TIP 48: Liquidity Bootstrappening Part 3: Threshold DAO x Wormhole

Proposals
1

TIP 48: Liquidity Bootstrappening Part 3: Threshold DAO x Wormhole

Vote Type:

Token Holder DAO Snapshot

Overview:

Wormhole is excited to submit a proposal to the Threshold DAO to help bridge tBTC beyond Ethereum and significantly deepen tBTC liquidity across all chains.

For Wormhole, tBTC offers a compelling potential cross-chain canonical BTC for the network across both EVM and non-EVM chains.

The goal of this proposal is to facilitate tBTC growth into one of the top BTCs used in on-chain DeFi by engaging one or more experienced liquidity providers and providing an incentive to mint large volumes of tBTC in exchange for the option to purchase T from the Threshold DAO treasury, with a tertiary benefit of solidifying the Threshold DAO treasury via significant exercise proceeds.

tBTC per chain launch details are outside the scope of this proposal and details are thus omitted.

Milestones and Deadlines:

  • Upon successful proposal execution, 1,000 tBTC will be minted; 200 within ~10 days and 800 once redemptions are live.
  • For every additional 5,000 tBTC minted net of redemptions, an option is exercisable for 1% of the current T supply of 10,515,000,000, for a total of up to 5% of the total T supply.
  • If all minting milestones are satisfied, a total of at least 26,000 tBTC will be minted net of redemptions.
  • If all options are exercised, Threshold DAO would receive exercise proceeds in excess of $20 million.

Who is Involved?

Threshold DAO, Wormhole, Aligned liquidity provider(s)

Detailed Summary

This partnership proposal comes at an opportune time given the momentum towards expansion of tBTC outside of Ethereum described in this document. Threshold DAO will leverage Wormhole’s security and messaging layer to mint tBTC natively on EVM chains where available. This lightweight, pragmatic strategy should allow for fast expansion to critical networks when there is opportunity.

High Level Partnership Tenets

  1. Threshold Network will leverage the Wormhole Token Bridge to mint tBTC on EVM chains where available…
    1. In this model, Threshold gateway contracts on L2s will trust the following messages to mint tBTC:
      1. The native L2 bridges to that ecosystem (ie the Optimism Bridge, Polygon Bridge, etc); and
      2. Wormhole Token Bridge to wrap wormhole tBTC representation into a Threshold canonical tBTC in accordance with: https://github.com/keep-network/tbtc-v2/blob/fddc6305e9aff74a19b3a775174aadb6ff1ebbc2/docs/rfc/rfc-8.adoc#supporting-cross-ecosystem-bridges
  2. Where there are no native contracts available (e.g. non-EVM chains), tBTC will be wrapped by Wormhole’s asset wrapping layer.
    1. Chains like Solana, Aptos, Sui, Cosmos etc
    2. Wormhole’s asset layer currently secures hundreds of millions of dollars in TVL and has the added benefit of a fungible standard that can be moved across-chains in a path independent fashion (ie when tBTC is bridged between chains with Wormhole, you don’t get a double wrapped version that is incompatible with the canonical version on the chain)
  3. Threshold DAO will engage one or more experienced liquidity providers to seed tBTC liquidity in important ecosystems where tBTC has an opportunity for growth.
    1. In order to align with the Threshold Network, liquidity providers will have to mint and hold 1000 or more tBTC in order to qualify under this category (each additional LP will be required to mint and hold more than the previous)

Liquidity Providers

To implement the proposal, Threshold DAO will engage one or more experienced liquidity providers (including an initial liquidity provider identified by Threshold DAO) who will be incentivized by earning stake in the Threshold network via options to purchase T tokens which become exercisable after minting tBTC at an agreed schedule based on milestones (outlined below).

In general, liquidity provider(s) will be eligible to unlock options for T, up to a maximum of 5% of the T supply, as follows: after an initial mint of 1,000 tBTC, each additional 5,000 minted tBTC will unlock an option for 1% of the T supply. The options will have a strike price around or above the current spot price of T (3.6c today), with the higher strike prices applying to the higher milestones of minted tBTC. If earned and exercised, the T delivered upon exercise of any option will be subject to a vesting schedule such that: 50% of T will be fully vested at delivery, and remaining 50% will vest in equal installments over a 3-month period at 30, 60, & 90 days. Qualified liquidity providers will have a waived mint/redeem fee on tBTC for the first 21 months, rebated in Threshold T token. After the 21 month period is over, the mint/redeem fee rebate will be revisited.

With this structure, T will not be granted or loaned to liquidity providers; rather, liquidity providers will unlock the ability to exercise options for T as an incentive for minting tBTC and will help diversify the treasury of the Threshold DAO.

The minting of tBTC and the exercise by a liquidity provider of options for T will be publicly displayed and monitored.

This proposal is beneficial for Threshold DAO because:

  1. the community will not be required to risk any of its treasury without demonstrated performance
  2. it may put tBTC into one of the top spots of BTC in DeFi
  3. treasury diversification via aggregate proceeds received by the DAO

Liquidity Fragmentation and Security Considerations

tBTC, powered by Wormhole’s security and scale across 20+ EVM and non-EVM networks, can drastically expand its reach and deepen its liquidity as the preferred, decentralized, BTC that can gain adoption throughout EVM, non-EVM chains, and on CEXs. tBTC can leverage the scale of Wormhole to grow quickly and strategically while not compromising on its strategy to mint native tBTC on L2 and sidechains.

Part of the growth strategy will center around which chains to focus tBTC’s growth

Leveraging cross-chain bridges like Wormhole and resulting considerations around liquidity fragmentation are addressed here.

Wormhole’s token wrapping standard (today commonly referred to as xAssets) should work well within the framework favored by the community.

Ongoing Bridge Risk Analysis Framework

tBTC’s novel asset bridging mechanism allows “native” interoperability on chains with their own bridges, like Arbitrum, Optimism, and Polygon.

Multiple bridges can be whitelisted on each chain, allowing tBTC users to stick with a familiar bridge. For this reason, partnering with Wormhole will make tBTC even easier to use, allowing for faster bridging on L2s without fragmenting liquidity.

The downside of this approach is increased risk. Each new bridge that’s whitelisted is another mechanism that could be hacked, hurting all tBTC holders outside of L1.

For this reason, Threshold governance needs to be conservative whitelisting new bridges. We propose that during the partnership term, tBTC minter contracts on L2s natively supported by Threshold will only whitelist the native L2 bridges and Wormhole. During this term, a prerequisite for other non-native bridges being whitelisted is that they must be credibly expected to bring at least 5x Wormhole’s initial liquidity provision of 1,000 BTC in deposits (i.e. minimum 5,000 BTC), helping ensure any new bridges have skin in the game and appropriate security controls in place.

Tx Details (If required):

There are no immediate transactions required to support this proposal. Any release of funds as per milestones outlined in the proposal will be conducted through following Threshold DAO Governor Bravo proposals.

22 Likes
2

Thank you for such a well thought out and structured proposal @wormhole.

I am a strong supporter of this proposal, I believe the two projects have mutually aligned interests and that the increased supply will unlock significantly more integrations and hence utility for TBTC.

The acceleration of the Treasury’s diversification efforts would allow the Threshold DAO more options for growing the treasury balance sheet.

14 Likes
3

This proposal looks great!

Will there be a maximum cap on this?

I would love to hear feedback and questions from some of our delegates and other community members. Going to tag a few of you to get the conversation going. @JohnPackel @oleolezx @nico186 @jakelynch @JP1 @Eastban @ZeroInFo56 @Naxsun @mhluongo @maclane

9 Likes
4

Firstly, I would like to salute @wormhole for presenting such a well-structured proposal.

I am in strong agreement with this proposal, as I believe that it has immense potential to enhance the liquidity of tBTC across various ecosystems, leading to a significant increase in adoption rates. As stated in the proposal, this could also result in tBTC becoming one of the top BTCs backed asset used in on-chain DeFi.

While the proposal does acknowledge the potential risks of having multiple functional bridges, as stated as well, I agree that a cautious approach to the whitelisting of new bridges can effectively mitigate these risks. Therefore, I fully support this proposal and believe that it is in the best interest of the Threshold DAO.

10 Likes
5

I also strongly support this - and see the 3 liquidity bootstrapping proposals together as the game changer Threshold needs to establish tBTC as the leading Bitcoin bridge to the growing DeFi universe.

A couple comments for anyone who may have questions about some of the phrasing here.

  • “facilitate tBTC growth into one of the top BTCs used in on-chain DeFi” - this simply means accelerating our “north star” goal of growing market share

  • “tertiary benefit of solidifying the Threshold DAO treasury via significant exercise proceeds” - this refers to payment from market makers exercising the option to buy Threshold work tokens, which will both expand our token holder base, as well as accelerate the diversification of our treasury (arguably the “north star” goal for the Treasury Guild)

  • on your question @MrsNuBooty, my understanding is there is no cap on mint and redemption fee rebates, as we want to incentivize as much activity as we can (which will attract other users) - and because the rebate is in Threshold tokens, it’s a further diversification mechanism

One question I have is regarding, “The minting of tBTC and the exercise by a liquidity provider of options for T will be publicly displayed and monitored.” Am I correct in assuming that the Treasury Guild will be monitoring and communicating these?

9 Likes
6

Hamzah here from Polygon DeFi.

Firstly would like to thank @wormhole for the well thought out plan to grow tBTC. We are in dire need of a decentralized native BTC and Threshold is a strong contender to become that.

Really appreciate the effort to mention security of paramount importance and the idea to whitelist only bridges with good lindy effects and traction including L2 bridges.

Polygon DeFi especially on zkEVM is in early stages (check progress here) and we have huge plans ready in next few months. Would love to see tBTC take center stage there. :slight_smile:

11 Likes
7

@MrsNuBooty within the scope of milestones in this proposal there is no cap.

@JohnPackel it makes sense for Threshold Treasury Guild to be the primary group monitoring both of these activities.

5 Likes
8

Thank you @wormhole for the detailed proposal!!
I would strongly support this proposal !!
Looking forward for tBTC beyond ETH mainnet !!

7 Likes
9

What is the partnership term? Is it the same as the 21 month fee rebate term?

Is there an exercise period for the options (i.e. do they expire at some point if unexercised)?

5 Likes
10

Looks great. I am supportive of this

3 Likes
11

Thank you @wormhole for putting forth such a concise and well written proposal.
I am huge fan, and am in full support.

I have grown to become very fond of bridging assets and learned a great deal about the benefits and opprtunities. I think bridging tBTC beyond Ethereum will be a massive kick start, and draw a lot of new people and experienced alum’s into the space.

Historically, I am a fan and follower of NFT’s. I think there is a nice parallel here and wanted to mention my experience. A few years back the majority of NFT’s were on EVM, and there really wasn’t a supply of artists minting on other chains; nor was there a marketplace for buying and selling.

As gas costs increased many artists realized they could utilize L2’s as well as other chains to alleviate the end cost to collectors. Lower costs drove interest, and created new marketplaces. But it was still tricky for many fans to learn “how” to bridge, and to feel comfortable with some of the early applications available.

I think the dashboard and UX that has been developed by the Threshold Team is incredible. I have tested the dash on Goerli, and minted on mainnet - the dash offers clear instructions, consistent messaging, and interactive milestones that track the progress of your transaction.

I think this experience will carry over when bridging onto additional chains, and ultimately create a use case for tBTC to work in series. This will (imho) similarly drive a lot of traffic to the project and encourage a lot of new users into the space, that might otherwise not have interest.

5 Likes
12

Thank you for sharing this well considered proposal @wormhole. This is an excellent initiative, and I am in support of this proposal.

Some questions:

  1. Is there an expiry date on the availability of each tranche? This would support a robust cadence to tBTC liquidity roll out over a clarified schedule.

  2. Which assets will the DAO accept as payment for the options, in what proportions, and how will price be calculated for payments?

  3. How will the newly minted tBTC be allocated post-minting?
    This is likely highly nuanced, though some indication of what % of new liquidity will reach DeFi, and where, will allow the DAO to support via pool incentivization, protocol integration, and marketing.

7 Likes
14

Stoked to see this proposal as more people will have access to tBTC. The growth Threshold protocol is a win for all of DEFI.

Cheers!

4 Likes
15

We will be chatting about this proposal from @wormhole on our community call at 12pm Eastern today. I would love for everyone to join us!
https://twitter.com/i/spaces/1kvJpmaQvbbxE

4 Likes
16

Hey guys,

Thanks for the amazing feedback and comments. Naturally, there have been a few comments that have emerged that we’d like to address so we’ll use this post to consolidate:

As addressed by Will and John Packel - there is no planned maximum on this. We hope that the more that the liquidity provider mints, the better for both Wormhole, Threshold, and tBTC adoption - so we do not want to punish them!

As mentioned in the proposal, the partnership term will be 21 months with the hope that, if successful, there will be natural incentives across the contributors to continue the alignment

The options will be exercisable through month 33 - which is 12 months after the official partnership is scheduled to end

When the 21 months are up, the tranches are no longer available. However, once a milestone is hit, the option needs to be exercised or abandoned within 1 year of that date.

Wormhole team is happy to discuss with the DAO and treasury guild regarding what makes the most sense for treasury assets!

Great question! As you mentioned - this will be highly nuanced and a bit difficult to lay out cleanly at this point in time. We’d like to see a large amount of tBTC accumulate in on chain defi as well as potentially see tBTC listed on centralized exchanges. The beauty of the incentive structure of the proposal is for unaffiliated parties like Wormhole, Threshold, and the liquidity provider to collaborate and find ways to mutually promote tBTC adoption. We see a lot of opportunity on both EVM and non-EVM chains and we’d like to see tBTC listed on many DEXs, CEXs, accepted as a collateral asset, etc. At a high level we’d like to prioritize 1) chains with a lot of users and a thriving defi ecosystem 2) chains where tBTC can become canonical because there is a gap in BTC 3) where there exists strong opportunity to collaborate with projects that will actively prioritize tBTC adoption. On the CEX side, this should be much more straightforward. We’d like to get tBTC onto the biggest exchanges and additionally have support for deposits and withdrawals.

7 Likes
17

Thanks to the @wormhole team for putting together such a thoughtful proposal. In order to be able to fully evaluate the merits of the transaction it would be very helpful to get answers to the following questions:

Regarding Wormhole holding tBTC and the option vesting period:

  1. Is there a minimum amount of time the required “net” amount of minted tBTC needs to be in circulation in order for the option to fully vest? Could Wormhole for example mint 5k tBTC, exercise the option, vest their T tokens and subsequently remove the tBTC without consequence?
  2. In case of partial redemption of BTC by Wormhole, will the vesting of options be adjusted accordingly?

Regarding the options exercised by wormhole:

  1. The proposal states that “The options will have a strike price around or above the current spot price of T (3.6c today), with the higher strike prices applying to the higher milestones of minted tBTC.” Could you provide clarification on the exact strike prices associated with each minting milestone? If the spot price of T is lower during future option vesting periods would the strike still be higher?
  2. Are there any provisions for adjusting strike prices based on price movements ahead of tBTC minting?

Regarding Wormhole’s role as the bridge provider able to mint canonical tBTC on L2s and sidechains:

  1. Given Wormhole’s history of multiple security incidents, has the Threshhold team conducted an evaluation of the potential security risks? How has the team gotten comfortable around this?
  2. What measures have been taken to ensure bridge safety going forward?
  3. Are there any contingency plans in place in the event of a security breach or other adverse events related to Wormhole’s bridge?
4 Likes
18

The Threshold community and DAO are coming together to launch an exciting proposal, aiming to mint over 25,000 tBTC, which presents both a challenge and an opportunity for expansion. The project, centered on the integration of tBTC v2 and the establishment of a strong network of validators and staking services, demonstrates the incredible potential of decentralized teamwork.

If the project proves successful, it would exemplify the power of innovation driven by a united community, emphasizing the commitment and proficiency of all participants. This accomplishment would not only represent a significant milestone for the Threshold ecosystem, but also serve as a source of inspiration for others to join and contribute to its ongoing growth.

The path to minting over 25,000 tBTC may be laden with hurdles, such as guaranteeing a smooth migration / redemption process, enticing liquidity providers, and preserving the security and effectiveness of the platform. Nevertheless, the potential benefits make the effort worthwhile. Realizing this goal would solidify Threshold’s position as a frontrunner in the decentralized finance domain, providing users with a safe and streamlined solution for managing cross-chain assets.

I strongly support this proposal. Thank you Will for the timely reminder!

2 Likes
19

Thanks for the questions!

First, it’s important to acknowledge that there are separate parties to this proposal:

  1. Threshold and tBTC
  2. Wormhole
  3. One or more liquidity providers

Wormhole is not the entity who will be exercising these options. Wormhole’s role as an interoperability protocol is to allow and secure the cross-chain bridging of tBTC across supported networks. So, in answering these questions, Wormhole has just one view - as does each party. However, we will do our best to answer as completely as possible.

There is no minimum amount of time required for the tBTC to be in circulation in order to vest on the option. However, speaking from a practical perspective - there are few things that are important to reason through.

From a financial perspective - the lowest price option is $3.6 cents with other strikes at higher levels. The current price of T as of writing is $3.25 cents. This means that if the first milestone was hit and option were to be exercised, the option would be worthless.

From an operational and risk perspective, it would be hard for any reasonably sophisticated actor to justify risking at least $150M USD worth of Bitcoin for small financial gain.

So, it can be argued that the most profitable strategy for a liquidity provider would be to look to add real value to the protocol over a sufficiently long period of time to allow for growth. Without performing in good faith, there’s a good chance that minimal to no financial gain would be realized.

Finally, and probably most importantly, the type of behavior described is unlikely to be worth the potential reputation damage that would come from malicious behavior associated with a publicly identified wallet.

The exact option prices have not been shared to prevent foul play with regards to front running around exact prices. The important piece to know is that the strikes are all fixed / set and that while some of the strikes are $3.6cents, most are higher and grow incrementally.

As mentioned above, the strikes are set and there are no provisions for adjusting the strike price.

Regarding security, I think @mhluongo answered this question very well in Discord, but just to answer this publicly for those in the forum:

Wormhole has had one security incident that occurred over 1 year ago. All assets were re-collateralized, and the bridge restarted in under 14 hours. Here is the full incident report https://wormholecrypto.medium.com/wormhole-incident-report-02-02-22-ad9b8f21eec6.

Since the hack, Wormhole has:

Additionally, Wormhole has had many recent high-profile partnerships that attest to community trust, across multiple ecosystems.

A recent example is Wormhole’s recent adoption by Uniswap

7 Likes
20

Thank you for the thoughtful and very thorough responses, @wormhole.

I would note that DeFi and even Ethereum is still quite young, and everyone using these protocols needs to be aware of the inherent risks. To me, the way a team/community responds to an exploit is an indicator of how committed they are to continuing to build for the long term, and the speed of response, the $10M whitehat offer, the funds provided to make users whole and the $3.5M Immunify bug bounty (cited in this report) gives me confidence in Wormhole as a key partner as we build liquidity and grow the Threshold ecosystem.

3 Likes
21

This is really exciting and I fully support this proposal - Thank you Wormhole for taking the time to prepare this and to answer all our questions!

6 Likes