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.
Protocol Controlled Reserves
The Protocol-Controlled Reserves ("PCR") serve to protect the underwriters' capital when making claim payouts. Amulet believes this new model has the potential to scale sustainably.
Key Design Considerations
Minimize loss to underwriters' capital so as to continue to attract and maintain a large TVL as the foundation of the protocol.
Generate yield with a stable and growing TVL to develop the treasury pool.
Stake yields generated from the treasury pool into the underwriting pool to increase underwriting capital until it reaches critical mass for independent yield generation capabilities.
Have the growing treasury pool and protocol's yield generation capabilities back new underwriting tokens (aUWT) as the first tranche for claim payouts, further minimizing potential losses to stakers.
Key Components of Protocol Controlled Reserves
Treasury Pool: Measures the cumulative value of Amulet's operations. This includes PoS staking rewards, borrowing, and lending revenue on Amulet's underwriting capital and cover payment sharing.
Yield Backed Claims Pool: Collateralization of future revenues that Amulet is projected to generate in order to mint more aUWT for unexpected large claim payouts in order to reduce reliance on stakers' capital as far as possible.
With a solid PCR base as the foundation, Amulet can deploy assets in a number of ways. The primary function of PCR will be to underwrite protocol and individual user risks.
Eventually, Amulet will be able to continuously grow its TVL with minimized potential loss to the staked capital, build up a large treasury pool, create stable returns for users and capture value for token holders. This approach has the potential to build Amulet into a multi-billion dollar protocol in the medium-term, scaling with DeFi’s growth prospects over the long-term.
Treasury Pool
The Treasury Pool is a key element of PCR. Income expected to expand the Treasury Pool's size includes:
A portion of PoS staking rewards generated by staked SOL.
A portion of cover payments earned from cover sales.
A portion of investment returns generated from staked assets, such as mSOL, and aUWT.
Other revenue and fees generated by Amulet (e.g. LP rewards).
The Treasury Pool will be earmarked in the following manner:
Claims Reserve: x% reserved for large claims and to grow core funds through reinvestment in the underwriting pool.
Development Costs: y% to fund development.
Claim Payout Structure
In order to build up PCR and minimize drawdowns on underwriters' capital, a tranche is built into Amulet's claim payout structure. This tranche is backed by future revenues and therefore dubbed as Yield Backed Claim ("YBC"). What this means is that Amulet is collateralizing revenues that it is expected to earn in the near future in order to mint more aUWT for claim payouts so as to safeguard underwriters' capital against claims.
When a claim payout is approved, the necessary funds will be drawn from different payout tranches in the sequence outlined below:
Yield Backed Claim Pool.
Claims Reserve in the Treasury Pool.
Product Underwriting Pool (i.e., If there is a claim on Cover Product A, only the aUWT staked in Cover Product A's underwriting pool will be affected).
This way, underwriting capital contributed by underwriters will be least affected. Underwriters can be confident that their principal is SAFU while generating considerable earnings through the various yield generation opportunities available on Amulet.
The time period which Amulet uses to determine the amount of revenue to collateralize for YBC will shrink progressively as Amulet builds up the PCR. Under no circumstances will the said time period's duration extend beyond its initial parameters.
Last updated