Announcing Lower C-ratios tBTC

Good news! We’ll be lowering tBTC Collateral Ratios and turning on Risk Manager in Coverage Pools. The decision was made after important input from the community and an arrival at the following consensus:

150% — mint

105% — courtesy call

101% — liquidation

In the design of tBTC v1, the notifier of the courtesy call receives half of the left over ETH bonds. For this reason we want the liquidation starting point to be as low as possible. As the auction runs for 24hrs and starts by auctioning off two thirds of the bond, there is a risk that the auction will never be profitable to take. The coverage pool then acts as a buyer of last resort for the auctions. For this reason the Coverage Pool is also being turned on in conjunction with the changes in C-ratio levels.

History

When tBTC v1 launched the initial collateralization ratios were:

150% — mint

125% — courtesy call

110% — liquidation

These were adjusted to reduce the number of liquidations from the ETH / BTC volatility and to reduce the level of active monitoring and costs of redeeming keeps that was required by node operators.

Community members Naxsun and Corollari did some modelling and proposed a voting methodology in the forums on how to approach this. The topic was then discussed in Discord and voted on in two votes by node operators: One vote to change the starting collateralization ratio and a second vote to change the courtesy call level. This resulted in a change to:

200% — mint

115% — courtesy call

110% — liquidation

While this change reduced the number of liquidations due to ETH / BTC volatility, it was not capital efficient. Due to the large number of opportunities to earn interest on ETH in DeFi the network hit an ETH ceiling.

There are a number of deposits that are highly over collateralized that can be redeemed to free up ETH. As the liquidity rewards for tBTC v1 have been removed, this has reduced the tBTC v1 price premium and will help stakers to unwind their positions.

Community member Jake Lynch put together some research on how much we can expect the ETH / BTC ratio to change during the auction as a way to measure the potential impact on the Coverage Pool.

One proposed change to reduce the value outflow to the auction taker and the notifier was:

150% — mint

101% — courtesy call

101% — liquidation

However, tBTC v1 has not been tested in production with the courtesy call and liquidation values being the same. A consensus was reached around the current change given that it helps to reduce the losses for stakers in the event of a liquidation.

Current State

It is worth noting that the changes to the collateralisation ratios only apply to new deposits that are created after the changes have been applied. It is expected that the ETH available for collateral for tBTC v1 will decrease as the stakedrop subsidies decrease.

At the time of writing all of the C-ratios for the redeemable deposits are above 158%.