This is an archive of our post on Aave governance forum. Read the full thread here.

Summary

LlamaRisk supports enabling a new tBTC/WBTC liquid e-Mode with the parameters proposed by @ACI. It is a measured and rational decision that would not impact the risk profile of Aave’s Mainnet market while allowing users to take up higher leverage.

Pricing

Both assets are backed 1:1 by BTC. However, the pricing mechanisms used for these assets on Aave V3 are different:

• tBTC uses a Chainlink’s BTC/USD market price feed with a deviation threshold of 0.5% and a heartbeat of 1 hour.

• WBTC uses a Chainlink’s WBTC/BTC exchange rate feed with a deviation threshold of 2% and a heartbeat of 24 hours in conjunction with the same aforementioned Chainlink’s BTC/USD market price feed.

Therefore, users who borrow WBTC using tBTC as collateral will only be exposed to fluctuations in WBTC’s exchange rate. As pricing data suggests, this exchange rate has never deviated from the base by a larger than 30 bps (0.3%) threshold in any direction.

Source: Chainlink WBTC/BTC exchange rate feed, 12th November, 2024

Notably, WBTC being a borrowable asset in this proposed liquid e-Mode setup, liquidations would occur only if the WBTC/BTC exchange rates are>2% above the peg (the LTV-to-LT buffer). While historical data indicates a minor risk of potential liquidations, users should exercise caution, especially regarding the recent WBTC custody update situation.

Current Borrows

As the borrower data on Mainnet suggests, a negligible number of users are currently leveraging tBTC using WBTC. This amounts to 0.3% of the total loan amount backed by tBTC and indicates that the interest of such leveraging is almost non-existent. Nonetheless, introducing a proposed liquid e-Mode would increase the utility of this borrow setup.

Source: ChaosLabs Community Dashboard, 12th November, 2024

Estimated Increase in Leverage

The new liquid e-Mode would enable more leverage for tBTC. It is already possible to leverage tBTC assets but subject to a lower total leverage due to a lower LTV threshold of 73%. The maximum possible leverage for tBTC on Mainnet, assuming an infinite number of loops, is currently:

With a proposed liquid e-Mode max LTV of 93%, the highest possible leverage would be ~14x. While this is a large increase, the risk is limited by the pricing setup used.

Moreover, while there are currently only 4 wallets that borrow WBTC using tBTC, the mean health ratio of these loans is 1.49. It indicates higher risk-aversion among the borrowers; therefore, we can expect a lower actual leverage even if this liquid e-Mode is introduced.

Source: LlamaRisk, 12th November, 2024

The supply and borrow caps would also limit the overall possibility of leverage. Risk providers will continuously monitor loan composition and overall market health changes, especially in light of the introduction of such new liquid e-Modes.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.