This post is a continuation of Offboard wUSDM, mTBILL, wM, SolvBTC from Euler Prime and part of a wider reevaluation of Euler DAO-governed markets.
Summary
This proposal seeks to offboard tBTC and eBTC from Euler Prime. Based on fundamental and economic indicators, these assets do not meet the high standards mandated by the market. Removing these vaults would reduce the total risk exposure of Euler Prime, making it a more attractive venue for blue-chip lenders and borrowers at a lower risk premium.
Background
Euler Prime is Euler DAO’s flagship market on Ethereum. It is the second biggest market on Euler with $201.15M supplied and $96.22M borrowed. The cluster consists of 23 vaults, 11 of which hold less than $1M in deposits combined.
The 2 vaults discussed in this proposal were added to Euler Prime at an earlier stage of the protocol as part of a riskier growth strategy. Now that Euler Prime is an established market, these assets present asymmetric risk relative to business opportunity. As of writing this proposal, these vaults contribute only $44k (0.02%) of Euler Prime’s TVL.
Motivation
Euler Prime’s mandate is to be “[a] market tailored to borrowing stable assets against blue chip crypto assets.” After reevaluating the vaults that make up this market, we have concluded that tBTC and eBTC do not live up to the standards of quality, health, and demand necessary for Euler Prime.
Note about BTC risk
These particular offboarding recommendations are motivated by the goal of reducing total long-tail risk in Euler Prime. In a monolithic market with rehypothecation, exogenous disruptions in a single asset could affect the solvency of lenders and borrowers across the entire market, a process called risk contagion. We believe these BTC-derivative assets are among the riskiest assets in Euler Prime.
BTC wrappers are essentially bridges from Ethereum to the Bitcoin network. Due to fundamental technical reasons (Bitcoin’s turning incompleteness), this bridge cannot be done trustlessly, nor can the delay for mints and redemptions be reasonably reduced under 1h. Contrast this with an L1<>L2 bridge where shared security properties afford some degree of trustlessness and quick finality.
While tokenized BTC is an indelible part of Ethereum DeFi, care must be taken to understand and appreciate the individual risks of these solutions. If a given BTC derivative is not performing well on Euler Prime, the most prudent thing to do is to remove it from the market, so as to eliminate any long-tail risks it might introduce.
tBTC
The tBTC vault has been live for 175 days. It reached an all-time high of 17 tBTC in deposits which all flowed out when the last rewards campaign ended in January. Since then, the tBTC has held an insignificant amount of value, currently $16k (0.2 tBTC) among 3 holders. Efforts have been made to reach out to tBTC LPs to kick-start an LBTC/tBTC looping vehicle, however this did not pan out due to various reasons.
While the minting and redemption process for cbBTC and WBTC is guarded by a multisig, tBTC aims to be decentralized. This means a highly complex system architecture together with a node staking model deriving security properties from the T token. Threshold has had 3 publicly disclosed critical vulnerabilities in its system. tBTC trades at a 30 basis point discount to cbBTC and WBTC, evidence that the market broadly believes it is the riskiest out of the three. All of this points to the fact that tBTC carries a degree of bridge risk (instant, irrecoverable loss of backing) to Euler Prime that is not substantiated by the business opportunity it brings.
eBTC
The eBTC vault has been live for 109 days. It reached an all-time high of 50.7 eBTC in deposits on 2 February which dropped soon after the last rewards campaign ended. Since then, the eBTC vault has held an insignificant amount of value, currently $28k (0.35 eBTC) among 6 holders. Evidenced by the holder distribution and other onchain data, eBTC has a B2B2C distribution model where a large percentage of supply is held by managed vaults such as Liquid BTC, Bitcoin Sonic Vault, Lombard BTC Vault. Though there have been repeated efforts to find LPs for the eBTC vault on Euler, liquidity was never bootstrapped meaningfully. Following eBTC’s recent addition on Aave, we believe the opportunity left for Euler Prime is small and does not outweigh the high relative risk of eBTC.
eBTC is riskier than LBTC because of an extra layer of abstraction: a Veda vault with a 7-day withdrawal delay. Compounded with LBTC’s withdrawal period, eBTC takes a minimum of 14 days to redeem to native BTC. Meanwhile, eBTC’s liquidity profile has worsened. A 100 eBTC swap ($8M) yields only 72.3 WBTC. Given that Aave now holds 750 eBTC as collateral, a potential loss of confidence in eBTC’s peg could result in a self-fulfilling prophecy / liquidity spiral scenario which could affect Euler Prime negatively.
Offboarding Process
We propose a smooth and incremental offboarding process as outlined in the previous offboarding proposal.
Author
Objective Labs is a service provider for Euler Labs tasked with product development, risk management, and incentive optimization. Objective Labs is Euler-aligned.