Incentivize Interlay iBTC capacity as Polkadot common good

Big Spender

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Rejected

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Tl;dr: The Interlay community seeks Polkadot Treasury support for more iBTC collateralization since iBTC is used throughout the Polkadot ecosystem as a common good. We propose that the Polkadot Treasury support incentivizing 45 iBTC with a grant of 202,030 DOT.

Background
Interlay continues to operate as the main BTC bridge & Bitcoin DeFi Hub of the Polkadot ecosystem. The Interlay Bridge & DeFi Hub has stood the test of time & continues to be the most secure bridge for Bitcoin DeFi. The bridge has handled 711 BTC in bridge volume and currently provides 53.6 BTC to the Polkadot ecosystem and was recently as high as 89.5 iBTC. Due to high iBTC demand by hodlers, DEXs, and money markets there is again no spare capacity to mint more iBTC.

Interlay Actions to Increase iBTC Capacity

The number 1 priority for Interlay will always be to ensure the secure operation of the BTC bridge & DeFi Hub. INTR emissions incentivize vault operators to collateralize or back the minting of iBTC. But the primary beneficiaries of tokenized BTC have been DEXs and there wasn’t enough iBTC mint/redeem volume to significantly contribute to vault incentivization. Therefore the Interlay team reduced iBTC mint/redeem fees to near zero over a year ago, basically operating iBTC as a common good for the Polkadot ecosystem.

The Interlay community plan to work on the following important features to continue Interlay’s growth and make iBTC sustainable:

Add new lending markets, continuing to grow Polkadot’s lending market.
Add new vault collaterals to increase diversity and allow for more BTC to flow into Polkadot’s ecosystem.
Research how to further improve the Vault model for the Interlay bridge via collateral delegation and shared multisig Vaults.

We also support calls to reduce Polkadot inflation and staking rewards, as long as the real yield is maintained. Reducing the DOT staking APR would reduce the high yield (and INTR emissions) required to compensate DOT vault operators for lost staking rewards. (Luckily Bifrost and Interlay have teamed up to enable VDOT as iBTC vault collateral, reducing the need to compete against DOT rewards when using VDOT as collateral.)

Treasury Proposal

Last but not least, we believe that the DOT treasury can play a role in increasing the collateral capacity to mint more iBTC as part of the broader Polkadot DeFi liquidity campaign. After discussing options with the community in https://polkadot.subsquare.io/posts/263 we are proposing executing Option 1, that the Polkadot Treasury grants DOT to Interlay to pay out as vault rewards.

The original goal of Polkadot referendum 432 was for the Polkadot Treasury to grant enough DOT to cover the current vault rewards for a year for all of the iBTC that is currently in use outside of the Interlay chain. Based on sibling acct balances, there are 27.357 iBTC on parachains other than Interlay (with 25.1 iBTC on HydraDX). This 27.357 iBTC in the Polkadot ecosystem is currently worth $1.76M. Additionally, both HydraDX and Stellaswap will soon begin their partially-treasury-funded liquidity campaigns (ref 561 and ref 580), including increasing iBTC liquidity on their platforms. HydraDX has a goal of increasing iBTC-WBTC liquidity to $5.5M, up from $2.85M currently¹. Stellaswap’s goal is to increase DOT-iBTC to $1M, up from $35.9k currently². Together these will drive market demand for an additional 28.1 iBTC ($1.8M), but only if there is Interlay vault capacity to mint the additional iBTC against. Instead of asking the Polkadot Treasury to cover vault rewards for both the existing 27.357 and the incoming 28.1 iBTC demand (55 iBTC in total), we propose for the Polkadot Treasury to incentivize 45 iBTC capacity for use throughout the Polkadot ecosystem as part of the overall ecosystem liquidity campaign. Note that none of the Polkadot Treasury funds would directly benefit the Interlay team.

What will it cost to incentivize vault capacity for 45 more iBTC? The most popular vault collaterals are VDOT ($4.2M locked) and DOT ($2.0M locked). The initial secure collateralization threshold for VDOT vaults is 135% when opening a vault, 115% for premium redeem, and liquidation at 105%. At 135% collateralization, a VDOT vault currently earns 46.5% APR. Recently a large vault closed, which has boosted this APR, so let’s assume a lower target of 40% APR at 135% collateralization. The current price of BTC is $64,439, so the annual rewards to incentivize 45 iBTC at 40% APR and 135% collateralization is $1.56M.

We request 202,030 DOT ($1.56M at $7.74/DOT 30-day EMA) to incentivize capacity for 45 iBTC for 12 months. The granted DOT would be immediately staked as vDOT so that it appreciates with staking rewards throughout the year, further increasing the total value paid out to vault operators. A slow long-term DCA will be used to sell the vDOT to buy INTR which would be added to the existing INTR rewards paid out to vault operators, increasing overall vault rewards. The immediate impact would be to boost the vault reward rate to 46.5% * (53.6+45)/53.6 = 85.5% APR. Vault operation is technically challenging and therefore ‘sticky’, but that APR boost should be enough of an initial change to draw attention, motivating additional vault operators to lock collateral, creating more iBTC capacity. Likely enough new collateral is locked in vaults so that the overall rewards APR (including both INTR and DOT rewards) will fall back to the current APR.

After the on-chain proposal is passed, we will initiate follow-up Interlay governance referenda to:
1a) send the entire DOT grant to the Interlay sibling account on Bifrost chain.
1b) stake the DOT on Bifrost chain to receive VDOT.
2a) move the staked VDOT on Bifrost to the Interlay sibling account on HydraDX chain.
2b) Initiate a 12-month-long DCA to sell that VDOT for INTR.
3) increase the INTR vault reward rate according to the additional DOT rewards granted by the Polkadot treasury in order to incentivize the additional iBTC capacity.
4) Periodically move purchased INTR on HydraDX back to the Interlay treasury to continue payouts to vault operators.
The increased INTR vault rewards emissions and the purchases of INTR from the Omnipool should overlap and cancel out their effect on the INTR price.

Disclosures: I am not an Interlay team member. However, I am an Interlay vault operator so I will indirectly benefit from increased vault APR until the rewards rate falls back to its current equilibrium rate (40-50%). I created this proposal at the urging of the Interlay community and will be reimbursed from the Interlay treasury for my time creating this proposal.

Edited

Request

202.03KDOT

Status

Decision31days

Confirmation7d

Attempts

Tally

49%Aye

50.0%Threshold

51%Nay

Aye

≈110.24MDOT

Nay

≈114.75MDOT

0.0%
0.0%
0.0%

Threshold

Support(2.26%)

≈32.04MDOT

Issuance

≈1.42BDOT

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Nested

Flattened

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14oJ...Ef2y

It's a solution, but it's not a long-term solution. We're just hiding the problem. Expecting higher capital efficiency for secure entry of BTC into Polkadot

12s6...nE8h

Hello from Polkadotters.
For now, incentivizing vaults is the best possible approach, so we are in favor of this proposal. Vaults are the backbone of the Interlay iBTC Bridge, with this effort, they can attract more vault operators or increase the capacity of current vaults, which both are good results. AYE.

alexei

This is a reply to Giotto's video posted on Twitter earlier today, titled "Why Interlay proposal is a complete waste of money of Polkadot". https://x.com/giottodf/status/1793302690707149011

Thanks for voicing your opinion.

Decentralized solutions are more expensive than centralized. The reason iBTC was built on Polkadot is that Polkadot always emphasized the importance of decentralization.

Our vision was to create a product that long term BTC holders could use without concern, for example the DOT treasury. Instead of trusting a multisig (which is a problem in terms of security and regulations for a DAO), the DOT treasury can pay Vaults that stake DOT as collateral for this decentralized custody service, adding utility to DOT while allowing the DOT treasury to diversify into BTC.

In your video you are making one flawed assumption: the Vault and Minter are not the same people. Vaults provide the collateral and secure the BTC. Minters bring BTC. In the past, the demand for iBTC has always been high, with capacity always almost at 0 and iBTC deployed into DeFi on DOT (HydraDX, Stellaswap, Interlay lending). DOT recently launched incentive programs for some of these DEXes, where in some cases community voted to focus on iBTC pairs - which is great but there is not enough capacity to create more iBTC.

The Interlay treasury has been paying for a common good iBTC service to the Polkadot ecosystem for the last 2 years. But there is a limit to how much the Interlay treasury can stomach in absense of a large and growing DeFi ecosystem on Polkadot - which is blocked by manz problems including onramps, immature cross-chain UX and lack of ecosystem wide growth programs.

This leaves us with 3 options:

Protocols start sharing revenues they make on iBTC with Interlay. Even if this happens now, it will take a long time to grow the iBTC supply organically given the current size of the DeFi ecosystem on Polkadot
DOT treasury boosts iBTC growth and in a follow up step starts using iBTC itself.
Do nothing, and place your bet on wBTC

At the end of the day, iBTC was something that was created in line with the core Polkadot vision and team. It is an experiment - an ecosystem that uses a fully decentralized BTC bridge as main BTC from day 1. It only works, however, if the core ecosystem uses iBTC. DOT has suffered two major DeFi hacks (Acala and Nomad on Moonbeam) and has never recovered from that. HydraDX has been carrying the DeFi torch for the last 1.5 years - now it is time for the DOT treasury to step in, if Polkadot is ever to have a flourishing DeFi ecosystem with a decentralized BTC version.

The alternative is always to fall back to a centralized wrapped BTC solution. However, wBTC does not exist on DOT, can only be imported by double-wrapping, which introduces even more friction and risk.

wBTC and iBTC are complimentary. One is an institutional product the other a decentralized and community oriented. They represent 2 sides of the spectrum: trust in a single trustworthy player vs no trust in anyone enforced by economic insurance.

If you have given up on decentralized vision, I do not blame you. I have struggled with this myself over and over during the last few years. I have not given up completely yet though - DAO treasury diversification secured by the native DAO token as insurance can work, both from utility and economic perspective. This is being tried in other ecosystems as well, btw - Thorchain, Zeus on Solana, anetaBTC on Cardano, teleBTC on Polygon, oneBTC on Harmony (rip), sBTC on Stacks. Think of it as a form of “restaking” - which this ultimately is, especially since Vaults can use vDOT as collateral that generates staking rewards.

It is up to the DOT community if this is worth a shot.

Up 2

16GL...8NA2

William, thanks for reviewing. Sorry I missed your twitter comment.

Use cases:
One "holy grail" usage of iBTC is to be able to borrow stablecoins using BTC collateral, providing leverage to long Bticoin. Getting iBTC listed on Moonwell proved too costly and difficult so the Interlay integrated a DEX and money market directly into the Interlay chain last year. The money market has listings for iBTC, DOT, vDOT, USDT, USDC, HDX, and BNC currently. https://app.interlay.io/lending You can see there is $5.6M in tokens lent (including $1.1M in iBTC) and $1.8M borrowed (including $599k in stables). During March everyone wanted to borrow stables to long crypto, so the Interlay USDT and USDC markets became pegged at near 100% utilization and borrowing rates of 50% APR while Moonwell USDT borrowing spiked to 194%. The USDT and USDC lending/borrowing would certainly be larger if we had an on-ramp of stables into the ecosystem (I heard Binance currently paused due to a runtime breaking change).

HydraDX has the largest iBTC depth with $3.2M iBTC-WBTC (and 25+ iBTC on the Hydra chain) and currently has a daily volume of $30k.

With swap fees alone (no liquidity incentives), people depositing iBTC into the Omnipool earn 0.41% on their deposit. Depositing iBTC into Interlay lending currently earns 0.35% APY. (note: people don't want to short BTC right now, so borrowing is light. This will be heavier later in the bull market cycle as people begin to short BTC)
DEX liquidity incentive campaigns are about to reward iBTC depositors, targeting 25.5% APR but with a max of 200%. See Hydra's Apr/May 2024 monthly newsletter that was released yesterday: https://hydradx.substack.com/p/hydradx-monthly-april-may-2024?ref=onepagecrypto.com

For iBTC specifically, this will drive huge demand and frustration for people unable to mint more iBTC via Interlay's bridge. This proposal specifically targets enabling minting more iBTC so that people can bring in more liquidity from outside. Hopefully with well crafted marketing the Hydra and Stellaswap teams can bring in a lot of outside liquidity via the Wormhole MRL bridge or over Hyperbridge and Snowbridge as those mature. There is no single orchestrated "Polkadot DeFi Liquidity Campaign" but I consider these several proposals in tandem to be the basis for a strong DeFi marketing campaign. Please note on Twitter that folks in Cosmos are also talking about how to how to enable more usage of Bitcoin in their ecosystem since Bitcoin seems to be one of the hot narratives at the moment.

Effect on INTR
iBTC vault operators are incentivized using INTR. Due to heavy emissions, historically most vault operators sell their INTR rewards. Therefore I assume that as we use treasury DOT to pay out INTR rewards to vault operators they are going to in turn sell their INTR rewards for DOT or vDOT or something else. Therefore the buy pressure of Interlay treasury buying INTR will be counteracted by the sell pressure of vault operators selling their INTR and the net effect will be zero.

Alternative Funding Methods
Please see Option 2 and Option 3 presented during the initial community discussion: https://polkadot.subsquare.io/posts/263
Both of these would have created a permanent increase in iBTC capacity, either by using staking rewards or by depositing treasury DOT into a vault. However, they require more tokens up front and therefore the community indicated it was preferable to spend less on a temporary (12 month) grant.

Up 1

13ND...fLeQ

Polkadot is a dieing (to be phased out) crypto ecosystem, compared to other top crypto infrastructure.

Unlike ethereum supported by worldwide and solana based in US, no particular large ethnic group / nationality has a favour to polkadot ecosystem. Bitcoin is now about 70,000 and ETH is about 3700. However, DOT is still at 7 only, not to mention ATH value. Price reflects the true value, especially in the core of hedge funds. Some guys may say, after the successful deployment of snowbridge, funds will enter polkadot ecosystem soon. If I am ETH / SOL maxi, I will rather investigate more in ETH restaking, ETH ecosystem or SOL memecoins / DEPIN system.
Who will care for the DOT? Let it phase out!
After the approval of BTC-ETF, more funds from traditional finanical systems enter to cryptos. DOT should grasp this opportunity, which may be the last opportunity to incentize the entire Dotsama.
WBTC is conceived in ethereum, DOT will not be their priority in their mindset.

Interlay iBTC is the first few batches of parachains. If DOT community would like to make DOT great in future, DOT should support their own ecosystem. The liquidity from tranditional financial system through Bitcoin ETF is one of the best choice to save Polkadot. Otherwise, I believe DOT will be phased out soon, and very soon.

Up 1