Proposal: USDC-to-Coinbase Onchain Wallet Migration

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Original post from Bearlusconi: Proposal: USDC-to-Coinbase Onchain Wallet Migration - Proposals - HONEY **

Overview:** Berachain Foundation (the Foundation) plans to migrate the USDC collateral backing the HONEY stablecoin from the current on-chain custody setup to a Coinbase Onchain Wallet (Onchain Wallet) solution (the Onchain Wallet Services). This Forum Post outlines the rationale, precedent, technical details, risks, and governance considerations for this migration.

  • Migration: We intend to move the USDC collateral (which currently resides in on-chain vaults/multi-sig custody) into a Coinbase Onchain Wallet provided through the Onchain Wallet Services.

  • Precedent (MakerDAO/Sky’s USDC PSM): This approach mirrors what MakerDAO (now rebranded as “Sky”) implemented with their DAI stablecoin’s USDC reserves. This move allowed Sky to participate in Coinbase’s Prime Rewards Program and earn a yield on their USDC collateral and involved partnering with Coinbase to create and manage the onchain multi-party computation (MPC) wallet holding the USDC collateral (as further described below)​.

  • Onchain Wallet & HONEY Minting Mechanism: The Onchain Wallet integration will use a non-custodial wallet that interfaces with HONEY’s issuance system. In practice, when USDC is deposited into the designated Onchain Wallet, an equivalent amount of HONEY will be programmatically minted on Berachain. This setup ensures that every HONEY in circulation remains 100% backed by USDC held in the Onchain Wallet (just as it is today, only the location of funds changes). Access to the Onchain Wallet will be split between the Foundation and Coinbase initially, via an MPC key scheme. Coinbase is not itself authorized to initiate Onchain Wallet transactions and does not have access to the Foundation’s key shard or the full private key to the Onchain Wallet. Eventually, the Foundation’s key shard will be permanently destroyed (burned) once the system is proven and the reserves are migrated. This planned step (similar to what Sky’s team did during their Coinbase onchain wallet setup) will leave the custody contract effectively immutable, no single party (including the Foundation) will have unilateral control, cementing the one-to-one backing of HONEY without governance interference.

  • Prime Rewards Program: Rewards are determined by the calendar day average of fully-settled USDC held in the Onchain Wallet as determined by Coinbase. Coinbase will use commercially reasonable efforts to issue rewards to the Foundation’s account within seven business days of the start of the next calendar month but in no event will the rewards be credited later than 30 days after the start of the next calendar month.

  • Risks & Considerations:

    • Our proposed self-custody mechanism leverages an MPC setup where the initial authority is split between the Foundation and Coinbase. In our planned process, the Foundation will eventually destroy (burn) its key shard, making the custody contract fully immutable. Coinbase is not itself authorized to initiate Onchain Wallet transactions and does not have access to the Foundation’s key shard or the full private key to the Onchain Wallet. This means that even though Coinbase remains the sole party with an active key shard, that key shard is not sufficient on its own to alter the function or control of the Onchain Wallet. Once the key shard burn occurs, the system is designed to prevent any unilateral actions – ensuring that HONEY’s 1:1 backing remains permanent and resistant to modifications. This approach effectively mitigates risks associated with centralized control, as it guarantees that neither the Foundation nor Coinbase can redirect or misuse the collateral outside of the predefined smart contract rules.

    • Perception and Precedent: While the USDC reserves backing HONEY will be held in an on-chain wallet provided through Coinbase, we understand that some community members might worry this appears contrary to DeFi’s trustless ideals. The Onchain Wallet is secured using an MPC system: one key shard is held by Coinbase and the other by the Foundation. When the Foundation eventually burns its key shard, the custody contract becomes immutable and fully enforced by smart contract logic, ensuring that no single party—including Coinbase—can unilaterally move the funds. This design preserves decentralization by ensuring that HONEY’s 1:1 backing remains permanently secured on-chain under pre-defined rules.

  • Community Disclosure & Transparency: Even though this migration can technically be executed without immediate on-chain governance, we believe it is paramount that we proactively disclose this proposed change with our community. We uphold decentralization not just through technology, but through transparency and community involvement. Learning from Sky’s experience, lack of transparency around collateral management can erode trust​. We confirm that nothing changes for HONEY holders in everyday use. This is an improvement in how collateral is stored.

  • Approval Process: The foregoing proposal will be presented to the Guardians to review and discuss. If the Guardians approve the proposal, the proposal will be promptly implemented.

Technical Considerations

Onchain Wallet: technical overview

  • The Onchain Wallet utilizes a Multi-Party Computation (MPC) scheme with two shards, one held by the Foundation and the other held by Coinbase.

  • Coinbase will not have access to the Foundation’s shard, and therefore cannot independently authorize transfers of funds from the Onchain Wallet.

  • The Onchain Wallet will be used only for:

    • Test transactions prior to integration

    • Providing allowance to the HONEY smart contract

  • No transactions will be executed post-integration, minimizing the potential risk of unintended or malicious operations.

HONEY Integration: Technical Details

  • The Onchain Wallet will be integrated into Honey’s collateral management system, as follows:

    • HONEY currently holds collateral assets within its Collateral Vaults.

    • The USDC Collateral Vault will be integrated with the Onchain Wallet such that:

      • USDC held by the Vault will be transferred to the Onchain Wallet.

      • The Vault smart contract will maintain full flexibility in depositing to and withdrawing from the Onchain Wallet.

      • HONEY’s accounting system will fully reflect USDC assets held in the Onchain Wallet.

  • Atomic deposit and withdrawal functionality will be achieved by granting appropriate allowance to move USDC in and out of the Onchain Wallet to the USDC Collateral Vault.

  • This implementation mirrors the battle-tested architecture adopted by Sky for their own onchain wallet integration, and has been audited by Zenith (formed by the merger of Zellic and Code4rena).

Backward Compatibility

This integration poses no backward compatibility issues with current HONEY systems.

Test Cases

Unit tests:

Fork test:

Reference Implementation

Security Considerations

Financial risk:

  • This agreement introduces no additional financial risk to HONEY.

Technical Security risk:

  • Other than integration of the Onchain Wallet, there is no additional application security risk to HONEY.

  • The primary risk would require compromise of the Foundation’s key shard, resulting in potentially malicious access to the Onchain Wallet (and by extension, HONEY’s assets). Coinbase is not itself authorized to initiate Onchain Wallet transactions and does not have access to the Foundation’s key shard or the full private key to the Onchain Wallet.

  • Following an initial test period, the Foundation will explore further hardening of the setup, including the option to destroy its shard. This would make it impossible to transfer funds out of the Onchain Wallet, except through the HONEY smart contracts.

Operational risk:

  • As already specified, no transactions will be executed post-integration, minimizing the potential risk of unintended or malicious operations.

Proposed Date

Proposed date: Tuesday 2025-04-22