iBTC x Moonwell: A Path to Truly Decentralized Bitcoin Lending

Summary

  • Interlay’s iBTC is a next-generation, trustless wrapped Bitcoin asset. It is secured by an open network of over-collateralized Vaults, rather than relying on a custodian or multisig.
  • IBTC was launched in August and aims to become the go-to, Polkadot-native Bitcoin for DeFi.
  • One of the main use cases for Bitcoin in DeFi is to borrow USD stables against BTC - which is why integrating with Moonwell is of great interest to the Interlay community and BTC holders.
  • This post outlines how iBTC works and a suggested path to powering Moonwell’s ecosystem with trustless Bitcoin.

Intro

  • Interlay is a decentralised network dedicated to connecting cryptocurrencies like BTC with DeFi platforms like Polkadot and Ethereum.
  • Interlay is a Polkadot parachain, currently connected to Acala, Moonbeam, Parallel, and Astar via XCM.
  • Interlay’s flagship product is iBTC, a 1:1 bitcoin-backed asset that is fully-collateralised, inter-operable and censorship resistant. Interlay will be exporting iBTC to all Polkadot parachains and soon into other ecosystems.
  • The system has been operational on Kintsugi, Interlay’s canary network on Kusama, since March 2022, successfully withstanding the market crash.

How does iBTC work?

In 1 sentence: iBTC is a synthetic BTC asset, backed by collateral, AND an IOU that allows any iBTC holder to claim Bitcoin at a 1:1 ratio.

In more detail: To the user, iBTC looks like any other wrapped BTC asset. You deposit your BTC to mint iBTC in a few simple steps. The core difference to the likes of wBTC, renBTC etc. is that BTC is secured by an open network of over-collateralized operators, so-called Vaults. It is best explained using the image below.

  1. Vaults Register. Vaults lock collateral in different assets (collateral system similar to MakerDAO) before they can accept BTC deposits. The amount of BTC a Vault can receive is determined by the amount of collateral locked.

  2. Lock BTC. User requests to mint and sends BTC (on Bitcoin) to the Vault address provided by the Interlay parachain.

  3. Mint iBTC. The Vaults collateral is now locked and the Interlay parachain mints iBTC to the user at a 1:1 ratio to the deposited BTC. iBTC can now be used in DeFi as a fully fungible asset.

3a. Redeem (success). User returns iBTC to the Interlay parachain and requests a redeem. One or more Vaults send BTC to the user (on Bitcoin) and prove this to the Interlay parachain. The Vaults collateral is unlocked. A user can redeem with any Vault they like.

3b. Redeem (fail). If a Vault does not send BTC to the user within a pre-defined period (currently 24h), the user can decide whether to (a) retry with another Vault or (b) trade iBTC for the Vaults collateral. In both cases, the user receives a 10% premium, slashed from the Vaults collateral.

Bitcoin light client. Bitcoin transactions are verified by a Bitcoin light client, built into the Interlay parachain. This means: both user and Vault must prove that BTC was actually sent. This normally happens automatically (UI or Vault software).

Collateral. Supported collateral assets are white-listed by governance (setting a maximum cap and collateral thresholds). Like in MakerDAO, each Vault has exactly 1 collateral asset, while an operator can open multiple different Vaults. Currently, DOT is the only collateral asset. More assets will be added in the near future - the Interlay community is exploring liquid staking assets, USD stables, other wrapped BTC assets, etc.

Liquidations. Vaults positions are over-collateralized. Currently, DOT-iBTC Vaults require 260% collateral (thresholds set conservative for now). When collateral ratios drop, Vaults must top up collateral or self-redeem iBTC to rebalance their position. If the collateral ratio of a Vault drops too far, the position can be liquidated, just like in MakerDAO: anyone can burn iBTC for the collateral, at a premium rate. Before liquidations happen, Interlay incentivizes users to redeem against struggling Vaults for a 5% premium.

You can always check the Interlay Dashboard to inspect the system’s overall collateral health.

Why use iBTC on Moonwell?

Bitcoin is by far the largest asset in terms of market cap and trading volume. We have seen offer 400k BTC minted onto DeFi so far (albeit, 99.9% centralized). The main use case, as seen on Ethereum, is lending. BTC holders prefer low-risk yield by lending out BTC, or borrowing USD stables against their BTC (hold BTC but still use capital).

Why iBTC in particular?

  • iBTC is a Polkadot-native asset. There is no additional, centralized bridge risk.
  • If BTC is lost, iBTC holders are reimbursed in collateral at a beneficial rate (currently ~110%), making iBTC financially trustless. This means: Moonwell protocol knows that even if the bridge itself breaks, there is enough collateral to back up the Value of iBTC. In the worst-case scenario, iBTC becomes a pure synthetic asset.
  • Anyone can become a Vault on Interlay, making it fully decentralized. The Moonwell community can operate Vaults and help supply BTC to the protocol.
  • If a Vault goes down, this does not affect other Vaults.
  • Vaults cannot prevent users from minting iBTC, making it censorship resistant.

Security

IBTC is the most secure BTC bridge by design. However, we know that a protocol is only as secure as it’s code. This is why at Interlay we put special attention to security.

Peer-reviewed design. Interlay’s design is based on peer-reviewed research published in the top-tier IEEE S&P security conference.

Open source code. All of Interlay’s code is open source: https://github.com/interlay

Formal specification. We maintain a 200+ page formal specification describing how the system should work, which is compared against implemented code and will (hopefully) be used for formal verification in the future.

Audits. Interlay has been audited 4 times so far (NCC, Informal Systems, SR Labs, Quarkslabs), with a 5th audit by Quarkslabs ongoing and more scheduled for 2022/23. Audit reports.

Bug bounties. Interlay has an open bug bounty on Immunify, with rewards of up to USD 1 million. ****

Path to IBTC on Moonwell

The ultimate goal is to enable one of the top DeFi use cases in the whole crypto space: borrowing USD stables against BTC.

Phase I: Preparation

The two main requirements for adding iBTC as collateral to Moonwell are:

  • Sufficient iBTC liquidity to guarantee successful liquidations;
  • An iBTC price feed by an oracle supported by Moonwell.

Hence, we identify the following goals for Phase I:

1) Build IBTC Liquidity on Moonbeam (Ongoing)

We have already started building iBTC liquidity on Moonbeam. Currently, there are two pools on Moonbeam’s two largest DEXes:

  • iBTC/GLMR on Stellaswap
  • iBTC/multiUSDC on Beamswap

More integrations are planned, most notably on Curve. Check out our iBTC integrations roadmap.

As we push for deeper liquidity, treasury proposals to the Moonbeam grants program, as well as the Polkadot Treasury are being explored.

2) IBTC Oracle Support (Ongoing)

  • Chainlink (Blocked). Currently, Moonwell only supports Chainlink price feeds. Unfortunately, Chainlink does not yet support iBTC and listing requirements (centralized exchanges or a few selected DEXes on Ethereum) do not seem realistic right now. A proof-of-reserves model could work but is blocked until Chainlink completes the Substrate pallet.
  • DIA (Ongoing). DIA is an alternative oracle provider in the Polkadot ecosystem and, from what we know, has been exploring integrations with Moonwell. The Interlay team is working with DIA to create a reliable iBTC price feed that can then be used in Moonwell. Here, both DEX price feeds and a Proof-of-Vault-Collateral model are being explored. The latter is particularly interesting since it would measure the security & price of iBTC based on the BTC spot rate and the real-time collateralization ratio of Vaults.

3) Enable iBTC Borrowing on Moonwell (TO DO)

As liquidity builds up, we will suggest enabling iBTC borrowing on Moonwell. Borrowing does not require deep liquidity or oracles and can hence be safely enabled early on - as a signal to BTC holders and Bitcoin-interested DeFi users to pay attention and start using Moonwell.

Phase II: iBTC as Collateral

Once enough IBTC liquidity is available on Moonbeam, a governance proposal will be made to enable borrowing against iBTC.


Call for Feedback

We are calling both the Moonwell, Interlay, and overall Moonbeam & Polkadot communities to share thoughts and provide feedback on this proposal.

IBTC is the next generation of BTC on DeFi and - we believe - has the potential to attract a new wave of liquidity and users to Moonwell, Moonbeam, and the overall Polkadot ecosystem.

Resources

8 Likes

LFG!!

I’ve been looking forward to this one - earning yield on the most decentralized asset using the most decentralized and trustless bridge (and a little bit of XCM).

3 Likes

I will vote yes, if there is a proposal.

1 Like

支持,iBTC若如上所述有眾多優點,只是目前流動性較低;期待看到波卡互操作性持續發展。

I only believe in native bridge in Dot ecosystem!

目前交易量及流動性池都相當低
我不清楚是否適合成為借貸抵押資產
開啟一個Build Poll

  • iBTC become a loan collateral asset
  • no not now

0 voters

想知道大家的看法~~~ :thinking:

Hey jgTral,

Like you mentioned, iBTC liquidity on Moobeam is quite low at this moment in time (12.6 xcIBTC). I would personally love to see that number continue to increase, but as it currently stands enabling collateral on this asset wouldn’t be safe.

I’d encourage you to give Gauntlet’s “Asset Listing Framework” proposal a read through. If passed, these will become the established guidelines for adding new markets/setting initial parameters (like collateral factor).

Below is an excerpt from their Asset Listing Framework which goes into detail regarding the levels of liquidity needed to safely enable CF on an asset:

Sufficient liquidity is required for an asset prior to enabling it as collateral. A cautious test of this is the combined slippage across all liquidity sources to measure how well a given asset can be absorbed into the market (a signal that may change upon asset listing).
We recommend that the combined (CEX + DEX) slippage be less than 5% for a sell order of either $300k or 10% of total asset supplied in Moonwell (whichever is greater) before enabling an asset as collateral. Gauntlet formulated this guideline by analyzing existing assets in Moonwell and their supplies. Then, Gauntlet modeled what the market could healthily absorb using our combined slippage model.

哇,謝謝
majin真的相當專業,我還有很多知識要學習,感謝您指點方向 :+1:

如alexei所述:

  • Sufficient iBTC liquidity to guarantee successful liquidations;
    如majin所述:
    iBTC liquidity on Moobeam is quite low at this moment in time (12.6 xcIBTC)

所以目前看來還需要給iBTC一些時間. :flushed:

哇,謝謝
majin真的相當專業,我還有很多知識要學習,感謝您指點方向 :+1:

We all have a lot to learn! Thank you so much for your participation on the governance forum, it’s great to see!