As part of Aave Finance SP, are thrilled to be working with BGD on this initiative and want to share our perspective on the Umbrella proposal:
Overview
The Umbrella proposal represents a comprehensive enhancement of the original Safety Module design. It has the potential to become the most widely adopted DeFi insurance module to date as it introduces flexibility while improving efficiency.
Migration to a More Efficient Solution
The shift towards a more efficient and practical solution for insuring the protocol against shortfalls and occasional bad debt events signifies an enhancement of robustness and security.
In hindsight, it’s clear that the asset providing insurance to the various collaterals borrowed in the lending market to cover missed liquidations should be the aToken related to it rather than just the AAVE token. This change enabled by Umbrella opens up the stkAAVE pool to new ideas and possibilities.
Capital Efficiency
One of the standout features of the Umbrella proposal is its capital efficiency. By targeting specific amounts to be insured and requiring only a “bonus” reward on top of the base yield of the reserve asset (aToken) to attract depositors, the solution becomes highly efficient and significantly more cost-effective for the DAO. This approach allows assets with higher borrow rates to be set up with larger insurance sizes and incentives.
Consequently, more borrows lead to increased revenue for the DAO, facilitating the allocation of a share of the Reserve Factor to the Safety Module.
Flexible and Automated Model
The ability to create a clearly defined model for each asset, with almost formulaic adjustments of parameters for each respective stk aToken, is further strengthened by the use of multiple assets as rewards. The aToken itself can be automated to adjust to dynamic market conditions, while AAVE or other assets can be utilized as additional incentives for growth or strategic purposes.
Collaboration and Future Work
We are very excited about this proposal and look forward to contributing to the creation and experimentation of the most efficient and secure insurance model alongside @ACI, @ChaosLabs, and @llamarisk for the future automation of these parameters.