Lombard LBTC Risk Assessment by Block Analitica
Introduction
LBTC is a token issued by Lombard that represents Bitcoin staked via the Babylon protocol. By depositing BTC into Lombard’s system, users receive LBTC at a 1:1 ratio. This token is designed to bring Bitcoin into decentralized finance by making it a productive, yield-bearing asset.
Users holding LBTC gain exposure to staking rewards and other protocol incentives without relinquishing the underlying value of their original BTC. Lombard’s approach employs a Security Consortium of independent validators to ensure secure operations, including staking and unstaking.
While LBTC does not currently generate yield because Babylon’s native staking rewards are not yet live, it is positioned to unlock future earning opportunities once these rewards begin.
Source: Lombard Dune Dashboard
LBTC is an ERC-20 token that can be minted on various EVM-enabled blockchains as of the time of writing, including Ethereum, Base L2, and BNB Smart Chain.
Lombard Protocol Architecture
The architecture is structured across three layers:
- EVM smart contracts on PoS chains
- Babylon Protocol
- Bitcoin blockchain
These layers are coordinated by the Security Consortium, a group of independent organizations responsible for validating and signing critical operations, such as BTC staking/unstaking in Babylon and LBTC minting/burning on supported chains.
The Security Consortium operates as a decentralized state machine, employing the Raft Algorithm for consensus. Its members share a Threshold Key, requiring signatures from at least two-thirds of participants to validate operations. These operations are verifiable through the LombardConsortium contract.
Source: Lombard Docs
Staking process:
- Secured deposit address for user’s BTC is generated by the Security Consortium using CubeSigner.
- When BTC is deposited and verified, SC signs the deposit via their threshold key.
- The signed payload is recorded on the Babylon chain, providing proof for LBTC minting.
- The user can mint LBTC in a trustless manner by submitting the proof to the LBTC ERC-20 contract.
Unstaking process:
- User initiates unstaking by burning LBTC tokens.
- A request is triggered to the SC to unstake the corresponding BTC from Babylon.
- After 7-dat withdrawal period (and 0.0001 BTC fee), bridge contract on Ethereum facilitates withdrawal via Bascule Drawbrigde mechanism.
- The Bascule Drawbridge verifies the request, ensuring withdrawal matches the validated deposit.
Technically, users are retaining the ownership of BTC, although transfers are restricted via a predefined set of UTXOs. The BTC can either be spent after a given time has expired (the unstaking delay) or sent to a burn address in case of slashing right away.
Network fees upon depositing/withdrawing are paid by users, with additional fees applied in case of early withdrawal.
Babylon Protocol Architecture
The Babylon Protocol facilitates Bitcoin staking across three chains:
- Bitcoin chain: Holds BTC collateral in a locked state.
- Babylon chain: Tracks and manages staking balances.
- Target PoS chain: Applies consensus rules.
The protocol includes a slashing mechanism (currently inactive) that uses Schnorr signatures, which can reveal stakers’ private keys if certain conditions are met. When this occurs, the exposed keys allow any party to spend the slashed BTC from the corresponding UTXO.
The protocol also supports near-instant bonding and unbonding. This is made possible by Bitcoin’s Proof-of-Work security, which makes long-range attacks impractical. Competing with Bitcoin’s hash rate to create alternate forks is prohibitively expensive, unlike in PoS systems, where such attacks require minimal cost.
Audits & Bounties
The protocol has been audited by the following entities:
- Halborn, smart contract audit - 5 August 2024
- Halborn, consortium audit - 13 August 2024
- Veridise, smart contract audit - 21 August 2024
- Immunifi, 250k bug bounty - ongoing (last updated 11 November 2024)
Active bounties:
## Risk Evaluation
### Liquidity
The Aerodrome CL1 - cbBTC/LBTC pool currently has a TVL of $27.5M and is the largest LBTC pool on Base. The composition of the pool currently consists of 185.13 LBTC and 111.29 cbBTC.
Source: Lombard Dune Dashboard
The price patterns for the pool show that the peg is maintained within a 0.01% deviation and is slowly converging towards a 1:1 peg with cbBTC.
Source: BaseScan
The available liquidity shows that the 2% threshold for swap tolerance is broken for order sizes of ~143 LBTC, and then increases due to the available LBTC liquidity being below the order size.
Source: Odos
Taking the above into account, we propose the initial supply cap of 100 cbBTC for the LBTC/cbBTC market on Base.
LBTC Oracle Proposal
Considering the current liquidity of LBTC on Base and the risk of potential LBTC temporary depegs, we believe there is little-to-no reason to rely on secondary market pricing as we’d want to avoid those causing unnecessary liquidations.
Hence, we’re proposing a custom oracle for the LBTC/cbBTC market that combines:
- Proof-of-Reserve LBTC feed provided by Redstone
- Market price as fallback in case PoR feed returns value out of predefined range
First, a brief breakdown of the Redstone LBTC PoR feed:
To find more about the PoR feed, please refer to Redstone LBTC PoR docs.
To mitigate the risk of a false pricing coming from the PoR feed, a fallback mechanism is implemented as following:
- If the PoR returns value that falls out of the predefined range, the Chainlink LBTC/BTC feed is used as fallback.
Initial PoR Range & Upgradability
While according to the new Proof-of-TVL tool developed by Nubit specifically for BTC LSTs reports that the LBTC backing currently stands at 101.19%, the Redstone feed currently has a cap of 1.005 implemented.
Considering the return value of the feed has been 1.005 so far, and the 91.5% LLTV proposed for the LBTC/cbBTC market, we’re proposing a safety cushion of +/- 0.02 mitigates risks of PoR mispricing significantly, while having enough room between the LLTV.
-
PoR range: 1.02 - 0.98
-
LLTV: 91.5%
Once Lombard starts generating yield, the cap of 1 will be removed, and the value will gradually increase, similar to reward bearing LST tokens like wstETH. This would also likely require an adjustment of the preferred PoR range by the Moonwell DAO.
In order to be able to address those potential changes, we’re also proposing this oracle to be upgradable by Moonwell DAO.
The oracle code has been developed my Moonwell contributors Solidity Labs, and audited by Halborn.
Parameters Summary
We recommend to onboard the LBTC/cbBTC to the Moonwell Frontier cbBTC vault with the configurations listed below:
- Pool LLTV: 91.5%
- Supply cap: 100 cbBTC
- IRM: Morpho Adaptive Curve IRM
- Oracle: Redstone LBTC PoR
- PoR range: 1.02 - 0.98
- Market price fallback: Chainlink LBTC/BTC feed
- Oracle code: Composite oracle