sBTC Research - Bitcoin Peg Wallet Handoff Transfer Fees

[AshtonStephens]

This is a research discussion post meant to be edited with research notes surrounding how we handle the BTC fees of transferring pegged in BTC from one peg wallet to another. A few notes:

There are two "hidden-ish" fees of being part of the sBTC system:

• There's a Bitcoin fee on the withdrawal
• The fee for the Peg wallet handoff

The largest concern is the peg wallet handoff fee. The peg wallet handoff is a latent part of the sBTC system that's not tied directly to any one withdrawal or deposit, and happens at least once every stacking cycle, but is technically unbounded (though there's likely some technical analysis that could reach an expected bound).

The peg wallet handoffs introduce a fee that sBTC users likely won't expect and could be unacceptable to people who have kept their BTC in sBTC for a period of time and withdrawal what ends up being less BTC than they expect.

This ticket is to research our options and document / propose a solution that places the transfer fee burden on a reasonable party.

[AshtonStephens]

Currently under investigation by @setzeus.

[AshtonStephens]

Jude's addition in stacks-network/sbtc#325 that further describes the issue; moving the content here:

One aspect of the sBTC system that may surprise users is the fact that the Stackers need to pay a BTC fee each time they perform a wallet hand-off. That extra BTC has to come from somewhere, but who pays it?

The SIP currently calls for every sBTC holder to pay the fee, collectively, in the form of a pro rata deduction in their sBTC holdings. This would ensure that the total outstanding sBTC gets reset to whatever the new BTC balance is, minus the hand-off fee. However, users may find this surprising (and negative) because their sBTC holdings diminish simply by keeping the sBTC in the system. The BTC fee is a "decentralization fee" -- it's the cost of having a rotating set of signers (Stackers), which necessitates re-keying the BTC to the new signers, which in Bitcoin's case, necessitates converting all the old wallet UTXOs into new wallet UTXOs on the hand-off. Moreover, this fee is a function of the total number of UTXOs, which can be large and unpredictable.

What are some alternatives?

[AshtonStephens]

The peg wallet transfer fees are unavoidable, but the result of this discussion was that there are four things that will fund the peg wallet:

1. During the prepare phase we will repurpose the traditionally burned bitcoin to be placed into the peg wallet.
2. We will watch the peg wallet and put money into it via a warchest via the donate transaction that exists already in the SIP.
3. Voluntary donations of outside stakeholders to the peg wallet
4. Possible service fees

It is unlikely we'll need to consider significantly donating to the wallet or introducing fees because the bitcoin transaction fees are not that high, and the prepare phase typically burns ~0.5 BTC, which given an average transaction fee of 0.000029 BTC results in funding a potential 17241 peg wallet handoffs.

In transferring the money to the peg wallet during the prepare phase the stackers will be responsible for sending all the transactions to the peg wallet, hopefully finding a semi-optimal way. In the short term this can be implemented largest to smallest UTXO which would result in at worst 2X inefficiency.