Proposal to add cbBTC Market to FiRM

FiRM
1

Summary

This proposal seeks to integrate cbBTC as a collateral asset on FiRM, Inverse Finance’s fixed-rate lending protocol. cbBTC, launched by Coinbase as a wrapped Bitcoin asset, offers users the ability to leverage their Bitcoin holdings within DeFi ecosystems, with its backing by 1:1 native Bitcoin held in Coinbase’s cold storage. By adding cbBTC to FiRM, users will be able to borrow DOLA against their Bitcoin holdings, enhancing FiRM’s offerings and expanding collateral options within the platform.

Background

Coinbase launched cbBTC on September 12th, 2024, introducing a wrapped Bitcoin asset to enable DeFi participation for Bitcoin holders. As a custodied asset, cbBTC is managed and issued solely by Coinbase smart contracts, with each token fully backed by Bitcoin held in Coinbase’s cold storage. cbBTC has been designed to interact seamlessly with DeFi applications, providing an easy entry point for Coinbase users to participate in on-chain DeFi activities.

cbBTC is entering the wrapped Bitcoin market, which is currently dominated by WBTC. While WBTC maintains a strong foothold across multiple DeFi protocols with billions of dollars in TVL, cbBTC’s introduction by Coinbase offers a compelling alternative backed by one of the most reputable centralized exchanges. This competition is expected to drive diversification in the wrapped Bitcoin space, benefiting the DeFi ecosystem as a whole.

The first cbBTC liquidity pools have already been set up on UniswapV3 and Curve, and an upcoming integration on Aave V3 is already in the works. These partnerships are expected to expand the asset’s adoption across DeFi protocols. Although cbBTC offers the benefit of utilizing Bitcoin on-chain, its centralized nature introduces counterparty risks, specifically due to the reliance on Coinbase as the sole custodian. However, Coinbase’s strong regulatory compliance and reputation mitigate some of these concerns.

Risk Assessment

Complete Risk Assessment - cbBTC Collateral on FiRM

A detailed risk assessment of cbBTC (linked above) was conducted by the RWG, and the key considerations include:

  • Centralization and Custodial Risks: cbBTC is a custodial asset, with Coinbase retaining control over minting, burning, and contract management. This introduces significant dependency on Coinbase’s operations and regulatory standing. The absence of a Proof of Reserves adds a significant element of trust reliance that increases custodial risk.
  • Governance and Administrative Control: cbBTC lacks decentralization in its governance, as Coinbase retains the ability to upgrade contracts, blacklist addresses, and pause operations. The presence of these admin roles raises concerns about the centralized control over collateral operations.
  • Liquidity: cbBTC’s liquidity is still in its early stages, with liquidity pools on UniswapV3 and Curve amounting to approximately $77.5M. Liquidators can also redeem cbBTC for native Bitcoin through Coinbase. While geoblocking may introduce some friction compared to on-chain liquidations, time delays are less likely given cbBTC allows any user with a Coinbase account outside restricted regions to mint/redeem. This broader access should attract automated arbitrage participants, helping to maintain a tight peg to BTC.
  • Competition: cbBTC is set to compete against other wrapped Bitcoin assets, most notably WBTC. Aave’s upcoming integration of cbBTC will provide additional supply and borrow markets, though its early liquidity limits the asset’s capacity to challenge WBTC immediately.
  • Security: cbETH contracts have undergone audits by OpenZeppelin, and “no material contract code has been modified [from cbETH] in deploying cbBTC’. Coinbase’s strong security measures, such as Multi-Party Computation (MPC) for wallet security, further reduce smart contract risk. cbBTC is covered under Coinbase’s bug bounty program.

On-Chain Actions

  1. Add cbBTC Market to DBR contract.
  2. Set borrowController of the Market to FiRM BorrowController.
  3. Set market supply ceiling to 10,000,000 DOLA.
  4. Set daily limit in BorrowController to 1,000,000 DOLA.
  5. Set Collateral Factor to 80%.
  6. Set Liquidation Factor to 50%.
  7. Set Liquidation Incentive to 10%.
  8. Approve cbBTC market on the DBR Helper.
  9. Set Minimum Debt Amount in BorrowController to 3000 DOLA.
  10. Set stalenessThreshold for cbBTC market to 86460.
  11. Set FiRM Oracle price feed for cbBTC to the deployed Chainlink cbBTC/USD PriceFeed contract.
  12. Add cbBTC Market to ALE.