I’d like to start brainstorming some more long term cover premium ideas that is a bit more dynamic so that we don’t require a governance change whenever we get these weird bursts of cover demand and have to quickly adapt.
This is a ‘part 2’ plan to the current cover premium change, aimed to be a post-farming madness change when we ‘revert back to a norm’
Currently price is determined based on Net Staked NXM only:
This helps the price move up and down the curve based on staked NXM and therefore determined risk by the community.
However there is no where to factor in cover demand/remaining capacity. I believe that available cover capacity remaining should also drive the price modifier slightly, but to nowhere near the extent that the NXM stake does.
I’ve put together a quick chart to demonstrate a potential idea.
Adjustment based on % remaining cover:
In this example I’ve used the 1.3% cover premium floor as an example because it’s a number we are used to. I still think that this can still remain the floor but by just adding a adjustment based on capacity we can ramp up the price once cover demand starts nearing supply exhaustion.
In this example for a contract that already has maximum net stake such as Yearn, Curve, Synthetix etc - a 1.3% floor would be in effect due to the Net NXM Stake original curve.
Based on my curve calculation (I went with an exponential growth of ^1/77) this would mean that the first 60% of available cover is still priced at 1.3% so no change.
However once remaining cover hits 40% the price starts increasing on the curve.
As highlighted example shows, 10% cover remaining would take the price to 3.2% and then aggressively move up to 6.4% across the last of the cover availability is dried up.
That means during times of farming demand like now - the amount of available cover currently never really dips below 5-10%. So prices right now for cover on the maximum staked protocols would be around 3.2-6.4% instead of the 1.3% it is currently.
Realistically we don’t actually want/expect to have cover usage under 50% so the true range of prices for the common protocols would be likely around 1.3% and 3.2% on average so this is still an average increase in premiums based on pre-farming usage - but not a big uplift overall.
The curve can be tweaked to be more or less aggressive, here is a curve of ^1/140 for example:
Hope this makes sense conceptually - let me know your thoughts.