The Aave proposal moves to add circle wrapped bitcoin collateral

TL;DR

• Aave Labs is proposing to onboard Circle Wrapped Bitcoin or cirBTC into Aave V3 Core, Aave V4 Core, and Ethereum.
• The proposal states that cirBTC, an ERC-20 Token backed 1:1 with Bitcoin stored at a regulated Circle Entity.
• It is currently at ARFC level, so it requires community feedback and votes, followed by a subsequent AIP.
• As the BTC wrapping market grows more competitive, Aave’s users will have another collateral option if the listing is approved.

Aave Labs opened a proposal for a governance to include Circle Wrapped Bitcoin (cirBTC) as collateral in Aave V3 Core, Aave V4 Core, and Aave V4 Core Ethereum. This brings one of DeFi’s biggest lending markets into direct contact with the debate about institutional Bitcoin wrappers.

This proposal was posted in the Aave governance forums on June 10 and asks that the community consider cirBTC for onboarding after Circle released the ERC-20 token on Ethereum mainnet June 8th. According to the proposal cirBTC represents Bitcoin native and is backed 1:1 by BTC that’s held in a regulated Circle organization, while reserves are kept separate from Circle corporate assets.

A new Bitcoin wrapper is now available at Aave Governance

If Aave approved the listing, the users will gain access to a Bitcoin-backed collateral within the Ethereum core deployments. cirBTC would then be included in a broader conversation with other Bitcoin-backed products that are used to support lending, liquidity, and structured DeFi.

Aave Labs stated in its governance post that Circle has no financial relation with it and the company is not compensated for this proposal. This detail is important because proposals for collateral onboarding can have obvious commercial implications. Especially when assets are backed by major central issuers.

It is not listed immediately. Currently, it is at the ARFC phase which allows for community discussion and review. Even if there is widespread support for the initiative, it would need to go through Snapshot voting and an Aave Improvement Proposal formal before being implemented.

What cirBTC means for DeFi

Wrapped Bitcoins have been a main bridge between Ethereum-based DeFi and Bitcoin’s liquidity for a long time. BTC Wrappers allow traders and investors to use stablecoins as collateral, gain yield, or build strategies, without needing to expose Bitcoin.

Circle’s inclusion in this category brings a new institution wrapper, with an issuer that is familiar. That does not automatically mean users will prefer cirBTC over existing alternatives, but it does create another option for protocols looking for regulated-custody-backed Bitcoin collateral.

Aave’s concern is not so much about brand, but rather about the risk. Governance participants may want to know more about reserve transparency and redemption mechanics. They will also be interested in liquidity, oracle support for cirBTC, the counterparty risk of cirBTC, as well as how fast cirBTC builds reliable market depth.

Even after the election, there is more work to do in terms of governance

Markets should not consider the proposal to be complete because it is still in its early stages. Aave makes collateral decisions based upon risk parameters and other factors, such as supply caps, thresholds for liquidations, oracle configurations, oracle configurations, oracle configurations. These can influence whether an asset is widely listed or not.

It is interesting to note the timing. Circle launched cirBTC only a few days prior to the Aave proposals, indicating that the major DeFi Integrations may be the first battleground of the new asset.

If approved, cirBTC could give Aave an additional route for Bitcoin-backed loans and increase pressure on the larger wrapped Bitcoin markets. As of now, cirBTC is more of a governance plan than an actual deployment. However, as the institutional market moves deeper into collateral markets, it’s worth keeping an eye on.