What is Cost Sharing?

Our previous article expanded on the concept of Network Staking. It was a follow-up to The Current Problem in DeFi Insurance, which explained the inefficiencies of the current offerings and our solution to it. So far, only half of that solution has been covered — that is why this article will focus on Cost Sharing, so you understand what it is, how it applies to FairSide’s model, and complements Network Staking.

To put it simply, cost sharing is a voluntary action of giving among like-minded individuals to assist in the financial need of one another. It is also commonly referred to as peer to peer risk sharing, and it’s a practice that has existed for thousands of years — before traditional insurance as we know it.

The best part is the benefit of cost sharing becomes stronger the more decentralized it gets — more participants equals less risk for those supplying the capital and a higher threshold for cover that can be offered. It only makes sense that it would be applied to the blockchain space because the model is decentralized. Right now, there are no traditional forms of consumer protection in this industry and there doesn’t need to be if users start to grasp the benefits that cost sharing can provide for the industry at large.

By pairing cost sharing and network staking with proven principles from modern insurance models — we are able to create a true insurance alternative. One that offers crypto holders the same benefits as traditional insurance products with all the transparency and efficiency that blockchain technology offers.

If you remember from our last article — the way cost sharing is applied to our network is sponsored by contributors bonding their ETH to the capital pool and membership fees paid to the network. Both a sponsoring contributor (stakeholder) and active members (cover takers) participate in sharing. Contributors stake assets to be shared (in the event of a loss) and earn rewards for supplying the capital, while members pay an annual fee to be shared and receive cost sharing benefits for their approved crypto losses.

So how do we determine rewards and cost sharing awarded?

1. How We Determine Contributor (stakeholder) Rewards

FairSide is a 100% staking network, our native token (FSD) is only created when contributors stake ETH to the capital pool, and in return mint FSD. Because of this, anyone holding FSD (even if purchased on a secondary market) is eligible for contributor rewards. Based on the funding levels of the capital pool, the rewards will dynamically change between 20%-85% of the membership fees earned. Since sharing occurs on a network basis, contributors will earn rewards from every membership fee collected.

2. How We Determine Cost Sharing

FairSide uses an entirely fair voting system for approving loss events. In our environment, we promote open voting to allow all members who reach governance status to vote, without staking additional assets. The larger the voting pool, the more fair the outcome will be. In order to produce the fairest outcome, the community votes to approve claim events — not individual member losses.

Prior to any known individual losses of members, a vote is taken by the community to approve the instance of a loss. Once affirmed by the community, the claim event is opened for cost sharing among the members. Additionally, individual contributors are not liquidated as claims are paid, because the cost is shared across the entire network and therefore they are not likely to act unfairly. There is more economic value gained in staking rewards within a healthy network that reduces the incentive to act unfairly.

Cost Sharing Covers

A member may receive cost sharing benefits for a financial need that occurs due to a cryptocurrency loss associated with an approved loss event.

How Does an Event Get Approved?

First, the affected project must meet the DAO’s criteria to be covered. This simply means the project in question has met thresholds any projects can qualify for surrounding each type of approved cover type or shareable event.

An example of a project threshold would be 2 public smart contract audits from approved vendors to ensure a certain level of quality assurance.

Second, the reason for the loss should also be a loss type the DAO has previously affirmed is a shareable event. Approved cover types could be smart contract failure, flash loan attack, governance attack, collateralized stablecoin de-pegging or any other loss type approved by the DAO.

If the claim event meets the project thresholds and is an approved cover type, the DAO will affirm the event and share in the loss. Members now only need to provide the suggested Proof of Loss. Once it is confirmed the member suffered a loss, payouts will be made via smart contract and claimable by the members primary wallet address.

How We Measure Your Need

You have a membership with a maximum annual cost sharing benefits amount of 100 ETH. In the event you meet all the criteria for cost sharing, we will pay you the total value of your cryptocurrency loss, less the 10% Un-Sharable Amount (USA). The USA is the personal responsibility portion retained by the member and reduced from approved Cost Share Requests. Value of your loss will be equivalent to the ETH value of the assets associated with the exploited project’s cryptocurrency held by you at the time of loss. Regardless of the chain or project in which the loss occurred, members will receive ETH or DAI during the payout equal to their loss minus the USA.

For Example, you have membership benefits of 100 ETH. You lose 1000 SOL while staking a DeFi yield farm on Solana blockchain. At time of loss, the 1000 SOL is equivalent to 30 ETH. Your financial need due to this loss would equal 30 ETH less 10% (USA). Benefits received 27 ETH = (30 ETH — 10%). You have 73 ETH in benefits remaining for your membership period.

So Why Does Cost Sharing Provide Such an Advantage to Our Network when coupled with our staking model?

The basic concept of cost sharing has been time tested and proven to reduce risk among individuals within a community for millenniums. Coupling these ideas with Network staking, FairSide provides an open mechanism to allow sharing among the crypto community while instilling the modern risk management principles of today’s TradFi insurers. FairSide’s combination of these concepts and proven principles is the first time insurance meets crypto. As a true insurance alternative, FairSide members will experience the social and economic benefits needed to be a healthy and more resilient community.

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