Introducing Coverage Pools

A backstop for tBTC, a buyer of last resort in tBTC v1 and insurer against fraud in tBTC v2.

Introduction

Keep Network is home of tBTC, the first fully trustless, decentralized and censorship-resistant Bitcoin peg on Ethereum.

tBTC system v1 has been running smoothly since its mainnet launch back in September 2020. All circulating TBTC is 100% backed by real Bitcoin held in deposit specific wallets, of which the keys are split over a group of nodes. The system is further over-collateralized by the nodes themselves, putting down ~200% of the guarded value in ETH.

As Matt Luongo lays out in his post about upcoming tBTC v2, although the system works beautifully, the economic constraints are real and greater capital efficiency is needed to address higher demand.

On the road to v2 we’re getting Coverage Pools, a new money-lego from the Keep Team which will unlock more growth for tBTC v1, and will be an essential piece of v2.

What are Coverage Pools ?

Coverage Pools are pools of collateral assets provided by passive investors, the underwriters, which risk their funds to ensure the safety of the peg in exchange for fees and rewards. Coverage Pools’ function is to be a backstop for tBTC, acting as the buyer of last resort in tBTC v1 and to insure against fraud in tBTC v2.

Coverage Pools will unlock more growth by:

• shifting the burden of extra collateral from signers to underwriters.
• expanding the available passive capital that backs tBTC.
• simplifying the staking operation.
• lowering capital entry bar to become a staking node operators (signer)
• increasing capital efficiency of the whole system.

Coverage Pools is a new awesome mechanism that will be able to double tBTC capacity in v1 and allow 10x — 100x capacity growth in v2.

This impressive increase in collateral efficiency and decentralization of tBTC v2 will directly challenge WBTC’s supremacy on Ethereum.

Coverage Pools for Investors

Coverage Pools mean a new investment opportunity for KEEP holders at first, and later for other asset holders as well. After KEEP, the initial five to ten assets in the pool aren’t determined yet, but will eventually be decided by governance. We imagine WBTC, ETH, stable coins and other pegged assets being the first selected.

When an underwriter contributes assets to the coverage pools (e.g. ETH), they’ll be receiving a token (in this example covETH) that represents their amount of participation in the coverage pool and by that their level of coverage backing an insurance event.

When they decide later to exit the pool, they can do so by redeeming their coverage tokens. If no insurance event occurred, then they will receive their underlying (in this example ETH) + KEEP rewards + networks fees.

Coverage tokens will auto-compound, as if the underwriter automatically put their rewards back in the asset pool. In either case partial or total redeeming of their coverage tokens will be available with an 14-day cool-down period. During this cool-down period funds will continue to earn rewards and cover any insurance event.

While underwriters put down capital and judge risk for themselves, it’s the role of governance to set and monitor the ongoing ratio of fees and subsidies earned by signers and underwriters to ensure the peg stays sound.

No Impermanent Loss

Entering the collateral pool exposes an underwriter to the shared risk of liquidation across all asset-specific pools, but it doesn’t require the underwriter to enter into any positions relative to other assets in the pool. If an underwriter deposits ETH into a collateral pool that accepts ETH and WBTC, the underwriter isn’t entering into a position relative to WBTC, or suffering any sort of impermanent loss, as they would in an AMM.

Additionally, the coverage tokens represent your underlying assets, and there are plans to get them listed as collateral in other protocols. That way, you can earn network fees from securing tBTC as well as fees from other, supporting networks.

Underwriters are still, however, entering into positions relative to the asset the coverage pool is backing.

First Release in Q2: KEEP-only coverage pool

Soon the first coverage pool will be added to the Keep Network dApp, then you can add coverage and earn fees and rewards. The initial pool will be KEEP-only. More multiple asset pools are planned as the system scales.

Coverage Pools for tBTC System

Coverage Pools become an essential part of tBTC System as they provide a way to scale the TVL and amount of nodes, by lowering c-ratios, splitting between active participation (node operators) and passive participation (provide capital) and reducing node operator cost and hassle.

We’ve open-sourced our work on our github, and you can read more technical documentation there. If you’d like to learn more, join our discord and hop on our community calls to discuss the technology. We also have community grants for building out specific parts of the coverage pools ecosystem, like arbitrage bots, so you can earn for contributing to the protocol.

The team would like to thank community members Nahuus and EstebanK for writing and collaborating with us on this summary.