RFP-Idea: Onboard tBTC on Radiant Arbitrum and Ethereum

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Onboard tBTC on Radiant Arbitrum and Ethereum

Abstract

This RFP Idea proposes integrating tBTC (Threshold DAO’s fully decentralized bridged Bitcoin asset) as a full collateral and borrow market within Radiant Capital’s Ethereum and Arbitrum deployments.

Brief introduction to Threshold & tBTC

tBTC, offered by Threshold Network and governed by holders of the T token, is Threshold Network’s flagship application. tBTC is bridged Bitcoin that is completely permissionless, which allows anyone to bridge their Bitcoin and use it in DeFi applications without sacrificing privacy or risking censorship.

  • tBTC is sitting at ~200m USD TVL
  • Doubled BTC-denominated TVL in 6 months
  • tBTC is live on 8 chains
  • Has native minting on Ethereum and Arbitrum
  • Live on GMX, EigenLayer, Symbiotic, Notional and used crvUSD collateral.
  • About to go live on Aave, Compound, Karak and Synthetix.

Motivation and Rationale

Our team at Anthias Labs in collaboration with the teams at Thesis and Threshold Network have put together the following asset analysis for tBTC vs WBTC in the wake of the recent news and controversy surrounding WBTC from BitGo. Anthias Lab’s thesis with this proposal is that the centralization risk brought about by WBTC’s current custody model poses a significant risk to Radiant. Prior to now, alternative-wrapped Bitcoin solutions were too nascent to supersede WBTC. However, we believe that now is an opportune time to begin the replacement of WBTC with a DAO-governed, community-owned and operated advancement in tBTC.

WBTC Breakdown

The primary competitor to tBTC is WBTC. WBTC, or Wrapped Bitcoin, launched in January of 2019 via a collaborative effort among BitGo, Cyber Network, and Ren. Currently, tBTC has a USD market cap of $199,500,000 and a BTC TVL of 3,367.68 BTC. WBTC has a USD market cap of $9,334,189,864.76 and BTC TVL of 153,387.1826 BTC. WBTC has a circulating supply of 153,372 WBTC. tBTC has a circulating supply of 3,367 tBTC.

There is over $9bn in WBTC currently minted (see here). BitGo is the sole custodian, with proof here via Arkham. Merchants are the partners in the WBTC network that handle the intermediary process between people who want to mint wBTC and the custodian (BitGo). This is a centralized process. As the WBTC documentation outlines, “to receive WBTC, a user requests tokens from a merchant. The merchant then performs the required KYC / AML procedures and verifies the user’s identity. Once this is completed, the user and merchant execute their swap, with Bitcoin from the user transferring to the merchant, and WBTC from the merchant transferring to the user. Minting refers to the process of creating new wrapped tokens. Minting in the wrapped framework is initiated by a merchant and performed by a custodian.”

Merchants include many different protocols including Kyber, Aave, CoinList, Wintermute, and many more. Listed here in partners section of wBTC dashboard. WBTC Network also has a Wrapped Tokens DAO that votes to approve new custodians or merchants. These are institutions, and they all share in a multi-sig.

Offering Difference

The primary benefit of tBTC over wBTC is that because of Threshold’s unique cryptographic primitives, Threshold Network is able to offer a wrapped version of Bitcoin on Ethereum and 7 other chains that operates without the need for a custodian. “Instead of centralized intermediaries, tBTC uses a randomly selected group of operators running nodes on the Threshold Network to secure deposited Bitcoin through threshold cryptography. That means tBTC requires a threshold majority agreement before operators perform any action with your Bitcoin.” In order for the wallet to move funds, it produces signatures using a Threshold Elliptic Curve Digital Signature Algorithm, requiring 51-of-100 Signers to cooperate. The 100 signers on each wallet are chosen with our Sortition Pool, and the randomness is provided by the Random Beacon. The probability that a Staker is chosen to be a Signer is equal to their percentage of the total tBTC Stake. Each Signer is chosen independently. The same Staker can be a signer on the same wallet multiple times. New BTC custody wallets are currently generated every 14 days.

Wallets are generated that store the BTC deposited. These wallets are operated via large operator-run multisigs that require 51% of the nodes to move the BTC anywhere. Additionally, these nodes validate the minting and burning of tBTC. The T token staking is needed to operate a node (minimum 40,000 T). The crypto primitives of Threshold (Proxy re-encryption (PRE) (Proxy re-encryption - Wikipedia) * Threshold signatures (TSS) (https://academy.binance.com/en/articles/threshold-signatures-explained) * Distributed key generation (DKG) (Distributed key generation - Wikipedia) * Random beacon (RB) (What’s in a beacon?. A foundational stand-alone component of… | by Antonio Salazar Cardozo | Keep Network | Medium)) are what determine these wallet creations and node operations.

tBTC Risk Assessment

Custodian Risk

Because of tBTC’s unique architecture of utilizing proxy re-encryption and threshold cryptography, tBTC is able to offer a bridged BTC solution whereby users do not need to rely on the custody of a sole party for the maintenance of their underlying BTC. Instead, Threshold operates a random selection of node operators that must come to a consensus via threshold cryptography in order to perform any action within the Threshold ecosystem. There are currently 136 nodes up (active monitoring can be seen here). “By rotating the selection of operators, tBTC v2 protects against any malicious individual or group attempting to seize control.” (More on Threshold’s node design here).

To overtake the network, a user would need to create approximately 145 new validators overnight to ensure a 51% validator selection as well as achieve more than 51% of staked T (currently at over 3.2bn T or $78m). We find this highly unlikely given the price impact to the token and the amount of current T staked.

However, even if this could be done, the validator network (the Signer Network) is currently permissioned to a list of Professional Beta Stakers, until the Schnorr upgrade is live

Technical Risk

tBTC has previously been audited by Least Authority (https://leastauthority.com/static/publications/LeastAuthority_KeepNetwork_tBTC_Bridge_v2_Updated_Final_Audit_Report.pdf) and Consensus Diligence (Thesis - tBTC and Keep | Consensys Diligence).

tBTC faced 2 minor bugs that did not affect users in October of 2023, but they were addressed shortly after, and the protocol has not faced any similar bugs since. More on this report here.

tBTC has also received a collateral risk assessment from Llama Risk (linked here) and runs a continual bug bounty program with a maximum bounty of $500k via Immunfi.

System Risk

The primary risk that the tBTC system faces is operator collusion, which would result in the seizing of all underlying BTC, and effectively leave tBTC useless. Via the custodian risk analysis above, we find this risk to be long-tail enough that it is worth accepting for a truly decentralized bridged-BTC alternative to WBTC. Especially as tBTC gains further integrations in the wake of this WBTC shifting, the number of nodes and staked T will inevitably increase as we have seen with other systems and lead to a greater proliferation of security for the network.

Liquidity Profile

tBTC’s current most liquid pool is on Curve Ethereum. It is the tBTC/WBTC liquidity pool with TVL of ~$25m and 1-day volume of $1.3m. Additionally, there is a tBTC/WBTC liquidity pool with TVL of $4.5m and 7-day volume of $3.5m and a tBTC/ETH pool on Uniswap v3 Ethereum with TVL of $280k and 7-day volume of $123k. tBTC then has the WBTC/tBTC Curve pool with ~$6.8m TVL and 1-day volume of ~$475k.

We would recommend a lower LTV and debt limit that can be slowly increased as liquidity increases for tBTC to handle liquidations. However, this asset is redeemable for its underlying BTC permissionlessly by anyone, so it will be a matter of whether the DAO thinks it will need to have the ability to be swapped on a DEX to handle liquidations or if liquidators can/will handle redemptions themselves. If the latter is the case, potentially, we can increase the recommended Liquidation Bonus from 10% to 13% to reward the liquidators for the extra step required.

Useful links

Key Terms

tBTC - Threshold Bitcoin

Max LTV - The Maximum LTV ratio represents the maximum borrowing power of a specific collateral. For example, if a collateral has an LTV of 75%, the user can borrow up to 0.75 worth of ETH in the principal currency for every 1 ETH worth of collateral.

Liquidation Threshold - This represents the threshold at which a borrow position will be considered undercollateralized and subject to liquidation for each collateral. For example, if a collateral has a liquidation threshold of 80%, it means that the position will be liquidated when the debt value is worth 80% of the collateral value.

Specifications

Add tBTC as a full collateral and borrow market

Anthias Labs, Chaos Labs, and Radiant Capital teams to share more inputs on Max LTV, Liquidation Threshold, and Liquidation Bonus

Steps to Implement

Chainlink Integration: To list tBTC, a Chainlink feed for the tBTC/USD exchange ratio must be integrated. This feed will provide accurate, real-time exchange rate data for the tBTC token. Chainlink oracle feed is linked above.

Smart Contract Implementation: Based on the defined parameters, the Radiant team will implement the necessary updates to enable the integration of tBTC as a collateral and borrow market with the parameters as laid out above. This implementation will involve coding and testing the smart contracts to ensure their functionality and security.

User Interface Update: The Radiant Capital user interface will be updated to reflect the addition of tBTC as a collateral and borrow market. This includes providing users with the option to select tBTC as collateral and borrow assets, as well as displaying relevant information such as tBTC exchange rates, available loan options, and associated risks.

Overall Cost/Impact

Minimal

Timeline

Integration is expected to occur swiftly, subject to the following stages:

Local Testing: The Radiant team will conduct thorough testing of the implementation in a local environment to ensure its functionality, security, and compatibility within the Ethereum ecosystem.

Staging: Following Chainlink Feed integration, the implementation will proceed to a staging phase, where further testing will verify the integrity and functionality of the tBTC collateral and borrow market.