Capital, withdrawals and direction for the next weeks/months

As shared on Discord:

"Over the last month, we had many discussions here and on Telegram regarding the withdrawals and the use of the capital. So I would like to take a minute and summarise everything:

A) The ETH that is supplied to any Capital Bucket or Capital Pool is meant to be used for insurance. Until last month, some of it was not used and stayed as part of a buffer that allowed withdrawals to happen. We had regular deposits and withdrawals. With more policies sold and more withdrawals happening, the buffer ended up being consumed. The ETH that remained inside the spartan bucket was all used for insurance.
Being sold out is usually a good news but in this case, we started seeing a lot of frustration and some wanted immediate withdrawals.

B) What was my blindspot? When we announced the Private Launch, the maximum yields on ETH were 6-7% from Alpha Homora and we had a hypothesis that a 20% yield will always be more attractive and that was our target yield from USF rewards. Therefore the hypothesis was that we would always have some buffer, especially after we add asset management and increase the yield even more. I didn’t account for the possibility that 20% won’t be attractive anymore, this fast. It is on me and I take responsibility for it.

C) How we approach this situation from a pragmatic perspective:
1- First we started with the Asset Management side, given it was pretty advanced and already audited, we pushed it first.
2- Second we made changes to the pricing model in order to have a premium price that goes parabolic whenever the amount of buffer available for withdrawals becomes too low. This will apply for new policies, we can not change the old ones.
3- Third we moved back to focusing on the official launch

All of the above solutions are pretty advanced, audited and ready to be deployed (the Asset Management has already been deployed and we made some tests on mainnet already to make sure everything worked as expected)

The question that was raised over these last days is whether we should:

  1. Put everything on hold and wait for all the Capital to be available for withdrawal (a first tranche will be available by end of June if we put everything on hold and a second one will be available 7 months from now). We won’t list any new policies and not do anything to sell any additional insurance - the objective will be to purely wait the Capital to be available for withdrawal.

OR

  1. We follow the plan stated above, move forward with the official launch, list more policies, sell more insurance, deploy more capital through asset management and have a higher yield to attract more deposits and have a buffer again.

Given that the official launch and the next steps would require the full support of the community, I would like to ask this question and submit it for a vote. We can not move with the official launch and at the same time have members of the community taking shots at the project. We would actually need everyone to help us spread the word and have as many insurance buyers as possible.

I would like to submit this for a governance vote."

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Here is the link for the vote: Scattershot (fork of Snapshot)

1 Like

I’ll vote for “follow the plan” of course! :+1:

That being said, a few comments for the sake of a healthy collective conversation.

  • the choice is skewed towards “follow the plan”, since the other option means that the project is likely to enter a death spiral. TBH I don’t know whether that there are any other options discussed on Discord

  • 20% might still be attractive, IMHO the main issue is the falling price of USF; 20% was based on USF rewards, not just on insurance premiums distributed to capital providers (please DO correct me if I’m mistaken)

  • with sold out policies, it is not clear how this seemingly super-positive situation benefits capital providers. If they get a substantial return regardless of USF price, it should alleviate the withdrawal pressure (in other terms, communication might be key here). If the return is low even though policies are maxed out, then there’s a deep issue with the economic model that needs to be fixed (increasing the premium price when buffer is low is an interesting solution, but is ‘parabolic’ the right model?)

  • even though it’s retrospectively obvious that capital is locked when used by sold policies, it is never clearly stated as such when users provide capital. I strongly recommend to display warnings so that people have a better understanding of risks, and extreme caution should be used when people complain about locked funds on social channels. It’s quite understandable that some people might be anxious, frustrated, or even angry. While there’s no way to enable them to withdraw at this point, it’s in the interest of the project to offer patient and kind answers to their requests, and to avoid to make them feel that they did something wrong.

My 2 cts :slight_smile:

3 Likes

Thank you philh!

  • It’s not necessarily a death spiral, it’s just that we will wait while the capital gets withdrawn. All capital suppliers received governance tokens and can have a say in this decision but we need to choose a direction. I am comfortable with both, the first one will allow us to focus on some other features while waiting for the capital to be withdrawn, the second one will allow us to move towards the official launch and deploy more policies.

  • The fall below 20% happened after the buffer was consumed, with asset management we will be back above 20% and we will see whether it already allows to attract new deposits or we need more

  • it depends on the number of policies that are deployed, so far we have only had 10 and from a pure insurance model point of view it is not sufficient. Overall having a large price increase for a policy that becomes maxed out can have 2 outcomes: either the policy buyers stop their covers and therefore the policy is not maxed out anymore or the APY increase (due to the large price increase) attracts more capital deposits and the policy is not maxed out anymore. We discussed this in Discord as well.

  • We choose to remain in Private Launch for this long for these reasons as well. There were a certain number of assumptions that we needed to check and confirm, or adapt to the reality of the market. This is what this period allowed us to do. When opening to everyone, we will definitely have a documentation that explains the risks, and describes how the different pieces of the system fit together. The frustration is understandable indeed and we are not trying to make the members feel they did something wrong, however we need to make sure we are aligned on the direction in order not to end up having the same discussions over and over again.

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I think Philh makes some excellent points.

Putting everything on hold for months seems risky for Unslashed, and thus for capital suppliers.

Is there a middle way, e.g. existing capital suppliers can opt out of their funds being used for new or renewed policies, and just wait for the existing policies to expire.

At the same time find a way to raise the yield to encourage new suppliers to come in (and some existing suppliers to stay)?

That should enable smaller suppliers to extricate themselves from the situation whilst whales who are less affected can continue.

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From a technical perspective, it is not something that could be done with the current SCs; all the capital is part of one same pool and therefore can not be divided. What we could do (and this is something I would need to check), is as soon as some capital is not used for insurance anymore, not allow any new or old policies to take it. But given the current discussions, it is very likely that any capital that is not used for insurance anymore will be withdrawn right away (which is what happened with the buffer and which is what happened more recently with some withdrawals).

There is however a third option that is being discussed on Discord: Discord

The spartan bucket being tokenised, its tokens could be put on AMM