[Proposal] Allocate 1 Million AURORA to Insure Aurora+ Staking

Summary


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.

Abstract


If approved, this proposal will result in:

  1. An insurance policy for Aurora+ Staking, currently worth over $1.3M in coverage (claims settled in stablecoin)
    1. Covered risk: smart contract vulnerability. In case of a technical exploit or malfunction, stakers in Aurora+ will be reimbursed for the losses in stablecoin.
    2. Coverage limit is dynamic and can be adjusted weekly
    3. 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)
  2. A deposit of 1M AURORA into a 6mo underwriting lock (can be extended up to 4 years with additional benefits allowing higher coverage limits)
    1. Capital can be withdrawn past the lockup time
    2. Capital is locked and kept away from the open market
    3. 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.

Preface


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.

Motivation


Current State of DeFi Insurance on Aurora

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

Evolving Aurora with Solace Insurance

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.

Background


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.

Goals and Impacts


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%.

Reasoning

  • 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.

Key Outcomes

  • 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.

Implementation


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):
    1. Approve AURORA token to deposit helper contract, DepositHelper.
    2. Deposit AURORA tokens to Solace Native: DepositHelper.depositAndLock(address depositToken, uint256 depositAmount, uint256 lockExpiry)
    3. Distribute insurance capacity to Aurora+ staking: UnderwriterLockVoting.vote(address voter_, uint256 gaugeID_, uint256 votePowerBPS_)
  • 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.

Next Steps


  • Community Discussion (starting Aug 25th)
  • Upload Governance Proposal to formal voting (planned for Aug 29th)
  • Voting Period

A Primer into Solace Native


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’s Key Benefits


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:

  1. DApp-level insurance that protects against smart contract risk, which is a major competitive advantage for DeFi investors.
  2. Access insurance and pay premiums utilizing a protocol’s native token
  3. Longer commitments through locking tokens yield more coverage for less

Key Concepts of Native Architecture


There are a few terms to learn to best understand Solace Native:

  1. Solace Insurance Capacity (SIC): The total value of coverage available for Solace to distribute.
  2. 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.
  3. 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.
  4. 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.
  5. Risk Management: The risk management team utilizes Solace’s quantitative Risk Pipeline to determine the annual premium rate for each of the insurance gauges.
  6. 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.
  7. 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.

How DApps participate in Solace Native


Consider this below scenario. There are three DApps that enter Solace Native, and each deposited their native tokens into the underwriting pool. Specifically:

  1. DApp A deposited $5 million of $A tokens
  2. DApp B deposited $2.5 million of $B tokens
  3. 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:

Gathering Premiums


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.

How Native Manages Underwriting Pool


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.

How Native Pays Out Claims


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).

Further Considerations

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

15 Likes

The web3/crypto world is inherently risky because the technology is so early. There are volatility investment risks, scamming risks and even smart-contract risks. The first two are not controllable but smart-contract risks can be mitigated. Perfect code is also not realistic either, so having insurance to promote usage makes a lot of sense!

I would love to see this implemented, then a marketing push to promote users to come to Aurora and use these insured protocols. This will alleviate some worries a new user may have. Aurora taking the lead may push a narrative that other protocols will use it too.

Questions:

  1. Can Solace give stats on previous insurance claims/situations in web3? Does not need to be Solace.
  2. Will there be some kind of dashboard where a protocol’s stats is provided? or how will this be tracked?
  3. Will Solace be integrated on Near too?
7 Likes

Hey, I’m Angler from Hats Finance.
Partnering up with Solace should be very beneficial for Aurora and the Aurora ecosystem. They are one of the best insurance builders in DeFi and their new product looks super interesting.

In DeFi it’s pretty common to use millions of liquidity incentives just to bootstrap trading liquidity for a short time. We need to mature in terms of security so using part of the token treasury to better secure users and early adopters is a decisive move. Users/community members affected by a hack and losing all of their savings won’t return. We have a special responsibility to take care of those adopting our technology.

My opinion is that this proposal is in the best interest of Aurora and its community.

5 Likes

Thank you for your thoughts and questions, Evie!

  1. Sources like Nexus’s claims stats and their claims assessment site can help most anyone learn about the rate of approvals vs. denials of claims and why each decision was made. Oftentimes, it’s based on whether or not the claim follows general terms and conditions.
  2. Yes, there will be a dashboard that will be a core component of the Native experience. We’re wrapping up the development, and it will include a breakdown of the weights between DApps, insurance capacity splits, and volatility indexes of tokens within the underwriting pool.
  3. That’s on the Solace roadmap, actually. :slight_smile:

As supplemental material, here’s a link to our previous risk modeling process that we’ve developed at the foundation for modeling Native’s exposures.

3 Likes

Thank you for your thoughts, Angler. I certainly agree - it’s of Solace’s utmost important mission to secure DeFi through insurance, and we believe Aurora will be a great network to bring Solace Native to drive that mission.

3 Likes

While I can see a reason for insurance, using the native token to insure one of the core contracts of the chain does not seem to make any sense.

In the case that the Aurora+ contract is exploited heavily, then one would also assume that the value of the AURORA token will massively drop. This would also mean that Solace could not perhaps cover all of the claims via lending, and thus would need to liquidate part of their tokens, which would crash the price even further.

I really don’t see the case where this insurance makes financial sense. If it actually protected from black swan events it should work, but as it stands it seems to just protect very small incidents that are most likely negible and unlikely to happen anyways.

Let me know if I have misunderstood something.

Hi, Jommi! Your intuition is correct and you bring up a valid point. However, I have to respectfully disagree due to a couple of reasons, which we certainly will try explain better explain moving forward.

First, is the fact that underwriting isn’t isolated to a particular risk exposure (applies to both, the market risk due to capital’s composition and underwriting risk of exposure to policies). In your example of Aurora+ staking getting hacked and subsequent market drop in AURORA valuation, the borrowing power of the underwriting capital does not proportionally decrease. Though any market drop does reduce the borrowing power, the main idea of limiting that risk is limiting individual exposure to a particular asset. Solace Native’s underwriting capital is formed as an index of insured protocols, and the larger the diversification there is – the safer and more resilient the system becomes, so responsibly scaling of this infrastructure is one of our primary objectives. Ultimately, even if AURORA goes to zero, there is still ample borrowing power to avoid the risk of default due to other tokens value. For the full transparency, about half of the insured protocols need to be hacked to push this infrastructure close to default and a need to liquidate some assets. And even in that scenario, it’s not necessarily has to be that same affected token, or a market trade on a DEX that would further apply negative market pressures.

Second, going off of the “financial sense” objection, it does make sense to start off with a smaller amount, as it either way hedges the risk and, more importantly, allows to scale the system further over time. Currently 1M AURORA is around $1.25M, and the staked amount is roughly $13M, so this policy will already alleviate 10% of the value-at-risk. Solace Native can’t insure considerably more at the moment, due the aforementioned fact that we need to keep the underwriting capital diversified, providing greater security not only to Aurora, but also other participating protocols. Therefore, we’ve been pursuing comparable amounts of native tokens from other DeFi protocols on Aurora and that’s what all parties are comfortable with today. Moving forward, this structure will grow to insure much larger exposures, yet we have to start somewhere.

A bonus point to further introduce the challenge is more related to the context within the DeFi Insurance sector. The major issue is the lack of underwriting capital, not the demand. So where do one get the capital to insure DeFi? Should it come from the outside of DeFi? Is there enough capital within? Who wants to do underwriting? Mercenary capital? LPs? Can a token sale be enough to gather any meaningful amount of funds? I’ll leave these as open questions to see if you or anyone wants to continue brainstorming and bouncing ideas around. However, multiple teams have tried various approaches over the past 2 years, and we believe Solace Native as an infrastructure solution today stands the best chance of solving the issue.

I appreciate your thoughtful review and hope my answer helps explain the logic we’ve been following here and further introduce the landscape we’re navigating.

6 Likes