eIP 1: Promote WBTC to collateral tier

  • Title: Promote WBTC to collateral tier
  • Author(s): Seraphim Czecker
  • Submission Date: 09.02.2022

Simple Summary

Proposal includes a batch of changes to the Wrapped Bitcoin (WBTC) asset on Euler. These include: promotion of WBTC to the collateral tier. Increase of WBTC collateral factor to 0.88. Increase of WBTC borrow factor to 0.91. Change in interest rate model.

Abstract

This is a proposal to promote Wrapped Bitcoin (WBTC) to the collateral tier on Euler, enabling Euler users to borrow against it. WBTC fits the collateral eligibility criteria of a collateral asset. It is backed by a robust oracle on Uniswap v3. It is widely distributed and decentralised. It has relatively high liquidity on numerous decentralised exchanges. Smart contract risk is relatively low. The proposal includes suggested increases to WBTC’s borrow factor and a change to its interest rate model. These changes would allow users to borrow more WBTC, and bring its interest rate in line with competing protocols. On the upside, adding a new collateral asset to the protocol would increase capital efficiency and provide more utility for users. On the downside, adding a new collateral asset always introduces a degree of systemic risk. In the case of WBTC, the benefits outweigh the potential risks.

Motivation

The goal of the proposal is to boost the capital efficiency and utility of the Euler protocol. The current risk factors on the protocol are purposefully restrictive as a part of Euler’s soft-launch in late Dec 2021. Since then, the protocol has performed well against a backdrop of extreme price volatility and a large number of liquidations across DeFi. Furthermore, there have been no reports of any critical bugs on the protocol in spite of a $1m public bug bounty being live for nearly a month. Promoting WBTC to collateral status and amending borrow factors and the interest rate model is the first step in ramping up capital efficiency in a risk-managed fashion on Euler.

Specification

  1. What is the link between the eIP author and the asset?

None. The proposer is the head of risk at Euler Finance and has no link to WBTC.

  1. Provide a brief description of the asset

WBTC token is a wrapped form of Bitcoin compatible with the Ethereum ecosystem. It was initiated by Kyber, Ren and BitGo in January 2019.

  1. How is the asset primarily used?

The asset is primarily used to bring BTC to the Ethereum ecosystem for DeFi purposes like swapping, lending, borrowing etc.

  1. Explain why the eIP would benefit Euler’s ecosystem?

WBTC is an established asset in DeFi and listing it as collateral would allow users to tap into Euler’s capital efficiency without swapping it for the already-listed collateral assets like USDC, DAI and WETH.

  1. Where does the asset trade?

WBTC trades on almost every major centralised exchange, including Binance, FTX, and Coinbase. It also has liquid markets on key decentralised exchanges, including Uniswap, Sushiswap, and Curve.

Consequently, it would allow liquidators to easily offload WBTC on various CEXes and DEXes in the event of a liquidation spiral.

  1. What are the volumes and market capitalisation?

Market capitalisation is $10 billion with $240 million traded in the last 24h.

  1. What is the liquidity like in the Uniswap V3 liquidity pool versus ETH?

The 0.3% WBTC/WETH Uniswap V3 pool is one of the most liquid of Uniswap pools. It has a TVL of $240 million and, crucially, has full range liquidity.

  1. What security/auditing reports have been done?

WBTC is being audited on a constant basis using Chainlink’s proof of reserve, which is onchain.

Implementation

Contract Method Token Token Name Token Address Updates
governance setAssetConfig USDC Wrapped BTC 0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48 borrowIsolated:false collateralFactor:0.88 borrowFactor:0.91
governance setIRM USDC Wrapped BTC 0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48 interestRateModel:MEGA

*MEGA mode: Base IR 0%, Kink IR 20%, Max IR 100%, Kink% 80%

**Base IR is the APY at 0% utilisation; Kink IR is the APY at Kink%, Max IR is the APY at 100% utilisation, Kink% is the utilisation level where the slope becomes steeper

Voting

Voting yes signals approval of the suggested implementation.

Risk Assessment by Euler Risk Team

Oracle Grading

According to our inhouse research, meaningful attacks on the 0.3% WBTC/WETH Uniswap V3 oracle appear unfeasible. The substantial TVL spread across the entire price range is able to prevent both artificially elevated and depressed oracle prices.

For more details, check out the full report.

Decentralisation

WBTC is a custodial solution, which makes it score lower from a decentralisation point of view. Nevertheless, WBTC is a reputable institutional solution with years of track record developed by a well-respected team, which mitigates risks.

Volatility

WBTC/ETH annualised 30-day realised volatility fluctuates from 50-100%, which is entirely manageable.

Liquidity

WBTC is listed on 88 exchanges (both CeFi and DeFi) according to Nomics with most volumes occurring on different Uniswap V3 pools, BKEX and FTX. Given the depth of liquidity pools and order books, it is unlikely that liquidating users in an adverse scenario will be challenging.

Smart Contract Risk

WBTC uses proof-of-reserve which allows transparency over the custodied funds.

Conclusion

While scoring lower on decentralisation, WBTC ranks very high on oracle security, volatility, liquidity and smart contract risk. We therefore recommend implementing the proposed eIP.

Relevant Links

Oracle grading tool: https://oracle.euler.finance/

WBTC audit: Wrapped Bitcoin ( WBTC ) an ERC20 token backed 1:1 with Bitcoin

5 Likes

WBTC is kinda basic for all defi projects, surely indeed we need it.

1 Like