First Exploit/Claim process through Unslashed

I was having a conversation with some friends/co-workers about insurance in crypto and one of the things that we discussed was the first time an exploit occurs that is covered by Unslashed and the impact it may have on the project.

My general thought was that it would be good long term for Unslashed to have an official claim and pay out on it, as it would provide credibility to the platform and show the need/benefit of insurance. I also think that in the short-term it may be seen as unattractive and even have some capital providers leave based on the recency bias of high perceived risk.

The behavior of capital suppliers may also depend on how impacted their position was. For example, I think each policy in the Spartan bucket has a maximum of 5% exposure per policy. I wanted to do a little more digging on this-

One somewhat similar example I looked into was the first few successful claims that Nexus Mutual paid out and the impact that it had on capital suppliers and token price. So far there have been 3 major claims events and 2 payouts (members of the mutual decide if a claim is valid and should be paid.) These seem to lower the price of NXM in the short term as ETH is taken form the capital buckets to pay for the claims, but in the long run, they have not greatly impacted the overall price.

I was curious if others had opinions or ideas about this? Is there anything we could/should be thinking about? Are there any actionable things we could do to mitigate negative short term impact?

One thought was to strategically allocate USF that could be used to offset the loss of the first (or first few) exploits for capital providers in a good faith gesture so they are not as impacted. You could argue that is part of the risk of being a capital provider so I can see both pros/cons to that action, but wanted to see if others had thought about it at all and if there was interest in discussion.

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Solid idea and research! No doubt (to me) it’s needed for market validation and proof that the product works.

I think you are suggesting we allocate some $USF funds to help offset the risk of the first batch of capital miners impacted by the first claim, right? If so, I think this is clever/awesome, and I think an interesting model may be to do something like:

  1. Understand what the normal expected loss may be (like the 5% you mentioned)
  2. Make it clear for, at least, the first claim, this will be reduced to (making up a number here) of 2%
  3. Optionally, we could add this to the tokenomics, as well, that the actual number of your risk loss is tied to your loyalty level
  4. The question then is what is used to fill the gap.

Solid idea and it would/should further incentivize early Capital Suppliers and give $USF a chance to collect real world data to analyze, something I know Mar values!

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Yeah, Agree with everything you said.

I guess the one thing I am unsure about is if we allocate the USF to offset loss from capital suppliers, what negative or unintended consequences does that have?

Ultimately, it is not sustainable to do so on an ongoing basis and don’t want to set a precedent or expectation that this would be normal, but do think it could help reduce the “shock” of the first one in the platform.

Any other considerations that you can think of that may be negative here?

This is why other projects have the staking pool as the ‘backstop of last resort’ - making it sustainable.

Generally speaking, I’ve only heard nay’s on this idea, but it’s a yay for me on the staking pool being a last resort backstop. If designed right, you’d lose your earned rewards, first, not your original amount and, ideally, it would just be rewards that are hit.

Regardless, given the long $USF release schedule, I don’t think it’s unreasonable to allocate X $USF (not from the staking pool) set aside for the first payout.

We’d have to see if the cover buyers would rather have ALL ETH or ETH+$USF, but I think the overall incentive here is to reduce the risk to the earliest capital suppliers. Perhaps the time to launch this would be after their $USF rewards run out, because up until then, they are already receiving ‘a discount’ by earning $USF.

Allocation USF for a safety fund to cover the first claim would take out pretty much all the risk on Capital Suppliers and be getting rewarded for basically nothing. I would only be ok with this idea if it meant taking a portion of the Capital Suppliers USF rewards to be allocated into this “first claim fund”.

I would also see this only as a short term dynamic for the platform while premium collected is enough to cover a claim from the Spartan Bucket.

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This is 100% why I think if we do it, it coincides with the $USF running out (or, alternatively, build this $USF allocation by reducing the CS $USF schedule gradually)

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Separate issue since the capital would always come before the backstop, but we have another thread for that discussion and you know how I feel :slight_smile:

Yeah, I think I feel that way too. I do think it shouldnt pay out the full thing, so capital providers still have skin in the game, but rathe reduce the loss.

I like this. I think you could do this a couple different ways. Maybe you offset some portion of their loss and let them pay back a portion with future earned USF too? idk, but understand your point and agree that we want the capital suppliers to still have skin in the game since they are getting premium.

100% agree. I was thinking only to reduce the shock or impact of the first or first couple times on the Unslashed platform.

We also see need to realize that’s adding risk to the token and though reducing its intrinsic value + the drop on the token value when liquidated to pay the covers.

I definitely do not like the idea of having the staking pool as a backstop for the protocol since that would mean stakers taking the risk for the Capital Suppliers and essentially giving free returns but I’m not opposed to further explore the idea to allocate some of the DAO tokens to a “first claim” fund. Could be with a payback plan for CS or through managing their rewards (This could be hard to do this early as we could push out some suppliers by reducing the APY). An idea could be to set a top on the APR total return for CS (ETH+USF) such as 30% and whenever we go past that, the difference could be set aside for the pool.

Or maybe an initial period of the ETH fees could go towards the pool until it’s filled to a reasonable level…

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I’m not comfortable with the idea of dampening the impact of a claim on CS. Spreading the risk over a bucket of policies already serves this purpose, as you rightly pointed it out.

There’s no free lunch. Covering part of the first claim with another source of fund would introduce another risk (like reducing $USF rewards available to capital providers). How could such a decision be made without data to back it up? I’d like to see a model and a working simulation of different scenarios based on the claimed amount and the provenance of funds used to cover it, but I’m not sure that it’s even possible because of the lack of data.

While there are obvious consequences to consider if claims are not fully covered by CS (and why only the first one? If we soften the hit of the first one, wouldn’t there be the exact same issue with the second one?), I’m not even sure that it’s needed at all in the first place. As you noticed, NXM took a slight hit first and then recovered, so why should we be bothered by such a short-term move? I think that actually there’s a lot of value for a protocol to prove its resilience this way, rather than relying on non-sustainable, ad hoc tactics.

Just my 2 cents :hugs:

Hi guys,

I see your point @EAsports and @TaeKwonKrypto, but it looks like we are trying to find a way spread the word to CS to come to the platform and get rewards at no risk, and this would defeat the purpose of the platform (and crypto insurance) as a whole.

The point of a decentralised insurance is that CS have rewards for the risk they are taking, so if we tell them to come to the platform at little or no risk (for the first claim only) then we could end up getting the wrong type of CS which would run away once the first claim is paid for by the platform.

That said, there are some valid points above:

This is in line with what was discussed on a different thread re. how to split profits from the platform and part of that going to the “treasury”. What if part of the treasury funds (in ETH, not USF) are set aside for this kind of event?

Or another way to see it would be “what if part of the treasury funds go back into the Spartan bucket (and/or others)?” This would increase the platform’s stake in the bucket and therefore it will in itself serve as a sort of relief for other CS because, in the event of a claim, part of the claim will already be covered by the platform’s portion in the pool. Does this make sense or am I in need of a stronger coffee this morning?

I would definitely be against allocating USF to cover claims, because that USF will need to be sold/exchanged for ETH on the open market (i.e. Uniswap) which would tank the price of USF. Remember that claims are large sums and the liquidity is still quite low as you can see below, so imagine if the “hourly” volume is in the millions when the daily volume is currently ~650k…

Last but not least, this would be a bad idea, as USF stakers would consider the uUSF pool as a safe place to stake the USF in exchange to claiming rewards from the platform’s profits as well as to participate in the governance. If I am told that staking carries out a risk then I could move my USF to LPing instead, which could carry a similar risk but may get additional rewards longterm.

TL;DR: If part of the platform’s profits in the treasury are reallocated to a bucket in order to get some exposure to the risk (and also generate extra rewards to the platform for being a CS) and this serves the intended purpose then I would be ok with this. If we need to allocate USF for this purpose then it’s a no from me.

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Are you guys basically suggesting that if we allocate USF to cover the first hack / claim, that it’s going to essentially come from LP holders liquidity rather than capital suppliers? Because I think that’s not a good idea.

You’re saying “okay here’s a hack for $1mm, let’s dump $1mm of USF for ETH so we can reimburse the claims?”

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I don’t think that’s what @EAsports and @TaeKwonKrypto are saying, but if USF is allocated to cover a claim then that usf will need to be converted to ETH to cover it, hence having the impact I mentioned?

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I don’t think it’s a foregone conclusion we’d have to market sell $USF for ETH to cover the loss, but odds are the claimants would do that anyway, so it’s 100% a fair assumption it will impact the price.

My take is this is a novel idea to help kickstart the app by further reducing the risk capital suppliers (and, for that matter, cover buyer’s risk), but in general, it does feel unnecessary.

I suggest we table this and focus on the other items, but i love the ideas this community keeps coming up with!

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oh you’re saying pay the claimants in USF? Yeah same impact, taking funds from your LPs to pay the insurance underwriters.

Probably not a good idea in my opinion

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Yeah… I don’t think is a good idea to involve the use of USF to play claimants in any way. In my opinion it would be better to take a portion of the capital suppliers return fee and put it into a fund for the “first claim”. Example: Let’s say APR for CS is 8%. Take 25% of that (or 2% of total APR) for the platform/treasury and from that send 50% to a pool (this equals 1% of total APR). However, if the tokenomics are defined as discussed this would need to be voted by $USF Stakers since the return on fee sharing would be impacted. The positive side on this alternative is that part of fee is never converted to $USF and remains as ETH to pay the claimant. The pool assigned for these events could be capped to a reasonable number for this dynamic to not impact return on USF stakers permanently and just until the pool has filled.

Still… this potentially impacts $USF stakers as they (we) would be taking the risk for capital suppliers but might be positive for the platform long term as more capital flows in for their almost risk-free return.

Gon’s idea is the only one I support. I think it is brilliant to have part of the Treasury Eth re-invested to the Spartan Bucket/as a CS, to both help cover the cost in the event of a claim and earn return.

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Thanks for the thoughts guys, Some really good points brought up.

I absolutely agree with this that CS need to have risk associated with them. I was just thinking about the impact of the first claim event and thought it would be a good gesture to allocate some portion of USF to offset the initial shock or impact. Something like 25% of the risk or impacted funds. Then you still have skin in the game, but it could be a nice gesture.

I am more interested in overall impact to the project rather than that specific idea thought. I was just brainstorming.

I thin your idea to have a portion of the treasury fund allocated to CS pools is awesome. Especially as we have some asset management going, this could be a great option to gain some yield and reduce risk for other capital providers.

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