[RFC] eUSD Backing Derisking

Electronic Dollar (eUSD) eUSD RFC
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Hello all, I’m here as a concerned RToken holder. I am currently holding eUSD, and some recent developments around Compound and wBTC have me worried about the collateral basket of this RToken in particular.

wBTC seems to be in the middle of a transfer of ownership to Justin Sun, which raises serious questions about its long term viability given Justin Sun’s dubious track record. In light of these developments, BlockAnalitica, a contributor to MakerDAO’s risk unit, is suggesting a de-risking of wBTC by pausing all further wBTC supplies. WBTC Changes and Risk Mitigation - 10 August 2024 - General Discussion - The Maker Forum

Compound is a well respected and trusted DeFi lending primitive, with TVL in the billions. However, their team has been notably absent, with Leshner leaving to start Superstate and a very small team remaining, only maintaining the DAO. The Goldenboyz proposal that amounted to a governance attack passing, and then getting canceled at the last minute has me concerned, given that EUSD has 50% of its allocation exposed to Compound.

Compound V2 has minimal wBTC exposure, given the reserve factor is 100%. However, minting is not paused, so users are theoretically able to mint new wBTC, and since there are no supply caps, a malicious wBTC minter could infinite mint and clear all cash from the markets.

Comet (Compound V3) USDC, has much more exposure to wBTC, with over 50% of its backing being wBTC.

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50% of eUSD’s backing is in Compound V2 and V3.

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The mounting risk in these markets has me concerned, and I would love to hear other’s thoughts on this collateral basket.

The Reserve protocol can move faster than the underlying lending markets, and is well positioned to move its RToken holders to safety. Moving out of the more risky protocols would be a strong signal to eUSD holders that its governors are taking a proactive approach to risk, and showcase the protocol’s capability of changing asset backing when risk conditions change.

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The most interesting part of this isn’t actually the changing custody model of WBTC.

It´s that BitGo clearly wanted to exit WBTC, and Coinbase didn’t acquire it. What the hell happened here?

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@elliot Electronic Dollar (eUSD) does not have any wBTC backing. If you are concerned about the wBTC market on Compound it would probably better to ask the Compound community discord or forums.

@claude I can only speculate on Coinbase and notice they are in the legal fight of their lives. Maybe wBTC further complicates? I havent done an analysis on the profitability and growth prospects of wBTC to know whether this would be a good biz for Coinbase.

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BTW here is a good take on what might replace wBTC in DeFi

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While you are correct that the RToken eUSD itself does not contain wBTC in its collateral set on the Reserve Protocol, it lends against USDT and USDC out with wBTC as collateral via Compound V2 and V3.

The most that Compound might do would be to disable further supplying of this as collateral and lower collateral factor over time, which still leaves lenders exposed to wBTC. Even that should not be counted on given the speed at which governance moves for their DAO.

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Thank you for your timely contribution.

As @0xJMG pointed out wBTC does not impact eUSD directly.
While Justin Sun may or may not be an indication for undue process, I think it is important not to pour out the baby with the bathwater.

eUSD deployers are actively monitoring risk and will update the basket if it becomes necessary or prudent.

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elliot, just to clarify, we appreciate your concerns, I hope our comments were not seen as dismissive.

If you feel it’s worth to change the collateral basket we can support the creation of a proposal to that end.

Some wBTC history: Maker has been uneasy about the collateral for years since proof of reserves was not what the risk team loved. They limited exposure for a while and only recently increased it again via SparkLend.

So, all in all, it would be amazing if a better competitor stepped in and took the cake.

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I guess we now have the answer: cbBTC - coming soon.

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Excellent thread on the topic:

Highlighting the response by Aaves Marc Zeller.

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My guess is that Aave will move to derisk from wBTC as the takeover time comes closer by pausing new wBTC supplies and lowering the collateral factor over time.

Compound I’m less sure about because the team there is much smaller and less involved. It will be interesting to see if Gauntlet posts about it in their risk recommendations and what their suggestions are. We should have this at the end of the month.

Longer term, I feel like it makes sense to move RToken backing from Compound to newer protocols like Morpho and Euler, which give lenders a lot more control over the risks they are willing to to take via isolated lending and vaults. The security posture on these markets from both a smart contract and market risk perspective is much better than legacy markets.

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The newer, more permissionless lending protocols certainly have a lot to offer. They’re friends of ours, so I feel I have to mention Ajna too :slight_smile:

Any specific vaults that stand out to you?

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Thank you for posting this, @elliot! It’s important that people are looking out for things like this and raising their concerns on the forum.

At Confusion Capital, we share the concern about potential risks to cUSDC or cUSDT redeemability if something goes wrong with WBTC. We’ve asked a grant recipient to analyze how Compound might behave in different de-peg scenarios and are also looking at the potential custody risk - we’ll share our findings here.

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https://dune.com/21co/wbtc

Excellent dashboards about the backing and the supply dynamics of WBTC.
Anyone can track issues live on the dashboard above.

I have learned that wBTC backing is actually completely on-chain and observable. The issue is about custody and security of that custody, which has been secured by only three keys so far.

Two of those keys could move over to the new entity, but not all three.

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The counterpoint is this article and interview. But - and this is important - all of this is anecdotal so far.

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Ajna is a cool protocol, however, I don’t see it playing nicely with Reserve unless there was a vault that could do active risk management on behalf of the RToken basket. It requires you to be pretty active in choosing markets and since there is no oracle, you also have to manually call the borrowers if their LTV exceeds thresholds you are comfortable with.

Incredible, I’m looking forward to hearing what they have to say!

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They’re changing that or developing a solution that might allow more passive exposure in the future. The no oracle design stays, though.

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FYI @elliot, StableLab has posted some of their research related to WBTC risk: The role of WBTC in Compound’s V3 USDC Mainnet Market

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Looks like Aave is moving to de-risk from wBTC. [ARFC] Adjusting WBTC Parameters to Address BitGO Transition Risks - Governance - Aave

Compound is too, but it isn’t looking like they are lowering the collateral factor. [Gauntlet] - WBTC Risk Recommendations - Proposals - Compound Community Forum

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Maker is definitely offboarding wBTC now, Aave has a recommendation to follow from their risk provider.

I am not sure cbBTC is a full-fledged alternatives, and all others seem to have pretty limited DEX liquidity.

But if Aave dumps wBTC, liquidity of wBTC will suffer quite a bit… Something to look out for.