Discussion: WBTC-B collateral type, backed by B.Protocol with x10 leverage

Introduction
B.Protocol is a decentralized backstop protocol. We are live for one month, backstopping around $10m of ETH-A collateral and $3.5m debt. A first successful demonstration was done during the sharp market crash last Thursday.

B.Protocol introduces the concept of relying on committed liquidators, who get priority in the liquidation process, in return to their commitment.

In ETH-A collateral we are an opt-in system, where users can decide to manage their Vault with us, and give priority to the liquidators. B.Protocol liquidators in return share some of their proceeds with the users who give them the priority.

In this write-up we propose to experiment a native integration between B.Protocol and the MakerDAO system, by on-boarding a new collateral type, namely WBTC-B, which will be natively backed by a strong commitment from B.Protocol backstop.
EDIT: following @OneBiteLawnOrder question, we want to emphsize that the proposal is for it to be a native collateral in dss (Maker) smart contract, available to all users (e.g., via Oasis and other platforms), and not limited only to B.Protocol front end.

A success of such an experiment could benefit Maker to give a better value proposition to the users, namely x10 long position on WBTC, and could pave the way for more collaterals to be backed by B.Protocol with high leverage opportunities.

In the next Section we present a proposed set of parameters, then we propose a way to commit on liquidations, and finally we raise topics for further discussion.

Collateral parameters

  • Stability Fee: 4% (like WBTC-A)
  • Liquidation Ratio: 110% (support x10 leverage)
  • Debt Ceiling: 5 million (start with low ceiling in the experimental stage)
  • Auction Lot Size: 50,000 DAI (*)
  • Minimum Bid Increment: 3% (*)
  • Bid Duration: 6 hours (*)
  • Max Auction Duration: 6 hours (*)
  • Liquidation Penalty: 0-10% (*)
  • Dust: 500 Dai

It is also proposed to use the medianizer price feed directly, instead of the OSM, as otherwise the 10% buffer might not be sufficient until liquidation occurs.

(*) The auction parameters are applicable only when one of the backstop members is being liquidated.

Committed Backstop design
For simplicity we describe a system with a single liquidator. Scaling the system for multiple liquidators, in a permissionless way, will be handled by B.Protocol, and it is not in the scope of this writeup (we presented some ideas on how to achieve fairness here).

Initialization: the liquidator opens a Vault with $0.5M WBTC deposit, and 0 debt. We denote this liquidator’s Vault with lv. Liquidator can withdraw collateral or increase his debt, only if his net position (collateral minus debt) is over $0.5M (according to MakerDAO price feed).

Liquidation: when calling bite to an unsafe Vault v, then if v==lv, or lv does not have a net position of $0.5M, then v is subject to a standard liquidation process (by the cat or the dog).

Otherwise, the entire position of v is forked and added to lv. The user of v is losing all his collateral (which is effectively a maximum of 10% penalty). lv get all the user collateral and all of the user debt.

The bite function is callable by anyone.

Discussion
The expected course of events is that after a liquidation, the liquidator will take action to rebalance his new position, by repaying the new debt. In the long run, if he fails to do it, he risks being liquidated himself.

Given each user position is 110% over collateralized, an initial deposit of $X would in ideal situations be sufficient to backstop $10X of debt. Indeed, at a worst case an unsafe Vault has a position of $5.5M of WBTC collateral and $5m of dai debt. This position could be thrown at lv making a safe vault with $6m collateral, and $5m debt…

The proposed mechanism does not give mathematical certainty for the solvency of the system, however, insolvency would result in the liquidator losing his initial $0.5M deposit.

Over time the liquidator initial deposit might depreciate in value, and in this case his incentive to retop it is that in the meantime he will not be able to handle new liquidations. This mechanism design give rise to a more committed liquidator, which allows reducing the current WBTC-A 150% collateral ratio (where liquidators are not committed) to 110% collateral ratio in WBTC-B.

All the parameters presented here are very preliminary and subject to discussion. The development of bootstrapping of such protocol could be subsidised by B.Protocol, however it is important to generate a long term framework that will allow liquidators to profit. Hence, over time it might be needed to relax the capital requirements, or offer additional incentives to the backstop.

Operating within the framework of B.Protocol, who will integrate with additional lending platforms, will give rise to better capital efficiency for the liquidators, which could result in stronger commitment (i.e., capital) from their side.

Summary and open questions
The proposed collateral would benefit MakerDAO users, as it will allow better leverage (which is currently not available at any existing DeFi platform). It is our belief that this will be obtained without additional risk to the MakerDAO system, and moreover, it will actually increase its stability during sharp market movements.

The success of this experiment could lead the way to more higher leveraged assets, which could increase the total dai in circulation, and help prevent future Black Thursday events.

This post is a call for discussion on:

  1. what is needed to get the community consent for such a new collateral.
  2. missing technical details. E.g., behavior in the event of an emergency shutdown, potential adjustment to the OSM to support tighter collateral levels, changes that might be required when the liquidation 2.0 is live.
  3. Starting with a different collateral, e.g., ETH-C, is also something that is up for discussion.
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Interesting post,

Why is it that in your example LV is using the same collateral type as V? Would it not make more sense for LV to use a more stable type to avoid situations where LV and V get wiped out at the same time?

Thanks

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the $0.5M initial deposit should give the incentive to liquidator to try hard towards preventing both of the to be wiped out.

You are correct that technically a $0.5M DAI would give better guarantees, but would require much more changes in the dss (dai smart contract system).
While having it in WBTC requires much fewer changes.

I guess we can teak it around a bit, such that the $0.5m dai is kept outside the vault, and in the event of a liquidation it is immediately used to repay some of the liquidated vault debt.

Thanks for this discussion @yaronvel. You can post a signal request right away if you wish to start the ball rolling on this proposal if you wish. Its an easy way to gauge community sentiment and if it passes you can then implement it on-chain. Check out Practical Guide to the Signaling Process on how to create one.

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Totally feeling this idea! Just one thing @yaronvel – can you explain your thoughts behind 0-10% Liquidation Penalty? ETB-B is 13%, just wondering how the community would feel about a lower LP for WBTC-B.

Otherwise, this will be a Maker Community decision–we will have to rally MKR voters, and get full participation by the community. Looking forward to hearing from more folks.

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thanks, i think it will be best to hear the community feedback for few days, so we could address it, before asking for a signal request. so we will do it next week.

if the collateral factor is below 113% (which is not the case for ETH-B) it is impossible to have 13% liquidation penalty. With 13% penalty, the debt the liquidator will have to pay, will be bigger than the user collateral. Hence, liquidators will not want to on-board the system.

Afaik the 13% penalty stem from a concern of an auction griming, or more generally that a keeper will intentionally make his cdp unsafe, hoping to buy his own debt at a lower price.
With the proposed system, for a user that is not the backstop, there is no such concern.
As for the penalty for the backstop CDP, it can be 13%, but the total collateral will be only 110%, so it is again less meaningful to have it over 10% (at least from what i understand, could be wrong here).

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Forgive my ignorance here but what would prevent other users from accessing the WBTC-B collateral type? Is there a function that would only permit B.Protocol to access it?

What do you mean by access? the idea is that all users will be able to borrow WBTC-B and repay it.
But the liquidation system (cat or soon dog) will be different and will give priority to committed liquidators (instead of sending it to the flipper).

It is definitely the desirable intention to give all users access to the x10 leverage.

I see, thank you. So anyone could access WBTC-B vaults, they don’t have to be using the B.Protocol front end? With the parameters you suggest wouldn’t this just immediately fill up from WBTC-A users refinancing for more favourable liquidation parameters?

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This all sounds very neat. The one thing I’m curious about however is the wisdom of enabling WBTC first with a 10x leverage system. Would it not make more sense to enable the same arrangement with ETH for WBTC first before we start opening the system up to riskier vaults? Obviously a fan of allowing users the freedom to decide what is best for them, but leveraged positions are objectively more risky and lead to more liquidations, so IMO it would make sense to ensure B-Protocol can handle a second asset through Maker before opening the door to more risky management parameters. Curious if others have thoughts about this.

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Great question, it makes me realize i forgot to explain this part.
Yes, WBTC-B will be accessible to anyone at the smart contract level as a standard MakerDAO collateral. It will be accessible via Oasis, and everyone else who is integrated with Maker smart contracts. It will be just like ETH-B for the end user, and front ends.

The desired result is that users will prefer WBTC-B or WBTC-A, but the governance will initially set a relatively low ceiling, so not everyone could use WBTC-B instead of WBTC-A. Over time, and the governance (of maker) gains more confidence, it could raise the ceiling. And the ideal outcome is that over time WBTC-B will completely replace WBTC-A.

Thanks, this is the kind of feedback we are looking for.
From B.Protocol side (and specifically from liquidators side), starting with ETH is also preferable.
However we imagined that for MakerDAO, WBTC-B will be a better value proposition than ETH-C (as ETH-B already exists).

I am also curious to hear the community thoughts on this.

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I don’t get the x10 factor here. Where does that come from?

Technically 110% collateral ratio allows you to take 11X long position.
If you have 1 WBTC, you deposit it, borrow dai against it, sell it to WBTC, deposit again, and borrow dai again.
Eventually it could end up with 11 BTC collateral, and 10 BTC in DAI debt (you can also do it in a single tx with a flash loan).

Was not sure if this count as x10 or x11, so i put x10 in the title.

OK. So it basically just WBTC. I thought you had created a leveraged version of BTC.
I kind of suggest you drop the x10 in the title - if you look at other collateral or vault discussions they do not include this. How much you leverage is really up to the Vault owner.

Really, x11 leverage is the point that you get liquidated you shouldn’t be using anything close to that much leverage.

well the novelty here is the higher potential leverage. but will try to make the title less confusing.

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yes, this is the maximum leverage. a more precise terminology would be 110% collateral ratio in WBTC-B vs 150% collateral ratio in 150% in WBTC-A.

ETH-A/WBTC-A is presented as allowing x3 leverage, so here x11 is the theoretical bound.

But even as a more conservative borrower it reduces your risk to get liquidated the lower your minimum LR is.

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