Thorchain: Tailored Cover Proposal

The Thorchain team is looking to purchase a material amount of coverage as part of a increased focus on security following the two recents exploits. They are discussing with multiple DeFi insurance protocols in an effort to source as much coverage as possible.

The Nexus core team has been discussing with Thorchain directly and have come up with a structure that works from both sides. However this needs to be agreed upon by the Nexus community, and one major item, price is still outstanding. Once the Nexus community gains agreement on price we can list the protocol for staking, and then cover purchase can follow.

Structure Overview

  • Proportional coverage based off non-RUNE TVL (total value locked excluding RUNE).
  • Nexus Mutual to cover 30% of losses up to a maximum amount of 30,000,000 DAI (actual capacity dependent on staking with a max cap of 30m DAI).
  • Payments only made where RUNE DAO also pays a proportional share of the losses in reimbursements of at least 20%. Note: this is to ensure alignment of interest.

Example:

Total TVL = $100m

non-RUNE TVL = $50m

  • Hack occurs resulting in losses of $30m total, with $20m of the loss coming from the non-RUNE TVL portion.
  • RUNE DAO contributes at least $4m (20%) of the non-RUNE TVL loss as reimbursements.
  • Nexus Mutual pays 30% of $20m = $6m claim payment.

Note: Proportional coverage structure was agreed upon with RuneDAO as it allows other providers to easily add coverage independently as required.

Coverage Conditions

  1. Standard Protocol Cover wording applies, with adjustment saying the cover can only be purchased by the Rune DAO as well as applying the proportional structure criteria from above.
  2. Cover must be bought in smaller tranches initially, until Nexus Mutual has implemented partial claims payments. Note: this is because Nexus is currently only capable of total payout or nothing. In the event of a claim of a partial amount individual tranches will be submitted to claims assessment that add up to the loss actually incurred. This is expected to change in late 2021 and only one cover will be required from then.
  3. Coverage period, minimum of 3 months.

Pricing

  • Non-standard flat pricing that does not rely on NXM staked.
  • Annualised price of 8.5% - 10% ← to be discussed with members. Note: for reference the current price of Thorchain cover is 8.5% and this is riskier because Thorchain team reimbursements won’t prevent claims being paid.

Next Steps

  1. Discuss with Nexus community and gain broad consensus on terms.
  2. Finalise wording document and make technical changes to off-chain pricing.
  3. List protocol on Nexus Mutual and open for staking.
  4. RuneDAO to purchase cover.

Key Points of Discussion

  1. Pricing rate
  2. Maximum capacity offered
6 Likes

It’s super difficult to estimate the likelihood of an additional attack, because
(1) the multichain chaosnet (MCCN) is halted, exploiters may be waiting for MCCN being resumed
(2) I cannot see any additional security measures taken in the “roadmap” https://twitter.com/THORChain/status/1416210370075660292

However, I think since we would only cover up to 30% losses (simplified), 8.5% cover rate would be fair enough.

3 Likes

From my perspective, this is a valuable “logo” to get on our customer roster. The more of these types of deals we can do, the more momentum we get in the marketplace.

2 Likes

@Hugh what “cover multiplier” would be applied here? The current 2x?

I.e. if $10MM is staked, is $20MM cover available?

1 Like

Yep, 2x. So we’d need $15m of NXM to reach $30m capacity, which is roughly 127,000 NXM staked at current prices.

While the mutual may be incurring a greater amount of risk by creating this bespoke cover product, our mission is to protect a larger portion of DeFi, and this would be an earnest effort toward that goal.

If members staked the minimum amount of NXM to achieve $30m available cover, this would generate $2.295mm in annualised cashflow with $1.1475mm entering the capital pool and $1.1475mm going to Risk Assessors.

(Calculated factoring in 10% of premium reserved for claims filing with real cost of 7.65% per annum for coverage)

With the minimum duration set at three (3) months, this would generate $573,750 in cashflow with $286,875 going to Risk Assessors.

If we underwrite such a policy, we will earn a sizeable amount of revenue but be subject to a future claim payout should the measures THORchain has taken fail to prevent another exploit. In any event, I believe this would be a positive for the mutual, as a claim event would result in multiple DeFi cover protocols assessing a claim.

It would be a great opportunity to demonstrate our ability to underwrite large cover policies, protect users, and, in the event of a loss of funds, demonstrate the strength of our cover products and the strengths within our Claims Assessment process. Fully in support of moving forward with this. I will stake NXM against this policy.

4 Likes

@Hugh - I like this proposal. Like @BraveNewDeFi wrote, this would be a great opportunity to show the community that we can underwrite larger cover policy and protect a whole network. This shifts also some of the responsibility from the users of the network to the DAO of the network (and insurance that it purchased using its treasury) and I like that approach.

I was wondering if they would align their interest further by purchasing NXM and staking them on the cover.

2 Likes

Good to see this happening and as @adambenayoun mentioned, this places responsibility on the DAO but also encourages a more proactive risk management approach of DAOs’. It will be interesting to see which DAOs’ take note and are up next in structuring a similar deal.

I’m just wondering what would happen to the exisiting staking that is in place for Thorchain now. Since this will be restricted to purchase of the Thorchain DAO, I assume the existing one stays for individual users. But then what happens during a claim? Will the individual be paid out from the insurance on the DAO and the individual one (assuming he/she has taken out coverage separately)?

Existing cover stays in place, as you mention, it would be for individual users. It’s still valuable to the extent that Thorchain DAO doesn’t have complete coverage and doesn’t fully reimburse users for future hacks.

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