Redirecting incoming revenue stream from insurance fund to DAO treasury

Dears,

I’m working as an Atomica integration team lead. Atomica is a Protofire subsidiary company. Our team is developing an automated risk market protocol and DeFi insurance as a service platform.

We are afraid LIDO can’t cover all risks with their own balance sheets. The tail risk shortfall event may kill one or two years of the DAO revenue.

Hopefully in the next few months we can offer you Safety Module as a service. By using LIDO Safety Module users can stake underwriting collateral and contribute to the LIDO protocol safety.

Also we are planning to launch:

  • Eth/stEth peg parametric protection;
  • Slashing Protection for stackers, node operators and validators.

Our risk platform uses underwriting funds more efficiently. We can provide a lower rate for the Slashing Protection.

May I ask you which percentage of the annual revenue will be acceptable for the Slashing Protection?

As we calculated at the current 4% Eth 2.0 stacking rates and 0.5% cover rate, Slashing Protection cover cost can be compensated after 1.5 months. At the 0.5% cover rate, Slashing Protection can cost you about 12.5% of the annual revenue.

Also we can cover not only Eth 2.0 Slashing risk, but also all the other Slashing risks such as Solana, Polkadot, Cosmos, etc.

Please check the sample Eth 2.0 Slashing Protection calculator

LIDO DAO you can create their own risk markets and earn additional fees from running risk markets and paid insurance premiums.

If you would like to see more details about Slashing Protection, we can prepare a technical proposal.

Best regards,
Jaroslav Alekseev
Atomica integration team

1 Like

The Snapshot passed! Thank you for your votes!
Results:
Yes, redirect - 61M LDO - 99.99%
No, do not redirect - 7.8K LDO - 0.01%

Today, around 2 PM UTC, we plan to start the Aragon vote on switching the flow of fee from the insurance fund to the treasury fund. Get your keys ready!

1 Like

Would need to do a deeper dive, but from the looks of it the cover is provided for 7% penalty of the sum max — am I reading this correctly? Any short doc on cover terms would be awesome

1 Like

Aragon vote to redirect Insurance fund fees to the DAO treasury is now live.
:bangbang:Please note that the main voting phase will last 48 hours and end on
Thursday, July 14 at 2 PM UTC.
Until then, you can vote both for and against the proposal.
After that the Objection phase will start and will last 24 hours.

https://vote.lido.fi/vote/134

Please, cast your votes!

3 Likes

Hi Kadmil,
Thank you for your reply.

1-7% was chosen as an example. I tried to show how slashing risk can affect the LIDO revenue. Our team can create any policy covering the range you need. We are more flexible vs legacy DeFi protocols such Nexus or Unslashed.

I’m working on the Slashing policy wording template, but we can use LIDO DAO Slashing policy wording templates as well. It’s still an early draft version

It’s better to know your requirements. Who is the best person in LIDO to talk about the risks?

We have our own fund to cover mild slashing events such as 1-7% slashing of a single node operator. While it would be detrimental to our balance sheet, its not a risk to the operation going forward. The community has previously expressed interest / voted to self insure this risk.

The real risk worth discussing is extreme tail events such as 1- 2 nodes being 30 -100% slashed. What coverage is available for these types of events.

The real risk worth discussing is extreme tail events such as 1- 2 nodes being 30 -100% slashed. What coverage is available for these types of events.

Apart from understanding if coverage is available the most important question is whether that coverage is practical (i.e. from a protocol sustainability perspective) and realizable (from a “if this event were to actually happen, how would this actually get covered?” perspective).

I think we should critically question whether such scenarios (and especially the more catastrophic ones) are practically coverable or not, regardless of whether an organization (a competitor or a 3rd party insurer) offers a promise that it is. We also need to consider that Lido is an on-chain protocol and coverage via 3rd parties which likely hinges on the continued operation and solvency of 3rd party is not a guarantee. Note that in certain cases of catastrophic scenarios (e.g. client bugs), the issue would be widespread across the Ethereum staking ecosystem and non-Lido specific, which means that these coverage providers would all be getting claims at the same time, drastically reducing the likelihood of actually being able to meet the required obligations (or at the very least the timeliness of claim payouts).

Additionally, I think it’s reasonable to consider reframing this discussion and understand that Lido stAssets are financial primitives that basically create optionality for users (e.g. one of the points is that stETH should be substitutive of ETH). Does it really fall on the protocol itself to identify and execute coverage solutions for users, or perhaps it should embrace the nature of DeFi and instead work to provide users with information, education, and options (via integrations)?

There are already ways for users to reduce their risk exposure to stETH (e.g. through using tranching products such as IDLE Finance’s Junior and Senior Tranches, or purchasing cover via Nexus Mutual).

I think it makes sense to consider an approach like this:

  • Make it clearer to users in what cases / up to what amount the DAO basically can and would self-cover losses (this can and should extend to Lido understanding whether its constituent Node Operators have insurance over the services that they provide to Lido or not);
  • Improve the showcasing of DeFi integrations on the Lido frontend, especially with regards to risk-management or insurance options, and make them more easily accessible to users who want to utilize them.
2 Likes

I agree completely improving transparency on the Lido frontend. I think that would add tremendous value in both articulating the risks and offering convenient solutions such as Idle and Nexus.

More importantly, I think explicitly stating what the DAO will cover in such an event is vital. Articulating this point could change the economics / affordability of cover if Idle / Nexus had some assurances.

From the practical stand point of protection in a tail event, I agree its a complex issue. Widespread events would certainly compromise the insurance providers. I believe there are still risks of isolated slashing events that could be insured. Did not one happen early on that was an implementation issue from a NO? However, is it even economical to insure, I am not sure?

Ultimately, your suggests are the simplest to implement and best align with the culture of DeFi. I think we should reframe this conversation on how to implement your suggestions and work to explicitly define the DAO’s responsibility.

4 Likes

No slashing has ever occurred on Lido validators on Ethereum mainnet. We had a sustained downtime/operator by Operator that they reimbursed stETH holders for (see here). Generally, insurance does not cover events like this (unless you get specific insurance for this via some sort of “operational guarantee” or SLA with restitution clauses, but I’ve never seen it within the scope of “slashing insurance”).

1 Like

Just added 2 cents.

The operating margins for Lido are relatively thin unless asset APRs jump and sustain for the long period. This is most likely the case for most protocols in the space.

Those that do offer full coverage are most likely charing an increased fee which would require massive technical lift to implement on our side and as Izzy mentioned goes against the ethos a bit.

I agree that leveraging 3rd party providers to offer this as an ala cart service to Lido stakers would be the ‘simplest.’

2 Likes

Aragon #134 passed and was enacted!

Thank you for your votes!!!

3 Likes

4 546,38 wstETH to be transferred to the Insurance fund after it is moved to a separate address

2 Likes

The updated model can be found here
As we did before, we consider basic 4 scenarios for current and future state of BC:
#Scenario 1: max risk offline (single big operator, 100% validators offline for 7 days)
#Scenario 2: min risk slashings (300 validators slashed)
#Scenario 3: medium risk slashings (single big operator, 30% validators slashed, 100% validators offline for 7 days)
#Scenario 4: max risk slashings (single big operator, 100% validators slashed)
The updated model includes Bellatrix spec that provides harsher penalties.
In the first three scenarios, the impact varies from 177 to 5,132 ETH and they can be covered with the proposed 5500 stETH.
The last scenario (tail one) requires alternative options that in my opinion should be related with proactive risk management like validator diversity management, risk and response planning, etc. rather than insurance.

5 Likes

Thank you for the update!

I agree on your assessment of risk and our inability to cover large tail risk.

@Izzy can we workout a roadmap for updating the front end to state risk parameters and mitigation options. Alternatively, it may fit well in the documentation section and interested stakers will find it.

2 Likes

I think we probably need a special section or page on a per-protocol basis, at the very least starting with a Q&A block in the FAQs under e.g. stake.lido.fi, polygon.lido.fi, etc, since it’s possible that there will be have different approaches for all of the different stAsset products.

1 Like

I agree that seems like a logical location. I would support its own sub section so its not lost in the long list of risks. Maybe a section like can I mitigate or reduce risk? Here we could call out the insurance fund and the 3rd party options. Maybe an example quantifying the risk such as we have in this thread, that dives into the individual impact a staker might experience using nice round numbers such as 100 ETH and the most likely slashing impact.

Finally we have updates on this topic.

Insurance Fund contract successfully deployed at InsuranceFund | Address 0x8B3f33234ABD88493c0Cd28De33D583B70beDe35 | Etherscan :partying_face:

Also next Tuesday, October 4, we plan to launch an Aragon vote to transfer 5’466.46 wstETH (worth of stETH) nominated in stETH from the DAO Treasury to the new Insurance Fund contract.
The amount of 5’466.46 wstETH consists of two parts:

  1. 4’546.38 wstETH is the amount that the Treasury had at the moment of redirecting revenue stream from Insurance fund to the DAO Treasury
  1. 920.08 wstETH is the amount that was used to cover the latest RCC and operating expenses and it was assumed that this amount should be returned to the Insurance fund
4 Likes

:oncoming_bus: The Omnibus vote has started! The main phase, in which you can vote For and Against, will last until 2 PM UTC Thursday, October 6th.

Please cast your votes!
:arrow_right: Lido DAO Voting UI

2 Likes

The previous omnibus did not reach a quorum, so we decided to restart this vote again.
The main phase, in which you can vote For and Against, will last until 2 PM UTC Thursday, October 20th.
https://vote.lido.fi/vote/141
Please vote! :bus:

Voting #141 is over :checkered_flag: and passed, phew! :+1: (7.2% pro)

5 Likes