Aave Community Members Plan to Propose a Plan to Onboard Threshold Network's TBTC

Unchained has learned that members of the Aave community are gearing up to propose a plan that would provide holders of wrapped bitcoin (WBTC) the option of

Members of the Aave community are preparing to propose a plan that would allow holders of wrapped bitcoin (WBTC) to supply and borrow an alternative tokenized version of BTC, Unchained has learned, in response to the recent custodial changes surrounding the keys to WBTC’s multi-signature wallet. The alternative version would be Threshold Network’s TBTC, which has a market cap of almost $177.2 million.

Marc Zeller, the founder of Aave-Chan Initiative, a service provider for the dominant lending protocol, told Unchained on Telegram that his organization is working to onboard TBTC and aims to have a governance vote on the improvement proposal by next week.

Matt Luongo, the co-author of the TBTC protocol, confirmed to Unchained that he is working with the Aave-Chain Initiative on the onboarding process and is waiting to get a risk analysis from Chaos Labs, a risk management firm. “The other piece that’s happening with the [Aave Improvement Proposal] is just the code getting done,” Luongo added.

Aave’s governance body has conducted forum discussions on whether to onboard TBTC and passed a snapshot vote on it in May 2024. However, crypto users can’t currently supply or borrow TBTC through Aave’s V3 protocol on Ethereum, the lending protocol’s largest market with a total market size of more than $13.6 billion.

The only bitcoin-related asset that crypto users on Aave can currently supply and borrow is WBTC. 33,910 WBTC — worth more than $1.9 billion — currently sits in Aave’s Ethereum V3 markets, of which roughly 3,760 WBTC, worth almost $213.7 million, is the total amount borrowed, data from Aave’s venue shows. Zeller pointed out that Aave’s governing body has not yet had a discussion nor reached a consensus on whether to offboard WBTC.

According to Chaos Labs, one reason why Aave has not offboarded WBTC so far is that it is trying not to imperil a substantial source of revenue.

“The existing debt against WBTC generates approximately $6 million in annualized revenues from the reserve factor alone, with demand continuing to grow at a notable pace,” Chaos Labs wrote in Aave’s public forums.

Maker’s Way Forward

The governing body of Maker, widely known for its decentralized stablecoin DAI, has taken a more aggressive approach in its response to BitGo expanding the number of parties possessing the keys to the multi-signature wallet holding the bitcoins backing WBTC.

On Thursday, Maker DAO executed a proposal that reduces the debt ceiling for all WBTC vaults to zero, preventing any new borrowing from WBTC vaults and decreasing WBTC’s loan-to-value (LTV) ratio on SparkLend from 74% to 0%. The changes came in part because Maker wanted to reduce the risk arising from Sun’s involvement with WBTC operations.

Maker holds a substantial amount of WBTC, with blockchain analytics firm Nansen showing that two of Maker’s smart contracts are the eighth and ninth largest holders of WBTC, collectively holding 6,682 WBTC tokens, representing $377.7 million.

DAI, MakerDAO’s cryptocurrency pegged to the U.S. dollar, has a market cap of $5.2 billion, and nearly $155 million of which has been minted from WBTC collateral, according to analytics platform MakerBurn.

“I think that Aave wanted to be a little bit more gentler than Maker,” said TBTC’s Luongo. Maker was like we aren’t going to accept new loans for wBTC and we’re going to figure things out, and so I think [what] Aave… wanted to do, instead, was give people a really smooth way to migrate from a WBTC position to a TBTC position without immediately hurting WBTC holders.

Luongo added that “we have this existential crisis [about WBTC’s custodial changes]] and I think that what Aave is doing is more like courting BTC holders versus what Maker is doing, which is defending DAI, and so it’s a different side of the risk spectrum,” Luongo said, noting that “both make sense.”

Maker’s governance token MKR has decreased 4.8% in the last 24 hours to trade at $1,954 at presstime, while Aave’s native cryptocurrency AAVE has increased 1.3% in the same time period to $106.48, data from CoinGecko shows.

Aave and Maker are the third and fourth largest protocols in the decentralized finance ecosystem with a total value locked of roughly $11.2 billion and $6.8 billion, respectively, according to DefiLlama.