The Solace DAO is requesting 1 million AURORA tokens to grant insurance for Aurora+ staking through its DApp-level insurance solution, Solace Native. This AURORA allocation will be utilized as underwriting capital and cover Aurora+ stakers against smart contract risk, with claims settled in stablecoin.
If approved, this proposal will result in:
- An insurance policy for Aurora+ Staking, currently worth over $1.3M in coverage (claims settled in stablecoin)
- Covered risk: smart contract vulnerability. In case of a technical exploit or malfunction, stakers in Aurora+ will be reimbursed for the losses in stablecoin.
- Coverage limit is dynamic and can be adjusted weekly
- Policy’s premium rate is set at 2%, while payments are implicit (require no additional fund expenditure/payment, charged weekly through the allocated underwriting capital)
- A deposit of 1M AURORA into a 6mo underwriting lock (can be extended up to 4 years with additional benefits allowing higher coverage limits)
- Capital can be withdrawn past the lockup time
- Capital is locked and kept away from the open market
- AURORA tokens are not liquidated during claims payouts
This benefits AURORA tokenholders and Aurora as a whole by
- Protection. Reduced impact of a loss that Aurora+ staking and/or its users might suffer in a perilous situation.
- Certainty. Coverage will provide assurance and greater confidence to Aurora+ stakers.
- Economic Growth. Boosted security of Aurora+ staking will improve investment thesis for AURORA token.
This proposal is shared by Solace’s team and was written by Nikita Buzov (founder) and Nima Cheraghi (head of growth). Solace’s team members have a vested interest in raising this proposal. Many are holders of AURORA and use Aurora+ staking, as well as several other DApps across the Aurora ecosystem.
As of August 19, 2022, there is less than $70,000 in insurance Total Value Locked (TVL) on the Aurora ecosystem, most of which is coming from Solace. In contrast, the Aurora ecosystem has over $160M locked across its ecosystem DApps. DeFi Insurance continues to lack the underwriting capital to properly secure the Aurora ecosystem and attract new depositor capital from retail and institutional investors.
Current DeFi Insurance TVL on Aurora according to DeFiLlama
Solace has deployed its newest insurance infrastructure to service DApps and protocols, Solace Native, on Aurora this past Monday, August 22nd, 2022. Solace Native provides DApp-level insurance to cover smart contract risk across a DApp’s smart contract code base. Aiming to solve the aforementioned lack of underwriting capital in DeFi insurance sector, the architecture was designed so a much broader range of assets and participants can help bootstrap the capital and efficiently underwrite.
If this proposal passes, Aurora+ will become one of the first DApps that will benefit from insurance, and the AURORA token will become available as an underwriting asset within Solace Native.
Solace is an insurance DApp on Aurora that offers smart contract coverage for many different DApps across the Aurora ecosystem, including Aurora+, Trisolaris, Bastion, Aurigami, BlueBit, and Vaporwave. Solace’s mission is to make DeFi insurance a trustworthy, scalable, and transparent experience. With this in mind, below is a proposal for an allocation of 1 million AURORA tokens to underwriting in Solace for the DApp-level insurance infrastructure, Solace Native.
Allocate 1 million AURORA from the community pool fund to provide underwriting capacity in Solace Native and, ultimately, insurance for Aurora+ with a yearly premium of 2%.
- At the time of writing this proposal 1 million AURORA would translate to ~$1.3 million, providing meaningful capital foundation to insure Aurora+, based on our research.
- AURORA is the backbone of the Aurora ecosystem, and over time can serve as the fundamental baseline token for the Native underwriting pool.
- Insurance for Aurora+ stakers, providing protection and greater confidence in the system. This is ultimately expected to attract more risk-aware capital to Aurora+ staking, and provide further competitive advantage to Aurora+. Both retail and institutional investors often face strict risk tolerances which cannot be met without the option to hedge the risk with insurance.
- AURORA tokens entering underwriting will serve as a strong baseline underwriting capital to increase capacity for Solace Native insurance. In the coming months, as the system matures, additional coverage can be facilitated and provided to Aurora+.
- Premiums will be accumulated in Solace’s float, which will stay inside the system and support paying out claims, further boosting available coverage capacity. This revenue stream will make Solace more resilient to unexpected shocks by having additional capital to insulate DApps in the case of a loss event and limit the risk of underwriters. Long term, these funds will contribute to a more robust risk management protocol and benefit the entire the Aurora ecosystem, meeting the growing insurance demand.
Underwriting funds: A lump deposit
- The Aurora DAO supplies 1M AURORA of underwriting capacity, starting from 6mo locking period.
- The funds will be deposited into the Solace Native underwriting pool via the following steps and function calls (contract address will be provided, once re-deployed on Aug 29th):
- Approve AURORA token to deposit helper contract,
- Deposit AURORA tokens to Solace Native:
DepositHelper.depositAndLock(address depositToken, uint256 depositAmount, uint256 lockExpiry)
- Distribute insurance capacity to Aurora+ staking:
UnderwriterLockVoting.vote(address voter_, uint256 gaugeID_, uint256 votePowerBPS_)
- Approve AURORA token to deposit helper contract,
- Aurora DAO will then hold a lock with voting power to distribute the Solace’s insurance capacity (Aurora is expected to direct insurance capacity to Aurora+ staking, though can decide to provide insurance to other ecosystem components, or later even sell their capacity to generate income themselves)
Underwriting duration: minimum of 6 months, maximum of 4 years, with an option of extending the locking time perpetually.
- Solace Native aims to be the ultimate long-term stakeholder in the Aurora ecosystem, and we wish to serve the Aurora community indefinitely.
- To facilitate this, we ask the community fund to support us and continue to underwrite Solace Native on a rolling basis, unless a counter-proposal is passed to remove the said underwriting funds.
- Community Discussion (starting Aug 25th)
- Upload Governance Proposal to formal voting (planned for Aug 29th)
- Voting Period
I think it’s important that Aurora DAO members are informed on what exactly Solace Native is. Below, we discuss the core architecture of Native, how DApps participate in Native, how Native manages underwriting assets, and how claims will be paid out.
Native uses a governance mechanism where DApps, DAOs, and protocols vote to distribute Solace’s insurance capacity.
DApps that enter Solace Native obtain several key benefits:
- DApp-level insurance that protects against smart contract risk, which is a major competitive advantage for DeFi investors.
- Access insurance and pay premiums utilizing a protocol’s native token
- Longer commitments through locking tokens yield more coverage for less
There are a few terms to learn to best understand Solace Native:
- Solace Insurance Capacity (SIC): The total value of coverage available for Solace to distribute.
- Underwriting Pool (UWP): A pool of tokens that will be used as the capital to underwrite financial risk for DApps. The UWP is also where DApps can deposit their native tokens to receive voting power over the Solace Insurance Capacity.
- DApp Insurance Gauges: Once a DApp confirms that they want Native insurance, Solace will create an Insurance Gauge for that DApp. Underwriters get to vote on each gauge, insuring the respective DApp.
- Underwriting Locks: Any EOA (externally-owned address) can enter underwriting locks using whitelisted tokens, which are pooled in a united underwriting pool. The underwriter receives equity representing their portion of the pool of funds. Each lock gets proportional voting power to allocate insurance capacity.
- Risk Management: The risk management team utilizes Solace’s quantitative Risk Pipeline to determine the annual premium rate for each of the insurance gauges.
- Premiums and Float: At each epoch, underwriting locks will be charged an implicit premium through their underwriting equity based on their votes. The premiums form the float pool that can cover claims (reducing the resulting underwriter’s risk), provides yield to $SOLACE stakers, and supports further Solace development.
- Claims Process: When a qualified on-chain exploit occurs, the affected DApp submits post-mortem for a review and Solace pays out the protocol (or directly affected users) based on the insurance capacity voted to that DApp’s insurance gauge in that epoch.
Consider this below scenario. There are three DApps that enter Solace Native, and each deposited their native tokens into the underwriting pool. Specifically:
- DApp A deposited $5 million of $A tokens
- DApp B deposited $2.5 million of $B tokens
- DApp C deposited $2.5 million of $C tokens
In exchange for their deposits, each DApp gets an underwriting lock with their voting power, denominated in $UWE (Underwriting Equity). Each $UWE gives one vote.
If we assume there’s a leverage factor of one ($10M x 1), then the Solace Insurance Capacity that three DApps will vote to allocate between each other is $10 million.
For simplicity’s sake, let’s have $1 million equal 10 $UWE votes. The breakdown for DApp would be as below:
Each DApp will pay their premium directly from their underwriting lock deposit after each epoch (voting period). Every epoch (1 week) Solace Native transfers the premiums from each lock based on the DApp’s premium rate multiplied by their respective insurance capacity allocations.
For example, if DApp A allocates all of its power to DApp A’s insurance (assume 2% premium rate) and gets $5 million in coverage value, their annual premium would be $100,000 ($5,000,000 * 0.02). For weekly epochs, it would be $100,000 / 54 = $1,852.
All premiums are then stored in Native’s float pool, which maintains the liquid capital for claim payouts.
Currently, the underwriting pool won’t be actively managed (idle tokens), with plans to upgrade the system allowing to productively utilize the funds over the next few months.
Each token in the index will have a minimum and maximum cap, which can be updated to manage desired token composition. The goal of the constraints is to reduce the expected volatility of the index through diversification. Later, additional financial tools will be used to minimize the market risks of this pool.
When an exploit occurs on any of the DApps with insurance, that respective DApp submits a post-mortem report. The DApp, alongside Solace, will determine the value of the lost funds.
Once a post-mortem report is submitted and reviewed by the Solace’s risk management, Solace begins the payout process.
Lend, not Liquidate:
Solace doesn’t sell or liquidate the tokens in the Native pool. First, Solace utilizes the premium float pool capital. If the float pool cannot pay out the claim alone, Solace leverages against the underwriting pool token and borrows stablecoins to pay out the claim.
Those stablecoins are sent to the DApp within one week of the claim approval. After the payout event, Solace uses the float to pay back the loan over time.
Claims can be disputed in case of a disagreement through an independent 3rd party not affiliated with Solace (current implementation will utilize UMA as arbitration to handle claim disputes).
How is the leverage factor determined?
Currently, the leverage factor will begin at 1. Since there is no standard regulatory framework for capital requirements in DeFi yet, we will be using an internal approach to
determine the required capital to meet expected claim payouts and a safe leverage range.
Ultimately, as the system scales up, leverage model will be introduced to increase the capital efficiency and accessibility of insurance, which means that same underwriters will gain more insurance capacity to distribute.
How does Solace assess the risk per DApp?
You can learn how Solace assesses each DApp here.
What tokens will Solace Native begin accepting on Aurora?
USDC, USDT, DAI, FRAX, WETH, NEAR, AURORA, TRI, BSTN, PLY, BBT, VWAVE, & SOLACE