Create Insurance Fund

Standing my the principle of doing right by our users, I believe to mitigate against unforeseen risks such as hacks and protocol failure that may result in fund loss, an insurance fund should be created. This would increase user confidence and reduce liabilities (and stress) to developers.

Strategy:
A) 1-2% (further discussion) of performance fees can be used to fund this.
B) Funds can be used to earn yield on low risk assets such as stable coin loans or validator yield.

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I agree with this. There should be an insurance fund in the event of a hack or a protocol failure.

The Total Premium Generated in the protocol is 4,921,861 so far. The performance fees generated of 10% is around $490,000. 1-2% of this is only around 5-10k, not nearly enough to provide meaningful protection.

I think we should require a higher percent of the performance fee generated to go into insurance.
Either that or increase the total number of fees generated.

There will be more adoption. More TVL= more performance fee. Which means more treasury funds

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more TVL also means more funds to protect though. It increases linearly. I think 50% of the performance fee → insurance fund is something that’s more reasonable.

I agree, it is small but it will accrue over time.

Here is an idea, start with a higher percentage and then reduce over time to a base percentage once thresholds are met.

Hi @Azrangar @Chuckie

As we work to ensure minimization of protocol failure, I think this proposal brings to light an important point. What’s the point of Performance Fees if not to protect the user base from tail risks? Currently, the core team views performance fees from the lens of Yearn strategists, a motivation behind the creation of the Inductors program. To optimize for max risk-adjusted performance from Inductors, some sort of EV calc needs to be done in order to ensure that Inductor risk taken is measured and safely optimized. Whether this requires an insurance product in Friktion or dedicated set of Insurance Funds to accrue as a cumulative protection mechanism, I agree with the views here that one needs to be established.

The next question is what amount the governance participants believes is required (as a % of notional TVL, assets deposited, etc) to minimize core protocol risk (will discuss this at the next Townhall)? @Azrangar suggested a decreasing base % fee, reducing at certain milestones, which I think can work well. Does anyone have ideas as to what these benchmarks should be? To start the discussion, I would propose user-adjusted TVL, volume, and referral-based goalposts. Would also like to find a way to integrate the Lightning OG program into the conversation.

Looking forward to seeing this discussion develop and form one of the earliest community-driven decisions at Friktion.

Uddhav

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I agree, Friktion performance fees benefit users since it both incentivize developers and it is only taken from the interest and not the principal. Hearing a broader thought at the Townhall on this can bring some fruitful discussion to charter a road map.

Agreed. A fund for insurance is vitally required. Provides depositors with a sense of security. I’m curious whether there are opportunities to collaborate with crypto insurance companies like Nexus Mutual and others.

This response is also a follow up to @Uddhav as well.

I don’t see Nexus offering coverage for Solana Protocols however InsurAce does. They are offering coverage for smart contract vulnerability to the user, not the protocols themselves. However, possible partnerships may exist. In terms of protocols seeking insurance from a provider, I haven’t come across any that does that as yet. Protocols such as Solend and Tulip have established their own insurance fund. I’m seeing opportunities here where Friktion can offer a diversity in yield (probably on Volt 2 & 3 since insurance funds are based in USDC) for these insurance funds that are awash with cash.