The Current Problem in DeFi Insurance and our Solution — Network Staking with a Cost Sharing Model

Before we get into the finite details of the various aspects of how FairSide functions, it’s important to know why we believe there is a fundamental problem within the current insurance platforms and the solution we’ve developed to solve this — Network Staking with a Cost Sharing Model.

As mentioned in our previous article An Introduction to FairSide the current protocols offering protection against loss operate by using siloed staking pools that can create permanent loss for stakers when losses are paid out. Models like these are not built according to the principles of diversification that come from traditional insurance and take the shape of high variance betting platforms that carry unnecessary risk for liquidity providers in return for questionable APRs .

Due to this high correlation of risk, project pools are capital inefficient as they require fully collateralised cover positions. The cover is limited to the amount staked in any given pool, severely restricting both the availability of cover and the amount of rewards that can be earned. Furthermore, if a pool has not been created for a particular project, no cover exists, leaving the users completely unprotected. This is why users are required to purchase multiple “policies”, if they want to have coverage for more than one project — how does that make sense?

To make it even more restrictive, the cover in these pools are strictly limited to the project and the type of loss selected. E.g. smart contract failure or exploit. As previously noted, this limited cover requires users to purchase multiple policies and pay additional premiums to cover their numerous positions in DeFi. Paying multiple premiums for just a few projects can add up to 10% or more. This cumbersome and expensive cover system prevents adoption for most users seeking cover.

This whole model is made even more complicated and biased when you consider their “stake to vote” model when assessing claims in the system. Due to the project pool or liquidation model, stakeholders face a financial dilemma to vote fairly. If they vote in favor of a claim, they will be liquidated to cover the payout. As a result, this system puts in question the fairness of the claims process. That’s where we believe Cost Sharing is important because our stakeholders do not experience a permanent loss and it is shared equally across the network — they are able to vote in favor of the network’s benefit and not their own.

The Solution: Network Staking with a Cost Sharing Model

To put it simply, instead of using one pool to cover one project, our model uses one pool to cover all projects. We call this, Network Staking, which decouples staked assets from specific project risk. The cost sharing aspect of our model is a non-insurance solution for members to protect their crypto assets. The community votes on whether to share in the cost of unfair loss events of its members. Unfair losses are paid from the Capital Pool. This is the primary function of our DAO.

The process is pretty simple. When a user stakes ETH into our network it all goes into one pool and they receive a token called FSD. The FSD pricing formula factors the amount of ETH in our singular pool of staked ETH. When a loss event occurs and our DAO votes to approve cost share request, losses are paid out.

To do so, we simply send ETH from our pool to users with approved losses. Instead of having to liquidate the entire pool like the other models do to payout their claims, the ETH used from our pool merely decreases the value of FSD that stakers hold — leading to a non-permanent loss that can be quickly recovered as the pool is recapitalized and the price of FSD raises in turn with the volume of ETH in the pool.

The benefits of network staking are huge. Using this diversified staking model, we are able to introduce blanket coverage that applies cross-chain, cross-project, and features multiple cover types to protect the members of the network from various forms of loss — not just one loss type like smart contract exploits.

The model of network staking also increases the capital efficiency of our network. Capital efficiency is the ability of the network to safely leverage assets in the capital pool. In our model we are able to offer coverage up to 10 times the amount of staked ETH. This allows FairSide to offer more cost sharing benefits and generate more stakeholder rewards, when compared to the same amount of capital held by leading competitors.

Our new innovation in DeFi cover not only solves the issue facing contributors, but the broad-based cover approach also fulfils the needs of the user. Network staking aligned with cost-sharing, could revolutionize the DeFi insurance market for the greater good.

Soon, we’ll follow up this article with more content on how the various aspects of FairSide work.

In the meantime…

If your curious to learn more please to more, check out our gitbook

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