At the center of the TIDAL functionality are the TIDAL mutual cover pools and the corresponding Reserve Smart Contract. Each such pool will be set up to provide cover for a combination of cryptocurrency contracts or assets. This allows the reserve funds to be used as a form of fractional reserve, allowing various levels of leverage, yields, and risks for LPs, depending on the reserve ratio, and the correlation between the covered assets.
Each mutual cover pool is governed by a Reserve Smart Contract where reserve funds are provided by Guarantors and LPs, and the corresponding cover token is issued that provides coverage for the specified DeFi protocol and token(s) for the specified period of time.
There may be multiple Mutual Cover Pools and Insurance Reserve Smart Contracts covering different assets, Mutual cover purchasers are able to search through insurance pools to find the coverage they need.
Pool Creation and LP participation Mutual cover pool can be created by selecting multiple protocols and assets to be covered. For example, the coverage could be a mix of protocols (Compound, Uniswap, Aave, Balancer, Curve, Synthetix, mStable, etc). Initially Tidal intends to offer a few pools with different risk levels, the detailed risk criteria and protocols inside each pool will be released at launch. New protocols can be added into the pool overtime depending on its risk profile.
LPs can quickly participate in any mutual cover pools and get exposure to the protocols they are interested in providing cover, from where they can leverage their capital to provide cover tokens, earning yield from multiple protocols.
Pool statistics are displayed and monitored to help the LPs and buyers in selecting the product that best suits their needs.
Users can also view the pool statistics by total amount of covers available, cover amount sold, Guarantor capital ratio, total payout to date, total premium earned, and so on. Users will also have their own statistics dashboard to monitor their reserve capital and cover status.
To assist in preventing insolvency of created mutual cover pools, TIDAL will set certain constraint parameters at launch that mitigate the risk exposure of each pool. This action is performed by several controlling algorithms, and can be adjusted through community proposals.
A few rules TIDAL intends to implement at launch are listed below:
The risk exposure level cannot go above a certain level, dependent on the correlation of contracts inside the pool, and the assessed risks of the assets;
Certain coins will be flagged due to their un-audited status which will limit the level of exposure from LPs capital;
The covered duration would also be limited to weeks instead of years, compared to traditional insurance products, due to the speed that the DeFi landscape changes.