On December 19th I cheekily asked Sam Kaz when Frax planned to release FrxBTC in the wake of the news that Ren Protocol was shuttering its V1 network, leaving a gap in the market for a trustless wrapped Bitcoin asset. The question was a follow on to a discussion about FraxFerry expansion and its merits.
For all purposes, the rollout of FraxFerry has been successful and well received by the Frax community. The addition of a FrxBTC bridge seemed to me a natural extension of the bridge to create a well-needed trust-minimized wrapped BTC asset on Ethereum.
FraxFerry is a simple, secure bridge for “shipping” tokens between chains. Its creation was a result of the multitude of bridge hacks that happened in Summer 2022, most notably the Harmony bridge hack. The hacker was able to exploit a vulnerability in Harmony’s Horizon Bridge that allowed them to steal $100m in user assets. Over 5 million FRAX and 100,000 FXS ($500,000 appx) was stolen during the hack. Paired with the Nomad bridge hack, the Frax protocol was exposed to millions of dollars of losses. The core dev team eventually made the decision that no unbacked AMO FRAX would ever be deposited into third party bridges ever again.
https://twitter.com/harmonyprotocol/status/1540110924400324608The core problem of the bridges is that they were providing immediate cross-chain liquidity for all asset types. They prioritized speed and liquidity over everything else, as it was what the market wanted. However, the immediacy of asset liquidity meant there were no safeguards against hacks and withdrawal of user funds, leading several high profile incidents.
At its core, FraxFerry acts like a cargo boat. Slow, reliable and able to transit as much as possible. Users deposit funds into the FraxFerry contract. At a fixed time daily, the “captain” calls the contract and starts the departure process. For the next 24 hours the funds are locked and cannot be accessed. After a day, if no problems arise, the funds can be “disembarked” on the destination chain. A set of “crewmembers” can pause the ferry if they think there is a fraudulent transaction or an issue with the funds being sent.
The 1 day transfer period is the core security measure in the contract. Most hacks happen in a short period of time. The Harmony hack happened over 11 transactions in the course of a few minutes. The Nomad hack drained $190m from the bridge smart contract in a few hours. Users paid for immediacy of liquidity by losing all of their funds. With FraxFerry, the 24 hour timelock is a long enough time to pause or cancel the transaction, while still being faster than other native L2 bridges with 1 week withdrawal times.
It was clear after the hacks that Frax as a protocol should prioritize the safe deployment of unbacked AMO funds above everything else. The risks to the peg far outweigh any benefits of immediate liquidity. This isn’t to say that Frax immediate cross-chain liquidity on demand will not exist, but rather that users will bear the risks and not the protocol with unbacked FRAX. If an individual chooses to deposit FRAX or FXS into a bridge, it's their choice to bear the potential negative outcomes. The Frax protocol should be bound to an extremely conservative risk strategy for unbacked FRAX. AMO funds should only be deployed into the “safest,” and most battle tested contracts with long standing history and strong teams.
As of writing this on Dec 21, 2022, Ren Protocol has announced the shutdown of the V1 of their network and the discontinuation of support for RenBTC. At its peak, more than 20,000 BTC was created and used on Ethereum. RenBTC was the most popular wrapped BTC asset after WBTC, and it was the only trust minimized product with significant market share and liquidity. RenBTC currently has over $4.5m deposited into Curve.
In the Frax main chat, Sam K dropped some hints as to how FrxBTC would be setup.
“Ya we'd need to run a BTC full node and also code a special purpose ferry that is basically a BTC SPV client for trustless verification of BTC movements on the BTC PoW chain. It isn't trivial, but it isn't insanely hard. It's more a question of scope and whether there would be significant need or usage of frxBTC.”
To create FrxBTC, Frax DAO would have to setup a multisig contract that controls the operations of a Bitcoin full node. According to Sam, the bridge would be “trust minimized” since Bitcoin does not support smart contracts. Instead, a collection of multi-sig controlled by veFXS holders would manage the Bitcoin node.
Westwood then popped in to ask some great questions about the decentralization of FrxBTC.
The primary problem with the creation of FrxBTC is that Bitcoin is a useless rock that produces zero revenues. The only fees that Frax will receive from creation and operation of FrxBTC would be from minting/unminting and the Fraxlend AMO. Assuming that FrxBTC could reach the same size as RenBTC at its peak and charges a 0.25% fee, Frax would earn 50 BTC ($840,000) from minting alone. Fraxlend fees are harder to gauge due to how much demand their might be for the product. If FrxBTC is not as successful as Ren, the fees might never exceed the costs and maintenance of the FraxFerry bridge.
Costs aside, there is a deeper question about which assets Frax should support in Fraxlend. To preserve security, Frax is only supporting high quality assets with AMO funds. The majority of asset markets are either Frax based products (FPI, FrxETH, FXS) and other Ethereum based assets (OHM, CRV, CVX) that are connected to the Frax ecosystem in some way. Notably, other competitor assets like StETH, rETH, and other LSDs are missing from Fraxlend.
Creation of the FrxBTC asset and its addition to Fraxlend would mean that Frax would have full control over its use, liquidations, and safety within the Frax ecosystem of products. No longer would Frax have to worry about the long term viability, security and independence of WBTC. We could establish the last major piece in the Frax ecosystem with a DAO controlled Bitcoin asset.
For all the platitudes though, creation of FrxBTC is at its core a question of time and resources. The DAO should really ask whether there will be significant demand for FrxBTC and will it improve the Frax protocol on the whole? There is not much benefit for Frax outside of providing a spot market in Curve and a lending market in Fraxlend. Organic demand is the only way a product like this can survive.
“BTC does not have any kind of yield or inherent value other than as a non-custodial digital asset (which is valuable in and of itself but that's it). So other than it being a cost that weighs down the protocol to subsidize its yield, there's really no reason for it to exist. At least that's my current view.” If the DAO chooses to create FrxBTC its unclear if it would ever be a profitable part of the ecosystem or if anyone would actually mint it. Sam K continues “ it needs to fit into the Frax vision. We don't ship random protocol features for fun. Like for example, we're not going to do something as random as an NFT marketplace. We have no reason or scope to be in that arena. But the question is, does a BTC stablecoin make sense. I'm not really sure.” - Sam K
So at the end of the day, Frax can create FrxBTC, it can be used in Fraxlend and LP in Curve/Fraxswap. Is this enough to warrant its creation? We will find out in a few days once the Snapshot vote is over. If it passes the RFQ will open the question to proposals and we will see what the best choices for the DAO are.
Continue the conversation on the governance forum: