InsureDAO: Grant proposal for depeg coverage pool

Introduction

Hello Aave community! I’m Taishi and am a product lead of InsureDAO.

Let me introduce InsureDAO first. InsureDAO is the insurance platform that covers Smart-Contract vulnerability risks and stable coins’ depeg risks. Currently InsureDAO is launched on Ethereum, Optimism, and Astar Network. InsureDAO is the only insurance protocol in Optimism at the moment.

Now I’d like to apply for the Aave grant to expand our depeg insurance in the Optimism network.

Project links

Summary of depeg insurance

Depeg insurance will enable users to cover the stablecoins’ risks. Due to the $LUNA shock, all users recognized the depeg risks of stablecoins. InsureDAO will provide the opportunity to cover the risk by constructing the short position combining with the several 3rd party dApps like Aave.

Depeg insurance will reduce the underlying assets risk to be out of peg and we are sure that this product will contribute to the expansion of the whole Optimism and Aave ecosystem.

Although stablecoins including algorithmic stables have the depeg risks, their utilities are becoming increasingly important to grow the entire blockchain ecosystem. As a result, we decided to launch the depeg insurance in order to contribute to the ecosystem’s growth.

The target users are those concerned about the depeg risks of stablecoins, however, have difficulties in managing the depeg risks by constructing the position by themselves. Furthermore, there’s no services which can easily manage the depeg risks of stablecoins.

InsureDAO can provide full on-chain basis depeg insurance without complexing flow for the user side. Our depeg insurance can eliminate difficulties for both buyers and underwriters.

The depeg pool earns leveraged yield from Aave. The pool provides sUSD or USDT De-Peg insurance and earns leveraged yield through Aave. Liquidity Providers would not lose their funds even if the De-Peg occurred since the pool makes a short position of sUSD and/or USDT.

To make sUSD/USDT a short position, the pool borrows sUSD/USDT from Aave every time De-Peg insurance is purchased. The pool swaps borrowed sUSD/USDT to USDC on Curve, and leverages the capacity by supplying them to the Aave pool. The pool earns (leveraged) yield from USDC supply pool, and insurance buyers pay the borrowing rate to Aave.

There are three types of depeg pools with different underlying assets.

  • sUSD pool : 1 month, 2 months and 3 months
  • USDT pool : 1 month, 2 months and 3 months

Here are the assumed conditions.

  • depeg threshold : 0.89
  • Grace period (within this period, once can redeem even after expiry) : 3 days
  • Twap length : 2 days
  • Twap frequency : 16 times
  • Twap threshold (upper price threshold of contract termination from twap) : $1.06
  • Spot threshold (upper price threshold of contract termination) : $1.11
  • Volatility allowance (volatility beyond this threshold, one cannot buy insurance) : $0.02

Now the smart contract of depeg insurance is under auditing and going to launch Optimism mainnet in mid October 2022.

The figure below shows the structure of depeg insurance.

You can also see the thread below to understand the structure of depeg insurance.

Strong point of our depeg insurance

There are three unique points included in our depeg insurance so users can easily purchase or underwrite.

on-chain basis judgment:

Unlike other depeg insurance, our depeg insurance payout will be judged by using Chainlink price oracle. That means all users do not have to care whether or not the payout occurs when depeg happens.

economically rational to both buyers and underwriters:

All buyers have to pay is just a borrowing rate in Aave and all underwriters have to do is to deposit USDC and get leveraged rewards in Aave. The principal amount deposited by underwriters will be fully covered even though depeg occurs.

clear payout operation for buyers and underwriters:

If depeg happens to underlying assets such as sUSD/USDT and is judged to make payout, all buyers have to do is to visit our website or call our smart contract to claim their funds. There’s no complex confirmation process or claim request required. On the other hand, all underwriters have to do is to withdraw the deposit amount and claim the accrued rewards earned from Aave deposit.

Benefits for Aave

Our depeg insurance uses Aave v3 to build short positions of sUSD/USDT and underwriting pools. That means if our depeg insurance succeeds, we can contribute to the growth of Aave TVLs in Optimism especially for USDC, sUSD and USDT pool.

sUSD plays an important role for the Optimism ecosystem as sUSD is used for option protocol like Lyra and derivatives platform like Kwenta.

The more sUSD risk is covered, the more use cases sUSD has. If sUSD becomes more and more convenient by getting risk hedge opportunities, it is beneficial for Aave to acquire more sUSD TVLs. The same can be said for USDT.

Furthermore, we can provide other stablecoins’ asset management opportunities for underwriters by leveraging through Aave to get higher APYs for those who hold stablecoins. We can make Aave TVLs increase.

Benefits for Optimism ecosystem

We can cover stablecoins’ depeg risks in addition to Smart-Contract vulnerability risks in Optimism to contribute to the growth of the entire ecosystem. Both sUSD and USDT are quite important in Optimism and their safety is strongly required now. InsureDAO will cover as many risks as possible and provide the new suggestions for stablecoins’ asset management and risk cover solutions to Optimism users.

Security brings more value and TVLs for the entire ecosystem.

Grant amount

We request Aave grant DAO to provide USD15k worth of token as a grant.

How we use the grant

We are going to use the grant as follows.

  • USD5k for depeg pool buyers (sUSD for 3k, USDT for 2k) for 3 month pool
  • USD10k for repeat buyers (only for 3 months repeaters, sUSD for 7k, USDT for 3k)

Why do we incentivize buyers?

A great insurance product is only possible when both the buyer and the underwriter exist. And the UX for buyers is quite new for our depeg insurance. That’s why we incentivize buyers. Liquidity providers, equal to underwriters are already incentivized by Aave by providing liquidity, the most important thing we think is to increase the number of buyers.

Milestones

Here are the milestones we set.

TVLs in Optimism

  • USDT pool
    • 1.5 million
  • sUSD pool
    • 2 million USD or 10% equivalent of Aave sUSD pool

Because our depeg pool capacity is up to 10% of the underlying assets’ Aave pool, we set the above as milestones.

What we would like to do with Aave

It would be great if we could do the following activities if possible.

  • Cross AMA : This will help not only Aave users but also Optimism users understand the benefits and structure of our depeg insurance and contribute to increase the TVLs of Aave Optimism market.
  • RT with each other : This will enable Aave to acquire new users who rarely use lending as well as who want to cover some risks which stablecoins include.
  • Partnership announcement : This will recognize users the benefits to deposit their funds in Aave and contribute to the growth of Aave Optimism ecosystem.

Conclusion

We are really sure that this proposal will be beneficial to both Aave and Optimism ecosystem. Hope Aave grant DAO will consider the possibility of this and we are really happy if we could collaborate in a good way.

Hi,

This is an interest product and something that could add lots of value as stablecoins grow in the future.

If you’re interested in applying for an Aave Grants, the best place to do this is here: Apply for a grant!.

Look forward to seeing more of what you are working on!

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Happy to hear your comment.
We submitted from the link you provided. Thanks.