Response to Recent wBTC Custody Concerns

[NRC] Notional Request for Comment
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Background: Bitgo recently announced that custody of wBTC will transition to Bit Global, a new company materially affiliated with Justin Sun. This change has raised concerns about the safety and security of wBTC.

Risk Impact:

  • Currently, there is no concrete evidence that this custody change introduces new risks to wBTC.
  • The technical structure of wBTC remains unchanged.
  • However, Bit Global will control the BTC backing wBTC, potentially exposing Notional to risks from fraudulent or criminal activities by Justin Sun.

Mitigating Factors:

  • Liquidity: wBTC is highly liquid. We can market-sell our entire supply caps with minimal slippage on both Mainnet and Arbitrum.
    • Mainnet: 1000 wBTC market sell → 5% slippage. Notional’s Mainnet supply cap is 250 wBTC.
    • Arbitrum: 360 wBTC market sell → 5% slippage. Notional’s Arbitrum supply cap is 250 wBTC.
  • Risk Management: Notional’s oracles capture wBTC/BTC price deviations, and our conservative risk parameters (e.g., liquidation discounts) should allow liquidators to manage protocol risk effectively in the event of a wBTC depeg.
  • Exposure: Our current exposure to wBTC is small, and our max supply caps are modest compared to larger lending protocols, reducing the likelihood of holding an unmanageable position.

Actions:

  • Monitor the Situation: We will actively monitor wBTC liquidity, reserves, and mints/redeems. If any of the following occur, we will take action:
    • Deterioration of Liquidity: If on-chain wBTC liquidity deteriorates substantially (>50%), we will reduce max supply caps.
    • Redemption Issues: If redeeming wBTC becomes problematic or the wBTC/BTC peg shows signs of instability, we will:
      • Disable new wBTC deposits into Notional.
      • Disable deposits into all wBTC-exposed leveraged yield strategies.
      • Reassess the situation and potentially propose increasing wBTC collateral requirements if the risk profile has demonstrably worsened.

This approach will help Notional manage potential risks associated with the custody changes while continuing to provide secure and reliable services to our users.