[WBTC] - WBTC Collateral Request For Comment

This is a good point, thanks. I agree that there are stability implications from unwinding basis trades, which we ought to consider, and are inherent to any lending market. These concerns apply to the existing ETH collateral type, though presumably anyone who has wanted to put such trades on has had plenty of time to, so we could assume that this potential is close to exhausted until market conditions change. I think having the DAI supply increase now due to borrowing against WBTC, only to be contracted later if conditions change, probably puts us in not much worse a position than if we hadn’t issued the WBTC DAI in the first place, provided the debt ceiling was under control, don’t you think?

In general I think we should treat the WBTC SF similarly to the one for ETH.

It’s not important what keeper could do today, but what keepers are actually able to do today.
There are many steps in your recipe and are not trivial. Keepers performance was abysmal during last market crash.

Just a bit of context: on the governance call it was alluded that a BTC transaction to Coinbase is needed to complete the cycle and that such a transaction takes an hour (6 cfs). I think Matt wanted to point out that CoinList already has BTC/USDC pairs which would make this much faster than previously assumed.

Fair enough. Will check the call. Still, i wanted to point out that community seemed to forgot what happens when market quickly crashes. Imo 10m debt ceiling would be mistake (too high). Operating the keeper under normal market conditions is (relatively) easy, not so much when network is fully utilized and fees skyrocket.

2 Likes

Generally speaking, experimenting with WBTC seems like a positive step, just based on the sheer market size potential. That being said, I think it would make sense to start very conservatively on the debt ceiling side, given the limited liquidity around WBTC currently ($8.1M usd according to defipulse). Limited liquidity of WBTC might cause temporary deviations of WBTC price from BTC price which might stress other assumptions? There’s likely a smaller cap that is big enough to validate market demand and allow WBTC supply enough time to react and grow.

5 Likes

Thanks for the discussion. I’m proposing the following forum pool to gauge general sentiment and specific responses to the points that were raised:

Debt ceiling

  • The debt ceiling for WBTC should be 15mm DAI
  • The debt ceiling for WBTC should be 10mm DAI
  • The debt ceiling for WBTC should be 5mm DAI
  • The debt ceiling for WBTC should be 1mm DAI
  • WBTC should NOT be added as emergency collateral at this time

0 voters

Liquidation ratio

  • The Liquidation ratio for WBTC should be the same as for ETH (150%)
  • The Liquidation ratio for WBTC should NOT be the same as for ETH

0 voters

Stability fee

(multiple choice approval: select all that you agree with)

  • The WBTC stability fee could be the same as the ETH stability fee (currently 0%)
  • The WBTC stability fee could be 1% higher than the ETH stability fee
  • The WBTC stability fee could be 2% higher than the ETH stability fee
  • The WBTC stability fee could be 3% higher than the ETH stability fee
  • The WBTC stability fee could be 4% higher than the ETH stability fee
  • The WBTC stability fee could be 5% higher than the ETH stability fee

0 voters

Auction Parameters

  • The auction parameters for WBTC should be the same as that for ETH
  • The auction parameters for WBTC should NOT be the same as that for ETH

0 voters

Oracles

0 voters

Once you have voted, please comment below explaining your decisions. When you have voted for a NO option, please consider explaining the reasons for your decision.

3 Likes

I voted for:

  • 5mm DAI debt ceiling
  • same LR as ETH
  • SF 0, 1, or 2% above that of ETH
  • same auction parameters as ETH
  • using the BTC/USD oracle data model

Explanation for my vote: I am proposing a 5mm debt ceiling to start, compared to my initial 10mm proposal, since the main feedback to the proposal has been concerns about concentration risk, custodian risk, and liquidity risk. I believe that the debt ceiling is the parameter that should be used to manage these risks. If WBTC collateral ends up being effective at increasing the DAI supply, and further easing is still required, the community can consider increasing the debt ceiling further. I am also expressing approval of a stability fee that is up to 2% above that of ETH, since I think any higher would reduce the effectiveness of WBTC as an emergency collateral type to boost DAI supply. All other parameter choices are justified in my original comment above.

8 Likes

I voted for:

  • 15mm DAI debt ceiling
  • same LR as ETH
  • SF 0, 1% above that of ETH
  • same auction parameters as ETH
  • using the BTC/USD oracle data model

Hi everyone, I am Getty Hill, a trader at Grapefruit Trading. We are a WBTC merchant and have been for a while. Over the last few months, we have seen WBTC liquidity improve significantly, and the utility increase for WBTC as well. For a while, WBTC suffered from the chicken and egg problem, but as more dapps have built support and markets for WBTC, we have seen good growth in the product. Having worked with Kiarash at Bitgo throughout the process, I can say they take security very seriously, and we have slept fine holding WBTC in our wallets.

I voted for the highest debt ceiling, but I think anything greater than five million is sufficient since that can always be changed later. As for the LR, I believe the same is fine. I don’t see any particular reason to choose something else. For simplicity, I think keeping the SF the same as ETH is good to start. I don’t have a strong opinion or knowledge about the auction parameters, but I would guess the ETH ones are good. The V2 oracle data should be fine as well, I don’t see a reason to change it, but I am open to hearing thoughts. Overall, I think WBTC would be a great addition. A lot of large ether holders also have bitcoin, and in my experience, they are happy to put those coins to work.

8 Likes

I voted for:

  • 5mm DAI debt ceiling
  • same LR as ETH
  • SF 0% above that of ETH
  • same auction parameters as ETH
  • using the BTC/USD oracle data model

I don’t see any reason that the parameters should be more conservative than eth, since btc is less volatile than eth, in the future we may even want to lower the LR vs eth to maybe 140% or similar. That said, I don’t think we should set the debt ceiling higher than the current supply of wbtc as this could probably cause issues like the price of wbtc significantly deviating from the underlying as almost all of it is locked up in makerdao vaults. I do expect this debt ceiling could be raised rapidly though as more wbtc is minted.

4 Likes

Hopefully none of this applies in a few weeks, :rofl:

I’m against adding wBTC at this time as I believe it will not stabilize the peg. Some people probably think that USDC brought the peg from ~$1.023 to ~$1.013 but I think it’s just the consequence of 50% ETH price increase + a few millions of ETH-collateralized loans.

I wonder when we will stop adding new collateral and start adding new code to the contracts that could keep the peg under control + bring back the trust in depositing ETH.

3 Likes

I think adding WBTC with a lower debt ceiling shouldn’t harm Maker at this point, but I remain a bit sceptic of its usage. Although this isn’t related to risk evaluation, I still want to point out:

  • if there’s not much demand for WBTC, why would there be more demand for leveraged WBTC (apart from carry trade Lev mentioned, which relies on low SF).

  • I don’t believe such product is attractive to bitcoines trading leveraged BTC on Bitmex or some other centralized venue and it remains questionable to me if they are willing to trade exchange counterparty risk for a) lower liquidity b) smart contract risk c) WBTC counterparty risk. You could though claim same for ETH in the first place, but ETH has much higher liquidity with DAI and no counterparty risk.

  • if people want to make leveraged BTC positions on ethereum, they will more likely trade new dydx 10x perpetual BTC futures which should have less slippage with USDC pair. Sure, some may prefer to use more decentralized version of it on Maker, but WBTC itself carries counterparty risks anyway.

  • we haven’t seen much usage on Aave, although I wouldn’t necessarily use Aave as a benchmark.

  • WBTC vault owners should have high confidence in WBTC DAI liquidity in order to use it, but it remains low until it’s being used at Maker and we have chicken and egg problem.

In terms of risks, obviously a detailed analysis should be made but here are crucial parts for me, at least when addressing core risk components (liquidity, volatility, counterparty risk):

  • even though WBTC is redeemable and issued on demand, low liquidity (at the moment) may cause problems for vaults when trying to quickly unwind positions in BTC price drop scenario. There isn’t a lot of WBTC traded currently, the most liquid venue is the new Ethfinex exchange called DeversiFi, but it’s with USDT pair. Other DEXes such as Uniswap and Kyber see $50k-$100k volume per day.

  • redemption cycle is quite long (includes many steps + BTC confirmation time). This is not a general problem if WBTC markets are liquid and market makers are providing full support. It is hard to imagine vaults deleveraging or auction keepers recycling capital will go through that cycle efficiently fast.

  • lower volatility and less severe historical crashes for BTC vs ETH definitely helps with managing portfolio risk although correlation is still very high.

  • in terms of counterpary risk, BitGo and mentioned insurance policy carries high confidence among any other alternatives. Probably if WBTC becomes unbacked in case BitGo gets hacked, the whole crypto would anyway crash as hard as possible as many exchanges use it. There is though another layer of counterparty risk with merchant setup.

All in all I don’t see a problem if Maker tests the WBTC vault usage with low debt ceiling and waits for improved liquidity metrics before it potentially increases it. I am still a bit sceptic about usage but I want to be surprised.

Keep in mind though that if governance wants to use low SF for WBTC to attract DAI minting this wouldn’t show us normal usage. Plus of course MKR would be carrying some risks as SF would normally need to compensate price volatility, liquidity risk and counterpary risk and we know both liquidity risk and counterparty risk of WBTC are much higher than that of ETH.

13 Likes

The poll for the addition of WBTC with initial risk parameters is up:

https://vote.makerdao.com/polling-proposal/qmnjrmznpnc9vczzdbuhhua4r3e1gtee5r1ar2yrjhyb82

5 Likes

Hey folks, I’m clearly late to the discussion here! I’ve been lurking on the forum a bit but this is my first post, please let me know if I violate any community norms or guidelines while I get accustomed.

As the protocol designer of tBTC, I’m against WBTC in MCD for the simple fact that it introduces a trusted synthetic as collateral when there’s a robust permissionless BTC peg available in days. The MKR community has an opportunity to move the entire space forward by supporting a trustless peg as its first Bitcoin collateral rather than further splitting liquidity with centralized band-aids, and I believe it should use the opportunity to lead.

I recognize that MCD needs security tokens and other “fiat” collateral to grow, but in this case there’s a fully backed, permissionless, 1:1 redeemable alternative ready to use on mainnet in 12 days. Why introduce the risk when it’s only buying 1000 BTC in liquidity and potential borrowers?

We’ll have a proposal for tBTC as collateral in MCD by the end of the week. Until then, I hope some of you will considering opposing this interim measure and putting all of our combined efforts behind a long-term solution.

12 Likes

I think it’s too early to add tBTC as it is a new coin. I’m against ading any new coins as collateral until they have some track record on mainnet. There should be a rule against adding coins that are less than 6 months old.

5 Likes

Great, let’s add both. No need to be exclusive.

9 Likes

I think the problem with WBTC is the difficulty of minting it. I’ve contacted several “merchants” about minting and the response has been the same: “we dont do those very often as they are difficult to do”. This is how i’ve found tBTC. tBTC is not necessarily a “new coin”, it is wbtc with a more decentralized implementation.

Maybe stall the proposal for a month just to be able to compare apples to apples? That said, it looks like one MKR holder decides these things anyway, so a lot of this conversation is moot.

Also, i have no problem adding both, and it is probably the wisest course of action.

3 Likes

I’m sorry but I have to disagree with this proposal, centralization should not be the solution for the peg issue, nor I think it represents Maker ideology with the ongoing transition to full decentralization.

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If liquidity is a concern for WBTC today, then I can’t imagine what it would be for tBTC. It takes time for exchanges to support new tokens, market makers to develop systems, and the market to figure out the risks. I don’t see tBTC being mature enough to compete with WBTC for at least a few months unless the organizations bootstraps liquidity at their cost.

Anyways, things can always be changed. Nothing here would be permanent.

3 Likes

That’s the plan. I’ll share more in our proposal

2 Likes