Aave Community Opposes Offboarding WBTC Despite Looming Restructure

While other web3 projects are panicking over Wrapped Bitcoin’s controversial restructure, Aave, the largest DeFi lending protocol, is pushing back against responding with drastic action.

On Sept. 18, LlamaRisk, a DeFi risk management firm, published a governance proposal calling for Aave to reduce WBTC’s maximum loan-to-value (LTV) ratio to $0 to prevent users from taking out new WBTC loans from the protocol. The proposal also advocates for lowering the limits on Aave’s supply and borrowing caps for WBTC.

The proposal comes as Bitgo, the company behind Wrapped Bitcoin, is readying to restructure the project by handing control over to a joint venture in partnership BiT Global and featuring involvement from Justin Sun, the controversial founder of Tron. LlamaRisk said it posted the proposal after entering into confidential discussions with Bitgo that were subject to a non-disclosure agreement.

“We remain unconvinced about the outlook for this partnership and its implications for WBTC transparency standards and user assurances going forward,” LlamaRisk said. “While we recommend proactive measures based on our concerns, we do not believe there is an immediate threat to WBTC; Aave has the benefit that it can take gradual, measured actions to mitigate protocol exposure.”

LlamaRisk added that taking gradual action would allow Aave to later reverse course should trust be established in the joint venture. Wrapped Bitcoin’s restructure is expected to go through on Oct. 8 at the earliest.

Wrapped Bitcoin is the largest BTC-backed token with a market cap of $9.65 billion, followed by Threshold’s tBTC with $215.6 million, according to CoinGecko.

Aave community calls for cautious response

However, key Aave’s community appears mostly unconcerned by the looming Wrapped Bitcoin restructure.

“WBTC users are legitimate users of the Aave protocol,” said Marc Zeller, the founder of the Aave Chan Initiative (ACI). “ACI will not support any scenario hurting them beyond absolute necessity.”

Zeller said ACI would support Aave expanding the roster of supported BTC-backed tokens, including tBTC and Coinbase’s cbBTC. Still, Zeller said ACI agrees that Aave should limit the growth of WBTC by reducing its supply cap.

EzR3aL, an Aave governance delegate, also believes that Aave should lower the deposit and borrow limits for WBTC. However, the delegate believes setting the LTV ratio to zero would adversely impact users in the event of a market dip.

PaperImperium from GFX Labs, a web3 research and development company, questioned how WBTC’s risk profile is greater than that of other asset-backed tokens supported by Aave, including as weETH, USDT, and USDe.

“What are you seeing in [WBTC] that prompts you to offboard while all these other assets over here have pretty poor trust assumptions too?” they asked.

Sky to offboard WBTC

By contrast, Sky, the collateralized debt protocol formerly known as MakerDAO, is hastily moving to offboard WBTC.

On Aug. 15, Sky reduced its debt ceiling for WBTC to zero to prevent users from minting DAI against the asset — with the measure enacted just five days after it was proposed.

On Sept. 12, Money Supply of the risk analysis team BA Labs proposed that Sky fully offboard support for WBTC by Oct. 8.

“Based on available evidence, it is highly likely that Justin Sun or affiliates control BitGlobal, with ownership concealed through shell companies and nominee directors,” Monet Supply said. “Justin Sun-affiliated stablecoins and custodial products have a significant negative track record and pose elevated counterparty risk.”