Risk Assessment and Mitigation

A major challenge for TIDAL mutual cover products is addressing insolvency risks by projecting the values of complex liabilities of DeFi assets and smart contracts under coverage.

Solvency, its adequacy and risk management, is at the heart of the operation of any insurance product, and underpins the prospect for TIDAL Protocol to contribute effectively to the overall DeFi ecosystem, and achieve the goals of the platform.

The first aim of TIDAL Protocol is to maximize the interests of the cover token holders through a properly kept and financially solvent level of reserve capital set aside for mutual cover. The establishment of effective risk management rules for the proper valuation of mutual cover liabilities and the establishment of provisions to support those liabilities is fundamental to the entire system, and requires a margin over and above the minimum requirement levels, as to enable the system to absorb unexpected adversities in an environment that’s as fast moving and unpredictable as DeFi.

TIDAL Protocol’s risk assessment and mitigation strategy can largely be discussed in two subcategories: risk quantification process, and pool controlling parameters.