Description
This proposal seeks to add WBTC and WETH to the Cryptocurrency category, or to add one of them. This would be done by calling addTokens on the pool controller from the Timelock contract, with the addresses of WBTC and/or WETH as arguments. This thread is to discuss the benefits and risks of doing so, and to determine which of the assets (if either) should be included in a Snapshot proposal before an on-chain governance proposal.
Rationale
As the two largest native assets in the cryptocurrency space, Bitcoin and Ether are the most obvious of any ERC20 tokens to be included in this category. Movements in the price of Bitcoin tend to affect the entire cryptocurrency economy, and movements in the price of Ethereum tend to set the trend for most of the DeFi market. Adding one or both to the category would expose the indices to a more representative subset of the cryptocurrency sector.
The only way to add Bitcoin to the category is through one of its wrappers. The two clear choices for this would be renBTC or WBTC. WBTC has a much higher market cap and has been around longer than renBTC, so it would make more sense to add it to the category.
Pools can not add Ether directly, and even if they could it would be impossible to measure its market cap since there is no total ether opcode in the EVM. WETH is the largest Ether token by far, and is the obvious choice if we decide to add Ether.
This proposal mentions weights in index pools. As a reminder, weights are calculated using the square root of tokens’ fully diluted market caps. Additional information can be found in the documentation.
WBTC Risks: Custodial
WBTC is a custodial asset backed by BitGo. As such, the security of WBTC is entirely reliant on BitGo. It is a highly trusted corporation, with several billion dollars locked in WBTC alone, but it is a single point of failure.
Accepting WBTC may set a bad precedent by allowing tokens which are managed by centralized actors into indices in a protocol designed to be passive and decentralized. Nonetheless, it is the largest asset in the crypto space and I believe it should be considered.
WBTC Risks: Market Cap
WBTC is not a standard token, in that it is a wrapper for another currency. This means that the weight assigned by the pool controller will not necessarily represent any economic indicator of Bitcoin relative to other assets, and instead will be based on how much Bitcoin is being used on the Ethereum blockchain through WBTC.
WETH Risks: Market Cap
WETH is a wrapper for Ethereum, and can be minted or burned arbitrarily. As such, there are 2 concerns: as with WBTC, the market cap is not really representative of any economic indicator for Ethereum itself; and its market cap, and thus the weight of WETH, could be manipulated by actors with sufficient access to liquidity.
Unlike WBTC, manipulating the weight of WETH in an index would be rather trivial, and would not necessarily impose a cost to the person responsible. WBTC must be created through a deposit process interacting with BitGo, while WETH can be instantaneously minted on-chain. This significantly reduces the cost of a weight manipulation attack.
For someone with a large amount of available liquidity in the form of Ether (several billion dollars worth, at time of writing), this would be completely free aside from transaction costs. You would simply: mint weth, trigger the pool reweigh, then burn the weth. For anyone else, the cost would be the fees from on-chain flash loans, assuming one had access to billions of dollars worth of liquidity for flash loans.
It’s important to keep in mind that because the market cap of WETH is so high, and because tokens are weighted by the square root of their market caps, a very large amount of liquidity would be required to successfully manipulate the weight of WETH in a pool.
- Add only WBTC
- Add only WETH
- Add WBTC and WETH
- Add Neither
0 voters