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Definitions
The amount of coverage that policyholders can obtain.
The amount of money available to back up the coverage. Policies in the same collateral pool share collateral, which is a common insurance concept known as fractional reserve. Because money will be earned from many policies, this design increases the return on collateral capital. More insurance also increases the likelihood of a payout (collateral deduction).
The capacity of any insurance is determined by the amount of collateral and the collateral ratio. For example, if there are 100 USDC in the liquidity pool and policy A's collateral ratio is 0.5, policy A's capacity is 200 (100 / 0.5), which means policy A can cover up to 200 USDC for policyholders at any given time.
The weekly premium is the payment made by policyholders to the collateral pool on a weekly basis. The goal of gradually adding premium is to allow more liquidity sources to participate in the collateral pool while sharing risks. It also generates a dynamic yield curve that allows LPs to forecast their potential earnings.
Each insurance policy has its own premium, which generates the profitability of the liquidity pool. Policyholder premiums will be directly paid into the liquidity pool, allowing liquidity providers to earn a percentage of the pool's deposit assets. The premium is paid out every week, and the LP can start receiving money as soon as the asset is placed.
If the collateral amount is insufficient to cover the outstanding purchased insurance, policyholders are repaid the uncovered amount every week. The uncovered amount for each policyholder is derived by multiplying his or her individual coverage vs. total coverage by the total uncovered amount.
E.g. Assume Bob has 100 USDC in coverage and the total coverage of all policyholders is 1,000 USDC. In the case of collateral deduction, the maximum coverage is reduced to 400 USDC (600 USDC as total uncovered), and Bob's uncovered amount is 600 x 10% = 60 USDC.
When collateral is insufficient to fund all triggered payouts, the pool becomes insolvent. A large leveraged pool (insurance coverage amount is significantly greater than collateral amount) and concentrated risk among policies (many policies triggering default at the same time) could lead to a high possibility of insolvency. Tidal, as a protocol layer, will enable transparency into the state and suggestions of each pool.
The duration of the policy is determined by the liquidity pool's withdrawal pending period, which is adjustable by the pool management. A short withdrawal pending period can only support short-term policies, but a long withdrawal pending period can support long-term policies.
As a management fee, a portion of the premiums can be directed to the pool manager.
The cost is optional, and the pool management may adjust it at any time. The goal of this type of design is to encourage pool managers to control liquidity and policy.
A percentage of the premium can be directed to the pool manager’s share in the collateral pool.
The fee is optional and can be changed at any moment by the pool manager. The goal of instituting a management collateral fee is to gradually increase the insurance pool's treasury through premium earnings. The treasury can provide a solid platform for policy backup as well as a source of funds for other investment options.
When liquidity providers remove capital, a % fee is paid. The charge is reinvested in the collateral pool as earnings.
The fee is optional and can be changed at any moment by the pool manager. The implementation of a withdrawal charge is intended to motivate LPs to keep their investments and stabilize the collateral amount.
Last modified 4mo ago