Hey everyone!
Marouane from Unslashed here 
First, I would like to thank everyone for their input and for this passionate debate!
There are some things that I would like to discuss from a neutral point of view as it doesn’t only apply to Lido but rather to most self-insurance initiatives/ideas. Then I will happily express my totally biased position regarding the topic at hand (renewing/not renewing/not renewing + exploring something else).
I/ External Insurance vs Self Insurance
There are 3 main models for Self Insurance that were described/discussed:
(A) using the ETH treasury that Lido holds
(B) using LDO as a “backstop”
(C) a mix of both (A) and (B) by using a tranching logic; a first tranche being ETH treasury and the second one being LDO for example.
When thinking of fat tail events (a slashing of 10k-20k+ ETH for example), picking A), B) or C) leads ultimately to the same result which could be broken down into the following:
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Price impact on LDO:
If (A): the ETH that was raised to maintain Lido as the Number 1 Liquid Staking protocol is now gone and the project is at risk. If (B), LDO holders will sell as soon as the news is out and the sold/airdropped LDO will likely be severely discounted. If (C), the result is a mix of both.
Some past examples of rather small to medium size losses:
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The MakerDAO 0$ CDP liquidations in march 2020 was a rather medium size incident; around 5m$ was lost and a coordination of several industry actors was needed to buy the newly minted MKR and recoup the losses.
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Compound’s oracle liquidations led to a price decrease of 20% for $COMP, and in this case Compound wasn’t planning on covering any losses.
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More recently, the Thorchain hack of 5m$ led to a price decline of more than 20% in $Rune so far and they have USD + BTC in treasury that they promised to use to cover the losses (for the story, I reached out to them a few months ago to discuss an insurance policy and didn’t hear back from the team who could have helped put one together …).
Will/do these tokens recover? Yes probably but the rational is to always discount the tokens by taking into account the additional risk that they bear. Moreover, when it becomes a larger scale loss instead of a small/medium sized one, the recovery is much harder. Think Harvest or Pickle for example.
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Business Impact:
We can all agree that stETH will very likely lose the peg after a slashing event until withdrawals become possible. The question of knowing what would happen if there is a second slashing becomes a reality. If the first was covered by self-insurance, would it be enough for a second slashing? And would LDO holders be willing to distribute LDO or ETH from treasury? or is it going to be some other “non-cash equivalent” solution (vested tokens, debt tokens, options, etc.)?
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Lido’s Image/perception/reputation post slashing event:
Lido started by having an external slashing insurance then a decision was made to stop it. In the case where a medium to large slashing event happens, some hard questions would need to be answered.
II/ Why (External) Insurance and how does Unslashed approach Lido’s risk?
Why a third party insurance? The simple answer is to avoid all the drawbacks of self-insurance.
Apart from providing a perception of safety and security, an external insurance actually allows to spread any losses over a longer period of time compared to self insurance; the 300 to 450 ETH of yearly premiums could be seen as an advance on possible future losses and continuing to pay premiums post slashing could be seen as paying back the loss incurred by the insurance provider. A 5k ETH slashing could happen in one month or in 2 years, we don’t know but what we know is that it would require 11 to 15+ years to be recovered by the insurance provider at the current premium price. A 15k ETH slashing 33 to 45 years. And during these 10 years or 45 years, Lido has the treasury and LDO price doesn’t suffer as much + the project can thrive.
On a long enough timeframe, any event that could happen tends to happen. Considering slots as the unit of measure for slashing is the equivalent of considering the number of times a car wheel spins to price a car insurance policy. Yes the wheels do spin millions of times per year and when an accident happens they stop spinning, so that’s 1 chance out of x million(s), but the reality is different as we all know. Using slots for probability calculations would simply lead to false math/assumptions/results.
6 months of ETH 2.0 doesn’t provide enough data points to compute probabilities in a simple manner, the merge and post-merge upgrades come with some amount of risk. Recently many Polkadot validators were slashed and the slashing ended up being reversed by the council, ETH 2.0 doesn’t have a council, once the funds are lost they are gone no matter who is responsible and what really happened. When considering Lido’s validator set we think of their activity on all the different networks they are part of and try to extrapolate the slashings and losses.
Taking a 20 years timeframe and trying to come up with a fair pricing leads us to the cost of 1% to 1.5% per year, this cost currently represents an average of 10% of the fees earned from the staking rewards. It might be seen as high compared to the DAO’s revenues, which I can understand, but it is still an event priced at 1% to 1.5% per year and that cost could be easily offset by increasing the fee Lido is taking from 10% to 11%.
Over time the pricing will follow the reality of the incidents/losses/risk, which means that if we are being optimistic and there are no reasons to remain cautious, the cost of the slashing insurance would diminish and reach the same levels insurance represents in other “regular” businesses.
And this is not something Self-Insurance will get to.
This being said, if the current cost continues to appear to be high, there are other alternatives that might be worth exploring:
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Use some ETH from Lido’s treasury that was supposed to be locked for Self Insurance and supply it to Unslashed’s bucket in order to have enough yield to offset the insurance cost. This will give the Lido DAO exposure to its own slashing risk as well as other risks that are part of the bucket. The Lido DAO could be long the bucket and short some specific risks the Lido DAO is not comfortable having exposure to. 3-4k ETH would allow to approx generate the 300-450 ETH per year.
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Have a separate Capital Pool for Lido’s policy, this could serve as a self-insurance for which there is a policy and an independent claims process.
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Have a separate Capital Pool for Lido as in 2. but with less ETH being locked and combine it with a tranching logic: Lido’s independent Capital Pool will be taking the first losses up to XX ETH and the policies that are part of Unslashed Bucket would take everything that is above XX and up to YY ETH. The premium price in this case will be naturally lower.
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Do different variations of 1., 2. and 3.
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Option 5: another option I would need to check and make sure it makes sense in this case.
Happy to have everyone’s thoughts on this and excited to see where this is heading! 
