tBTC v1 : The sunsettening
The main goal of this proposal is to preserve tBTC decentralization until the launch of v2 while simultaneously preventing losses to users.
In the opposing proposal, WBTC was introduced as an option to back tBTC v2 until migration in order to enable scaling. I’ve argued that losing decentralization for potential (and temporary) scaling is not worth the trade-off. My proposal will not enable new growth in supply over the next 2-3 months (while we wait for the bridge), but it will align incentives so that more tBTC ends up on v2.
Three ways to shutdown tBTC v1
- tBTC v1 are redeemed and tBTC v1 is shut down
- tBTC v1 are upgraded to tBTC v2 and then converted back to v1 by the DAO after launch of bridge
- tBTC v2 becomes backed by WBTC and the DAO seizes control of the vending machine to prevent conversions back. The DAO can mint v2 using WBTC, convert back to v1 and redeem.
Operating tBTC v1 is very costly, it’s highly dependent on a relay that costs $150k worth of ETH every month. It’s currently subsidized by Keep developers as a public good. Matt Luongo has voiced that he can only stomach another 2 months of paying for the relay (June, July).
Option 1. is therefore interesting, because the running costs will go away. But so will tBTC, and that’s a serious blow.
It means we have to start from scratch and bootstrap from 0 after the launch of v2. Even worse, with zero tBTC backing, any trading pair that has tBTC will fail and investors that are not paying attention will lose funds. This will also impact v2 pairs and ultimately cause tremendous damange as tBTC becomes unlisted and removed from exchanges and defi projects.
Shutting down tBTC v1 is also not going to happen in one day, it will drag on for weeks, or more likely months as we work to diligently gather node operators, tBTC holders and organize flag days to shut down in order to minimize losses. This option is unrealistic.
Option 3. will also not shut down right away. We can expect the running costs to continue for a while, but it might be justifiable to shut down before all redemptions are complete if the costs of running relay outweights covering losses. The main drawback of this proposal is turning tBTC v2 into a centralized wrapper and giving custody to third parties.
In this proposal we suggest option 2. which is to continue running tBTC v1, but focus on bringing people over to v2. That will allow us 2-3 months of getting people to migrate so that we can quickly shut down tBTC v1 when the bridge is live.
Option 2 : How it works
Effective immediately, Keep team will ask all node operators to deauth the sortition pool (meaning no more tBTC can be minted).
To incentivize node operators, the DAO will pledge to cover ETH losses that are caused as a direct result of the shut down (more on this later). Node operators who refuses to deauth will not be eligble for cover of their losses.
It’s important that minting is disabled so that redemptions will not result in available minting capacity (and therefore minting of new tBTC).
When the majority of node operators have disabled minting, the redemption process can be set in motion.
Redemption process
The distribution of reedemable deposits within Keep Nodes:
| BTC lot size | Number of lots | Total locked |
|---|---|---|
| 10 | 22 | 220 BTC |
| 5 | 76 | 380 BTC |
| 1 | 64 | 64 BTC |
| 0.5 | 10 | 5 BTC |
| 0.2 | 2 | 0.4 BTC |
| 0.1 | 1 | 0.1 BTC |
| 0.01 | 2 | 0.02 BTC |
| Total BTC locked: | 669.52 BTC |
As can be seen from the table above and AllTheKeeps website, all funds are redeemable. In order to redeem, the DAO will hire a “redeemer”. The role of the redeemer is to redeem requested lots using their own funds (or funds borrowed from the DAO if collateral is provided).
The redeemer must have a minimum 30 BTC (+ fees) available for the job, but the ideal candidate will have at least 50-100 BTC.
I suggest that the redeemer is accepted loosely based on a reverse auction principle, whoever offers the best price AND the larger BTC balance is accepted by the DAO as redeemer. But to prevent unreliable actors, the DAO treasury will judge at their sole discretion if the user is a worthy candidate.
As a backstop, if nobody wishes to perform the redemption processes, Agoristen is making himself available at gas/fee costs +0.25% premium. Any other offers should be 0.25% or less.
To redeem 670 tBTC, profit to redeemer is 1.675 BTC or less. The DAO also covers gas/minting fees.
Agoristen has performed large quantities of redemptions in the past and has been hired by several community members to perform redemptions, but he is happy to cede if other community members would like to take this role.
The redemptions will happen on one or multiple “flag days”. These are days announced in advance to get as many node operators to be available as possible. The Keep team will avail themselves on the flag day to help ensure a smooth redemption process and minimize or eliminate risk of losses. Keep team will also coordinate potential auctions to return as much funds as possible to operators.
To further minimize losses, redemptions will be performed based on lot size and collateral ratio. A larger lot size (10 BTC) is riskier to node operators and will be most difficult to close last (when there are few tBTC left). Additionally, we focus on completing lots with a high collateral ratio first as they represent a higher monetary loss risk to node operators.
Example below on which lots to first redeem (marked with red arrows):
As tBTC v1 is redeemed, the redeemer will deposit the resulting BTC into the v2 bridge and mint v2 tBTC, these will be moved through the vending machine, back to v1, which is then subsequently redeemed. The process is repeated until the vending machine is emptied.
At that point, we can expect a smaller amount of tBTC to be left in v1.
Now there will be a discussion in the DAO on how to proceed. How we proceed depends on the amount of tBTC left. If it’s a small, negligible amount, the remaining node operators can collaborate to seize the BTC outright, transfer it to v2, then take the loss of ETH collateral which is refunded by the DAO.
If it’s a larger amount, the Keep multisig can organize to reduce collateral requirements to 101%, a group of 3 community members and/or Keep team will initiate one node each with the minimum KEEP stake (10k KEEP) and sufficient ETH stake and the redeemer will then churn to reduce the collateral ratio to 101%. Finally this group will seize remaining BTC (at very little cost that is refunded by the DAO) and transfer it to v2.
Seizure of funds shall be fronted by the DAO by making a deposit to v2. E.g if we’re seizing 10 tBTC, the DAO should front the amount by deposting 10 BTC into v2. This way, tBTC always remain fully collateralized.
One note on cover of losses: The DAO will cover losses related to organized seizure of BTC (thus resulting in ETH collateral seized) - but will not cover normal operating losses such as nodes being unresponsive. Flag days will be organized to minimize the risk of operating losses. To be specific, when there is a small amount of tBTC left that cannot be redeemed, the node operators can seize the underlying BTC and transfer them to v2, but that will result in their ETH collateral being auctioned off (and the auction will never close - because there are zero or unavailable tBTC left to redeem with), the DAO will cover this loss. For situations when the auction does run in relation to seizure of BTC, it is intended that the Keep team will attempt to cover as much as possible from the auction and then the DAO will cover the difference lost.
Since seized funds are transfered into v2, any remaining tBTC v1 tokens will still be backed 1:1. This creates continuity and ensures all tBTC v1 pairs and defi protocols will operate unaffected by the migration. Any tBTC v1 user not paying attention will be able to migrate to v2 at any time through the vending machine.
Once all BTC are seized, tBTC v1 can be sunset.
How to bring people over to v2?
Incentives are implemented to incentivize migration to v2. The sooner a user migrates their tBTC, the more rewards.
Rewards distribution
| Month 1 | Month 2 | Month 3 | Month 4 | |
|---|---|---|---|---|
| Conversion to v2 tBTC | 0.25% | 0.75% | 0.75% | 0.75% |
| Deposit to curve pool | + 0.10% | + 0.10% | + 0.10% | + 0.10% |
The expected timeline is 2 months, but in case of delays we have two additional months of rewards. A user who deposits before Month 1 (starting on June 20th 2022) will gain in total 1% rewards on their tBTC minimum and up to 2.5% maximum. An additional 0.10% per month is awarded for depositing into Curve tBTC v2 pool, thus yielding a minimum of 1.2% or a maximum of 2.9%.
The requirements to be eligble for rewards is that funds are not converted back to v1 at any time, or for the curve pool, only last deposit date will count towards rewards. Additionally (to prevent users from grabbing tBTC from the curve pool and converting to v1 then back to v2) only net inflow of tBTC v1 to the vending machine is counted for rewards. That rule applies also if using multiple addresses. Attempts at gaming the reward system will be elimination criteria. Any funds converted from v2 to v1 after this proposal is in effect will not be rewarded, and funds mixed with them will neither (with exceptions judged by the DAO treasury to be honest actions). To be 100% sure you will get rewards, simply convert from v1 to v2 and leave the funds in that address untouched or deposit to the curve pool.
Once the v2 bridge is launched and the redeemer has emptied the vending machine, rewards can be distributed to v2 token holders.
A form is submitted to claim rewards after tBTC v1 has been sunset. The form is anonymous and can be accessed through Tor network. In the form, user will submit a signature from their ETH address signing tx hash of their deposit into the vending machine and optionally the tx hash of their deposit into the curve pool). DAO treasury will validate that their claim is correct and proceed to transfer tBTC v2 rewards to their ETH address. There will be a deadline to submit of 3 months.
Costs
Relay costs
This will be a separate proposal.
Incentives for migration to v2:
1% - 2.9% (of 670 BTC) is between 6.7 - 19.43 BTC (or measured in usd: $201,000 - $582,900)
If we’re using a claim form, we can expect that not everyone will submit a claim, that will reduce the amount we have to pay.
Incentives for redeemer:
1.675 BTC + gas/mint costs ( $50,250 + gas/mint costs )
Cover of losses:
This loss is unpredictable and unavoidable, but can be minimized by setting c-ratio to 101%. There’s about 10 tBTC worth of balances below 1 tBTC each which could be a rough estimate on loss (using the assumption that anyone with more than 1 tBTC is going to care enough to keep up with what is happening). If we assume coverage of 100% loss on 10 tBTC the DAO will cover $303,000 (using $30k per BTC price and 101% c-ratio) worth of losses.
But let’s also make a more pessimistic assumption that there is 30 tBTC not redeemed in the end: 30 tBTC = $909,000
Range of loss guesstimate: $303,000 - $909,000
I suggest that the loss is capped at $1 million - if there are bigger losses a new proposal have to be put forth in order to consider how to deal with such situation.
Deployment of 3 nodes:
Keep team has voiced that they will likely take care of this if necessary. I’m assuming no cost in this proposal.
Total cost estimate:
$0.5 - $1.5 million
Proposal summary
Advantages
- Preserves decentralization of tBTC
- Simplifies the sunsetting process
- Continuity, both tBTC v1 and tBTC v2 remains operational indefinitely
- No loss for last standing node operators
- No loss for tBTC holders and tBTC v1 holders can hold forever if they wish to
Disadvantages
- 2-3 months of no growth (capped at ~670 tBTC)
- Relay has to be paid during this period
- Costs of redeemer, incentives, cover of losses
Disclosures
Agoristen
- Large tBTC holder
- No longer a node operator (I shut down my nodes early last year)
- Is most likely candidate for the redemption job (but happy to let it go to someone else)
