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MakerDAO – the protocol behind popular stablecoin, Dai – has elected to support WBTC as a new collateral type.
The addition of WBTC helps diversify the asset pool backing the crypto-native stablecoin as well as increasing total available liquidity. The BTC-backed ERC20 token is the second asset to be voted into the protocol since the introduction of Multi-Collateral Dai back in November 2019. After initially launching with ETH and BAT support, Coinbase’s USDC was inaugurated back in March in an effort to stabilize the Maker ecosystem following the events of Black Thursday.
But now – as of Sunday May 3rd – users are able to take out a loan in Dai by using WBTC as collateral.
For those unfamiliar, WBTC is a wrapped version of Bitcoin on Ethereum backed 1:1 by a reserve of BTC. WBTC leverages a consortium model to custody the BTC, relying on a handful of prominent DeFi projects like Kyber, Ren, and BitGo to hold, mint, and burn the assets. While issuing WBTC is permissioned and almost entirely relies on BitGo as a custodian, platforms like JellySwap and Ren’s wbtc.cafe enable BTC holders to easily swap their BTC into WBTC.
The introduction of WBTC as a collateral type comes with following risk parameters:
- Stability Fee: 1%
- Debt Ceiling: 10,000,000
- Liquidation Ratio: 150%
- Liquidation Penalty: 13%
Cheap Access to Leverage
While the Maker Protocol isn’t the first to support BTC-backed loans, the stability fee at 1% provides the cheapest access to leverage for BTC holders available on the market today.
Compared to centralized crypto banks, Maker is several times cheaper for BTC holders. As an example, one of the major US crypto banks, BlockFi, offers loans for 4.5% APY while others like Nexo offer 5.9% APY.
As such, we may see an increase in user participation from BTC holders as they look to capitalize on the cheap leverage with the Maker system.
WBTC’s Economic Bandwidth
One of the more important concepts when looking at the implications of WBTC on the Maker ecosystem is looking at the total available economic bandwidth of the asset.
With roughly 1,125 WBTC in existence – valued at around $10M – there’s realistically minimal implications to the protocol as it stands today.
If widely successful (meaning all of the circulating WBTC is soaked up by Maker), WBTC can support at maximum 6.6M Dai assuming the minimum 150% collateralization ratio. This translates to roughly a ~5% increase in the current Dai supply of 121M.
All in all, if BTC wants to act as an influential collateral type within the Maker ecosystem, there needs to be a massive increase in available economic bandwidth of the asset. This is possible either by (1) locking up BTC and minting more WBTC, (2) having the price of BTC increase, or (3) adopting other forms of tokenized BTC.
The Broader Trend: BTC on Ethereum
In the past few months, we’re seeing a broader trend emerge: BTC on Ethereum.
Ironically, in the same week as Maker elected to support WBTC, a new version of BTC on Ethereum went live on the main net called tBTC.
TBTC is a trustless form of BTC on Ethereum which relies on a decentralized group of bonded signers. If you’re interested in reading more about tBTC, feel free to read up on the FAQ here. The important takeaway is that this design provides one of the most important attributes when looking at asset adoption in DeFi – it’s trustless.
This is highly important as the goal of DeFi and crypto at large is trust-minimization.
And unlike wBTC, tBTC doesn’t rely on BitGo and other custodians to hold the assets. Instead it relies on a decentralized ecosystem of users, making tBTC perfectly aligned with the broader vision of open finance.
Despite only going live on Ethereum mainnet last week, tBTC has already been proposed as a collateral type within the Maker ecosystem. While it may be widely regarded that tBTC is a better alternative than WBTC for Maker given its trustless nature, MKR holders may hold off and wait for tBTC to garner some liquidity as well as battle-harden the protocol.
While some ETH holders aren’t thrilled about the addition of a trusted asset like WBTC (along with support for USDC last month), it does emphasize the opportunity for an alternative governance-minimized, ETH-only collateralized stablecoin – something like MetaCoin.
There’s elegance in both designs as they attempt to minimize system failures in their own respective ways. With Maker, it’s by supporting a diversified pool of assets that include both traditional and crypto assets. For MetaCoin, it’s minimizing the potential for governance failures while relying solely on trustless collateral. Both have their benefits and drawbacks.
All in all, for many it’s great to see Maker expanding its supported assets and ultimately diversifying the value that backs Dai.
If you’re one that’s worried about ETH losing its dominance as a collateral type, rest assured that ETH still makes up for almost 90% of the collateral in Maker and it will likely remain that way for the foreseeable future.