increasing these to 84% LTV and 86% LT.
eBTC currently participates in a eBTC-WBTC E-mode on Ethereum, with a LTV of 83% and LT of 85%. We propose increasing these to 84% and 86%, respectively, to reflect the updated risk perspective following Babylon’s Phase-2 upgrade.
These changes are consistent with the revised risk outlook, which supports LBTC’s inclusion at parity with other BTC wrappers under correlated-asset E-modes, given its improved backing security profile following Babylon’s latest upgrades.
Specification
LBTC & eBTC Liquid E-Mode Parameters
| Asset | Chain | E-Mode | Current LTV | Recommended LTV | Current LT | Recommended LT |
|---|---|---|---|---|---|---|
| LBTC | Ethereum | LBTC_WBTC, LBTC_cbBTC, LBTC_tBTC | 84% | 86% | 86% | 88% |
| LBTC | Base | LBTC_cbBTC | 82% | 84% | 84% | 86% |
| eBTC | Ethereum | eBTC_WBTC | 83% | 84% | 85% | 86% |
Next Steps
We will move forward and implement these updates via the Risk Steward process.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.
Copyright
Copyright and related rights waived via CC0