Summary
This governance proposal seeks to integrate Axelar Wrapped Bitcoin (axlWBTC) and Axelar Wrapped Ether (axlWETH) as collateral assets within the Red Bank. Incorporating these digital assets could enhance the utility and liquidity of the Red Bank.
Motivation
Axelar is a decentralized network that enables secure cross-blockchain communication. It provides consensus-agnostic protocols, a dynamic validator set, and developer tools for creating cross-chain decentralized applications (dApps) that operate across multiple networks and blockchains.
Built on the Axelar Network, Satellite is a decentralized cross-chain asset transfer application that allows users to send assets between different chains within various connected networks. For assets like WBTC and WETH, which originate on the Ethereum blockchain, the Axelar Gateway contracts hold the underlying assets and mint Axelar Wrapped counterparts, enabling their use on other connected chains.
In addition to axlUSDC, these assets are the most frequently bridged into the Cosmos ecosystem, boasting the highest total value locked (TVL). On the Osmosis platform, the axlWBTC-OSMO and axlWETH-OSMO pools have consistently demonstrated strong liquidity levels, each surpassing $10 million since July 2022. The widespread adoption and liquid markets make axlWBTC and axlWETH potentially good candidates for listing on the Red Bank. These new markets will enable the Red Bank to broaden its offerings and potentially improve utility for both borrowers and lenders.
Risks
As a Peer-to-Pool money market, every asset added to the Red Bank increases the risk to the protocol. Given that these risks could materialize in systemic ways—where one weak asset could significantly impact the entire protocol—the Martian Council must carefully balance the addition of new assets with the additional risk assumed by the protocol. We believe these decisions should not be taken lightly.
In the following sections, we assess the technical risk, centralization risk, market risk, and oracle risk associated with listing these two assets based on the Risk Framework. And finally, we suggest the risk parameters the Martian Council should consider for both assets.
Technical Risk
| Metric | Requirements | Axelar Network |
|---|---|---|
| Time Since Launch | Ideal | The Axelar Network has been launched since February 2022. axlWBTC and axlWETH have been trading on Osmosis since May 2022. |
| Custom Public Audit | Ideal | The Axelar Network has had 27 public audits available here. |
| Recent Audit | Ideal | Eighteen of the audits have occurred in the last year. |
| No Critical Vulnerabilities | Ideal | No critical vulnerabilities have been exploited. |
| Bug Bounty Program | Ideal | Their ImmuneFi bug bounty program of $2.25m covers over 2% of their total value locked of $105m. |
Centralization Risk
| Metric | Requirements | Axelar Network |
|---|---|---|
| Owner Decentralization | Ideal | The Axelar Network itself is decentralized and governed by AXL holders. The AXL tokens are distributed over time to the core team, operators, investors, and community programs. |
| Admin Decentralization | Not met. | The Gateway contracts custodying transferred assets are controlled by a multisig contract. Details of key holders are not published, however information about their team members can be found here. Since current affiliation of key holders is not known, this category is not met. In the future, the Gateway contracts are planned to be decentralized to the control of the Axelar Network. |
| Other permissioned addresses | Ideal | No other permissioned addresses. |
Oracle Risk
To grasp the bridging and oracle risks linked to axlWBTC, it is essential to first comprehend the process of wrapping native Bitcoin. When a user transfers native Bitcoin to BitGo, the underlying Bitcoin is stored by BitGo, which then issues a new ERC-20 Wrapped BTC (WBTC) to the user on the Ethereum network. This Bitcoin is securely held in reserve by a regulated Trust in cold storage, safeguarded by the Trust’s fiduciary responsibility and insurance coverage.
Since Ethereum’s native token, Ether, predates the ERC-20 token standard, it cannot directly interact with smart contracts. To do so, users must first send ETH to a smart contract, which then provides them with an ERC-20 compatible Wrapped ETH (WETH) token.
After obtaining the ERC-20 WBTC and WETH tokens on the Ethereum network, users can transfer them to the Cosmos ecosystem using the Axelar Network’s Satellite application. The Gateway Smart contracts hold these tokens in custody, and Axelar wrapped equivalents are minted on the target blockchain.
With multiple layers of custody involved in the process of wrapping and transferring tokens between different ecosystems, there is an increased potential for vulnerabilities and exploits. If an exploit were to occur, it would compromise the 1:1 backing of the wrapped tokens, may subject the wrapped tokens to significant market volatility and place the solvency of the Red Bank at risk.
The risk parameters for listing such assets should take these tail-end risks into account.
Market Risk
To apply the Risk Framework to determine the LTV of axlWBTC and axlWETH, we first calculate several risk metrics for the underlying native assets and apply additional conservatism for the bridged assets.
BTC
- Daily 95% Conditional Value-at-Risk (CVaR, 365-days): 3.92%
- Maximum intraday drawdown (90-day): 7.54%
- Median 24hr volume (365-day): $27,440,000,000
- Median 24hr market capitalization (7-day average, 90-days): $320,000,000,000
- Average high-low percent quoted spread (30-day): 1.28%
- Amihud’s illiquidity measure (90-day): 5.1e-13
ETH
- Daily 95% Conditional Value-at-Risk (CVaR, 365-days): 3.52%
- Maximum intraday drawdown (90-day): 6.36%
- Median 24hr volume (365-day): $13,000,000,000
- Median 24hr market capitalization (7-day average, 90-days): $145,000,000,000
- Average high-low percent quoted spread (30-day): 1.73%
- Amihud’s illiquidity measure (90-day): 2.1e-12
Based on these quantitative metrics, in the next section we propose the LTV and other associated risk parameters.
Risk Parameters Suggestion
axlWBTC
Max Loan-to-Value: 64%
Liquidation Loan-to-Value: 65%
Liquidation Bonus: 12.5%
Deposit Cap: 5 axlWBTC
Interest Rate Parameters:
- Optimal Utilization: 60%
- Base IR: 0%
- Slope 1: 10%
- Slope 2: 300%
Usable as collateral? Yes
Available to borrow? Yes
axlWETH
Max Loan-to-Value: 63%
Liquidation Loan-to-Value: 65%
Liquidation Bonus: 12.5%
Deposit Cap: 75 axlWETH
Interest Rate Parameters:
- Optimal Utilization: 60%
- Base IR: 0%
- Slope 1: 10%
- Slope 2: 300%
Usable as collateral? Yes
Available to borrow? Yes
Implementation
Execute the Red Bank contract with the following message to initialize the axlWBTC market:
{
"init_asset": {
"denom": "ibc/D1542AA8762DB13087D8364F3EA6509FD6F009A34F00426AF9E4F9FA85CBBF1F",
"params": {
"reserve_factor": "0.2",
"max_loan_to_value": "0.64",
"liquidation_threshold": "0.65",
"liquidation_bonus": "0.125",
"interest_rate_model": {
"optimal_utilization_rate": "0.6",
"base": "0",
"slope_1": "0.1",
"slope_2": "3"
},
"deposit_enabled": true,
"borrow_enabled": true,
"deposit_cap": "5000000"
}
}
}
Execute the Red Bank contract with the following message to initialize the axlWETH market:
{
"init_asset": {
"denom": "ibc/EA1D43981D5C9A1C4AAEA9C23BB1D4FA126BA9BC7020A25E0AE4AA841EA25DC5",
"params": {
"reserve_factor": "0.2",
"max_loan_to_value": "0.63",
"liquidation_threshold": "0.65",
"liquidation_bonus": "0.125",
"interest_rate_model": {
"optimal_utilization_rate": "0.6",
"base": "0",
"slope_1": "0.1",
"slope_2": "3"
},
"deposit_enabled": true,
"borrow_enabled": true,
"deposit_cap": "75000000"
}
}
}
Disclaimers/Disclosures
This proposal is being made by Delphi Labs Ltd., a British Virgin Islands limited company. Delphi Labs engages in incubation, investment, research and development relevant to multiple ecosystems and protocols, including the Mars Protocol. Delphi Labs and certain of its service providers and equity holders own MARS tokens and have financial interests related to this proposal. Additionally, Delphi Labs is one of several entities associated with one another under the “Delphi Digital” brand. Delphi Digital’s associated entities and/or equityholders or service providers of such entities may hold MARS and may have financial interests related to this proposal. All such entities, service providers, equity holders and other related persons may also have financial interests in complementary or competing projects or ecosystems, entities or tokens, including Osmosis/OSMO. These statements are intended to disclose relevant facts and to help identify potential conflicts of interest, and should not be misconstrued as a complete description of all relevant interests or conflicts of interests; nor should they be construed as a recommendation to purchase or acquire any token or security.
This proposal is also subject to and qualified by the Mars Disclaimers/Disclosures. Delphi Labs may lack access to all relevant facts or may have failed to give appropriate weighting to available facts. Delphi Labs is not making any representation, warranty or guarantee regarding the accuracy or completeness of the statements herein, and Delphi Labs shall have no liability in the event of losses or damages ensuing from approval or rejection or other handling of the proposal. Each user and voter should undertake their own research and make their own independent interpretation and analysis of all relevant facts and issues to arrive at their own personal determinations of how to vote on the proposal.
Edits:
- Adjusted the executed messages to be shown separately and title header to move MRC to the front