Risk Underwriting
Existing Challenges
Existing DeFi RPPs rely on external underwriters to provide capital for claim payouts and cover capacity. This is effectively the same as renting liquidity from stakers. While renting underwriting capital is effective in the short to medium-term, it does raise some serious issues that may greatly impact the scalability and sustainability of RPPs. For example:
In the face of outsized claims, underwriters may race to withdraw their capital, leading to insufficient claim payouts and subsequently reduced TVL and future underwriting capacity for the RPP as underwriters look to mitigate and recoup their losses.
Due to concerns over losing underwriting capital, many underwriters are unwilling to participate in RPPs.
RPPs lockup or impose other restrictions on underwriting capital in their capital pools when claims are submitted in order to protect the functioning of the claims process. This method reduces user experience and hinders participation in the space.
Yield generated from RPPs are generally not as competitive when compared to other DeFi protocols, hence users do not have a strong incentive to stake with RPPs. Some protocols use their token emissions to supplement their APY, but this is obviously not sustainable and puts downward price pressure on their governance tokens.
Hence, RPPs usually have smaller TVL compared to AMM, lending, and other DeFi protocols. The value of their governance tokens is also difficult to estimate given the uncertain risk of claim payouts weighing on RPPs' prospects.
Solutions
The solutions which Amulet propose for these challenges is a combination of
Underwriting Mining: Underwriting capital provided by underwriters; and
Protocol Controlled Reserves: Reserves to protect underwriters' capital.
At the early stages, Amulet will use assets staked in the underwriting mining pool in a conservative manner. As the protocol generates more capital from cover payments, investment returns, etc., Amulet will gradually build up the PCR so as to avoid drawing directly on the underwriters' capital as much as possible.
For more information, please refer to:
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