Summary

We propose listing tBTC as a collateral asset on Ethereum and Arbitrum. tBTC will be a variable lend/borrow asset. This proposal does not call for fixed rate tBTC markets.

tBTC has recently emerged as a leading alternative to wBTC for BTC holders to use their Ethereum in DeFi and take out loans against their BTC collateral. We believe that deepening Notional’s collaboration with Threshold Network could bring on new borrow demand, help acquire new users, and provide significant upside for Notional’s potential future growth.

Proposed listing parameters

Proposed collateral parameters for tBTC on Ethereum and Arbitrum:

Parameter	Proposed value (Ethereum)	Proposed value (Arbitrum)
Collateral haircut	0.84	0.80
Debt Buffer	1.20	1.25
Liquidation discount	1.06	1.06
Supply cap	100 tBTC	50 tBTC

Implied max LTVs vs. USDC on Ethereum and Arbitrum:

Pair	Min collateral ratio	Max LTV
tBTC/USDC (Ethereum)	130%	77%
tBTC/USDC (Arbitrum)	136%	73%

Proposed variable interest rate market parameters:

Parameter	Proposed value (Ethereum)	Proposed value (Arbitrum)
kinkUtilization1	65 (65%)	65 (65%)
kinkUtilization2	70 (70%)	70 (70%)
kinkRate1	1 (0.59%)	1 (0.59%)
kinkRate2	4 (2.34%)	4 (2.34%)
maxRate	225 (150%)	225 (150%)
feeRatePercent	20 (20%)	20 (20%)
minFeeRate	10 (0.50%)	10 (0.50%)
maxFeeRate	160 (40%)	160 (40%)

Remarks

• We propose to treat tBTC more conservatively on Arbitrum than on Ethereum.

  • tBTC is significantly more liquid on Ethereum.

  • tBTC redemption can only occur on Ethereum (although it may be coming to Arbitrum in the near future).

  • tBTC on Arbitrum does benefit from tBTC liquidity and redeemability on Ethereum due to fast tBTC bridging from Arbitrum to Ethereum via Wormhole. However, this extra step introduces risk and makes tBTC somewhat less attractive as collateral on Arbitrum.

  • Much of the liquidity for tBTC on Arbitrum is being incentivized with $ARB that the Threshold team has received in a grant from Arbitrum. We can’t expect this incentivization to continue at the same rate in the medium-term, however the Threshold team has demonstrated a commitment to tBTC liquidity on Arbitrum and will continue to incentivize with their native token $T.

• The oracle price deviation threshold (2%) is high for a volatile asset oracle. This is potentially problematic and could lead to significantly higher oracle price - market price deviations in times of volatility. For this reason, we propose using a wider liquidation discount of 6% vs. the 5% discount applied to wBTC.

Liquidity

Current tBTC liquidity on Ethereum and Arbitrum:

Protocol	Chain	Pools	tBTC Liquidity	Non tBTC Liquidity	% of Non tBTC Liquidity
Curve	Ethereum	tBTC/WBTC	$12,559,831.43	$13,637,952.36	52.06%
Curve	Ethereum	TricryptoLLAMA	$1,660,276.10	$3,268,555.12	66.02%
Uniswap	Ethereum	tBTC/WBTC	$887,621.73	$3,719,429.40	19.26%
Curve	Arbitrum	2BTC-ng	$1,953,449.67	$2,128,851.59	52.15%
Uniswap	Arbitrum	WBTC/tBTC	$1,259,239.52	$2,405,638.48	65.64%
Uniswap	Arbitrum	tBTC/ETH	$218,054.25	$398,379.75	64.61%
TOTAL	Ethereum	N/A	$15,107,728	$20,625,936	57.7%
TOTAL	Arbitrum	N/A	$3,430,742	$4,932,868	59.0%

Slippage

Current slippage for tBTC sales on Ethereum and Arbitrum:

Trade Size (tBTC -> ETH)	Slippage (Ethereum)	Slippage (Arbitrum)
1 tBTC	-0.15%	-0.1%
10 tBTC	-0.24%	-0.2%
50 tBTC	-0.50%	-0.6%
75 tBTC	-0.55%	-11.00%
100 tBTC	-0.60%	N/A
250 tBTC	-2.50%	N/A

Oracles

Proposed oracles on Ethereum and Arbitrum:

Network	Provider	Pair	Deviation	Address
Ethereum	Chainlink	tBTC/USD	2%	0x8350b7De6a6a2C1368E7D4Bd968190e13E354297
Arbitrum	Chainlink	tBTC/USD	0.5%	0xE808488e8627F6531bA79a13A9E0271B39abEb1C

tBTC Redemption

tBTC is redeemable for BTC via the Threshold protocol. tBTC redemption is currently live exclusively on Ethereum.

Important considerations:

• Redemption is permissionless.

• As long as the redemption mechanism is operational, we can be confident that traders holding wBTC or another BTC asset on Ethereum will arbitrage out any significant price tBTC price divergence.

• Redemption time is 3-5 hours in normal times. Potentially longer in stress periods. This makes the tBTC purchase -> redemption for BTC -> BTC sale arbitrage loop somewhat risky, but we can still be confident that any significant tBTC depeg will be arbitraged away.

Smart contract risk

tBTC V2 is well-audited, has an active bug bounty, and has been working live in production since 2021.

tBTC technology has undergone three audits:

• Least Authority (Sep 29 2022)
  • https://leastauthority.com/blog/audits/audit-of-keep-network-tbtc-bridge-v2/
• Chain Security (Nov 9 2021)
  • https://www.chainsecurity.com/security-audit/threshold-network
• Certik (Nov 19 2021)
  • https://skynet.certik.com/projects/threshold-network

tBTC has a $500,000 Bug Bounty with Immunefi:

• https://immunefi.com/bug-bounty/thresholdnetwork/information/

Future developments

The Threshold team has expressed plans to enable tBTC redemption on Arbitrum and increase on-chain liquidity for tBTC on the Arbitrum network. These developments could enhance the utility and attractiveness of tBTC as a collateral asset on Arbitrum.

If these enhancements are successfully implemented, we would intend to revisit this matter and issue a recommendation for more aggressive collateral parameters. This could include a reduction in the collateral haircut, an increase in the supply cap, and potentially more favorable liquidation discounts. These changes would align with the improved liquidity and reduced redemption risks, allowing for more efficient capital utilization within the Notional protocol.