WBTC is an ERC20 stablecoin on Ethereum backed 1:1 by native bitcoin. Each WBTC issued on Ethereum has a corresponding native bitcoin deposited with a custodian, which can be verified on-chain. The token contract is governed by a multi-sig contract, which consists of WBTC DAO members who operate the service. WBTC was incepted in late 2018 and currently dominates with more than 70% market share in tokenized BTC on Ethereum.
WBTC DAO consists of Custodians and Merchants. Custodian holds the native bitcoin on Bitcoin blockchain and also holds the keys required to mint new ERC20 WBTC tokens on Ethereum; currently BitGo serves the role of custodian. Merchants are entities which request minting and burning of WBTC tokens with their own keys and deliver the tokens to the final user. The WBTC DAO members; custodians, merchants and other institutions that hold keys to the main multi-sig contract which can alter, add or remove new institutions to the system - being a merchant is not a condition to be a DAO member and vice versa. For example Compound protocol is a DAO member but it is not a merchant and DeversiFi is a merchant but is not a DAO member. In the current structure of the WBTC DAO, BitGo is the only custodian while there are 13 different merchants and 19 different DAO members, all of them are well known financial institutions/protocols in the crypto space. BitGo is using a multi-sig wallet to store the native bitcoin.
BitGo being the only custodian does imply a significant counterparty risk to the asset directly, but we must take into account that BitGo is a crypto financial institution of significant importance for the crypto financial market, as many other financial institutions - exchanges, investment management firms, etc - use their service for custody of assets; we do not believe that addition of WBTC collateral significantly increases Makers counterparty risk exposure - as if something would to go wrong with BitGo, the instance would have a macro impact on crypto assets and is not specific to WBTC, but rather to majority of crypto assets.
Minting and burning of WBTC tokens is the process of creating and removing tokens from circulation. These actions are performed solely by custodian and merchants, the final user is not involved in these actions. Minting can only be done by the custodian after the merchant address initiates the mint. The burn can only be done by a merchant address. Custodian will wait for 6 confirmations on Bitcoin ~1h and 25 on Ethereum ~5.8min.
The final user transacts with one of the merchants. Merchants are required to do AML & KYC procedures and identify the user who is requesting to transfer WBTC to BTC or vice versa. The transaction can be performed via atomic swap between the blockchains or use a trusted exchange where the user trusts the merchant. This means that users with a special relationship with merchants and merchants themself, are the most favorable entities, who would arbitrage WBTC/BTC peg in the case of a spread. In our opinion, in the case of a larger discount on WBTC (~10%), there would be plenty of traders who would be prepared to hold the tokens and sell them at par later in time; those do not require to perform KYC with a merchant.
WBTC has the following fees; Custodian fees - occurs when merchant mints or burns tokens and is taken by custodian (~4-10bps), Merchant fees (~0.25%) - occurs when user exchanges tokens for native coin and is taken by the merchant.
Trading Volume & Liquidity
WBTC trading volume is in increasing trend on both centralized and on-chain permissionless venues, which is expected due to favorable market conditions and general increasing activity in the crypto market. In 2021 the average daily trading volume was $53m and $199m for CEX and DEX respectively. On-chain trading activity is almost four times larger, which is expected since the point of WBTC is to use bitcoin in ETH financial applications. On-chain trading volume and liquidity is the most relevant for slippage estimation as it is instantly accessible to Keepers, while CEX WBTC volume is less relevant, it is also an important metric for estimation of WBTC/BTC peg stability.
Source: Various DEX trackers/explorers/Graph API
DEX trading volume consists of AMM based venues; Uniswap, Sushiswap, 1inch, Balancer, Curve, 0x and Kyber. In the past month, 0x exchange has seen a large increase in activity, with larger trading volume than Uniswap and Sushiswap on some days. Some of this trading volume consists of renBTC (~14%) and other bitcoin pegged stablecoins on Ethereum. While this activity is not equally relevant as ETH and stablecoin volume, it is still important as renBTC can be redeemed for native bitcoin. We did not consider DIGG trading volume as the asset is newly established and diverged significantly from the peg at the time of writing.
WBTC is present on the majority of relevant AMM based markets including Uniswap, Sushiswap, 1inch, Balancer, Curve; paired with ETH and stablecoins in majority of cases and other bitcoin pegged assets in Curve. While increasing trading activity is important, on-chain liquidity is the most important metric, as it represents on demand 1-tx liquidity for Keepers to sell collateral assets into. At the time of writing, these liquidity pools held 33k WBTC, of which 13.7k is in bitcoin nominated pairs in Curve and 19.3k in ETH nominated pairs. Sushiswap is the most liquid, followed by 1inch, Uniswap and Balancer.
Based on the liquidity of these AMM pools, we can estimate slippage for x amount of WBTC sold and can help us determine the DC limits. For this purpose we use 1inch DEX aggregator UI; 1000 WBTC to DAI trade would produce 14% slippage and 90% of the trade would be routed via ETH based pools. In the case of a 30% price drop on bitcoin, and assumption that vaults will not try to prevent liquidations about 2.200 WBTC collateral would get liquidated and processed by keepers. In a realistic situation the amount would be smaller, but this can give us an idea of a worst case scenario.
Leverage on WBTC
When we estimate potential slippage on WBTC in case of severe price drop, we must take into account all different leverage based protocols, where liquidators/keepers would receive WBTC from liquidations and sell the proceeds into the market for initial capital. WBTC is a popular collateral asset in AAVE v1&2 and also Compound. Compound protocol supplied amount is currently 38.5k (31.3% of all WBTC supply), across AAVE v1&v2 9.7k (8%) WBTC supplied in the protocol and finally 13.8k (12.2%) is used as collateral in MCD. This means that approximately 51.3% of existing WBTC is used in leverage based protocols. Not all WBTC supplied in AAVE and Compound is necessarily used as collateral, thus the actual worst case amount liquidated is smaller than that, but the portion of total supply allocated to leverage based protocols is relatively high. In Compound, a relatively small amount of WBTC is borrowed, which means users are in general not recycling it (a popular farming strategy for stablecoins). Some of the users use multiple protocols to construct their final farming/LPing position; WBTC is generally used as collateral to acquire some asset via lending protocols, largest users in most cases build leveraged long WBTC/stablecoin position, but this is not always the case, as sometimes ETH or other tokens are borrowed in Compound or AAVE, or other collateral such as ETH, other tokens or stablecoins are also used as collateral; which further aggravates the estimation on when exactly these positions would be liquidated, as WBTCETH and other WBTCERC20 prices are also a factor.
In MCD, the largest WBTC-A vault is Nexo; 71.6m dai debt and 4497 WBTC in collateral represents a healthy CR. The second largest vault is a user that leveraged WBTC in MCD and Compound in order to acquire dai and ether which are deployed into 1inch and Sushi ETH-Stablecoin pools. The user seems to maintain 200% CR and can unwind his positions if he wants to from the liquidity in LP pools.
In Compound the largest 10 accounts present 60% of WBTC collateral; two of them are significantly larger than others which have a standard long WBTC levered position vs stablecoins, while the third largest account only supplies WBTC and is not using it as collateral. There are two large accounts that have long WBTC positions vs ETH, UNI and COMP.
In AAVE v1, one user significantly outstands as it represents 44.5% of all WBTC collateral; she is mostly borrowing stablecoins, but also other tokens such as YFI, MKR, MANA, REN, COMP.
In AAVE v2, 10 largest accounts present 39% of WBTC collateral, and the top 10 represent 25%; they are all long leveraged positions, they do not use the assets for farming/LPing.
WBTC specific risk; peg discount
As all derived or tokenized assets, WBTC can diverge in price from their underlying asset. This presents additional risk as WBTC can in the instance of a peg discount, drop for additional margin relevant to the underlying bitcoin, which will make valuation of the asset and bid decisions harder for Keepers. While we think a large price discount is unlikely and would likely be arbed by market makers who can afford to wait hours or even days for the peg to converge back, after the underlying problem would be resolved, it is definitely possible. Because of these reasons, we would advise the Maker community to avoid adding new products with lower collateralization requirements in the MCD system, at least until Liquidations 2.0 are enabled. The latest collateral auction analysis also showed sub-optimal outcomes for liquidated ETH-B vaults, which use lower than standard LR. In addition to our findings, some of the latest proposals in Compound governance is to reduce the c-factor for WBTC (from 0.75 to 0.6) , which would translate to an increase of the liquidation ratio (from 133% to 166%) in MCD terminology, when compared directly.
There are several ways of how WBTC can be converted back to native bitcoin.
- Use CEX venues; sell WBTC for BTC on Binance or other CEX (limited to liquidity and trading volume)
- Use Ren protocol or other permissionless bridge; sell WBTC for renBTC on Curve, redeem the underlying bitcoin via Ren bridge (limited by set market liquidity)
- For KYCed users; use WBTC Merchants for BTC swap. If the merchant has sufficient liquidity it can be done fast, otherwise the merchant has to request the burn of the WBTC tokens and wait for the BTC transaction from the custodian on Bitcoin. Only users that have passed the KYC process with the merchant can thus redeem the underlying asset. The average time needed since June 2020 from the burn or mint requested by a merchant and actual delivered asset from the custodian took 4.79 hours. (Limited to KYC, or being a Merchant, only relatively low amounts are instant)
- Any kind of WBTC - native BTC conversion takes considerable time compared to Ethereum only based trades, as CEX venues usually require at least 6 bitcoin confirmations (~1h) for deposits, but is still something that can be done in less than 6 hours, as ether or dai can be withdrawn out of the CEX venue (given that actual delivery of BTC is done is sufficient time).
As mentioned before, WBTC has recently gained more traction on CEX venues, thus WBTCBTC price feed is not very long. Nevertheless, the price did not diverge from the peg significantly in the past months, especially on Coinbase and Binance, while HuobiPro and OKEx saw a few short-term price spikes in both directions.
WBTC ecosystem is developing fast, which is most evident in increased volume, but also in greater acceptance of the asset by various centralized and permissionless financial institutions. Main concerns which we have are that more than 50% of WBTC is supplied and potentially used as collateral in different leverage based protocols and that WBTC to native bitcoin redemption cycle is limited to KYCed users and on average took more than 4h. We believe current DC on WBTC-A can potentially be increased for further 200m, but the calculated risk premium is close to 10% at fully used DC. We recommend avoiding WBTC vault type with lower collateral requirements, especially because a) WBTC can trade with a discount to the underlying due to potential redemption limitations, which in effect means increased price drop and b) because ETH-B vault showed sub-optimal liquidation outcome for Maker and for the vault user. In the case where WBTC-A vault with new ‘line’ is full before the Liquidations 2.0 are implemented, we recommend further scaling of WBTC collateral via new vault type with increased collateral requirement, similar to how the governance approached scaling of ETH collateral.