Coverage Section and LPs Rewards

Our community widely discussed permissionless coverage solutions against potential losses here and here.

Part of the conversation pointed out that users would be willing to use coverage/insurance products through Idle UI. We picked up these hints and worked on a coverage section for Idle dashboard that would allow users to buy coverage from multiple providers.

This tool can interact with any coverage protocols but, at the time of writing, only Cover Protocol would be available. Here’s a sneak pic of it:

Users can be Liquidity Providers, buy CLAIM tokens to cover their assets in Idle protocol, or buy NOCLAIM tokens (and get rewarded if no attack occurs on the protocol).

However, Cover’s pools for Idle’s smart contracts have very low liquidity (about 8k DAI). Such liquidity is not proportional to Idle’s TVL and purchasing coverage would be inconvenient due to the high premium.

We can have a couple of options here that we’d like to discuss with our community:

  1. Is there any interest from our Governance in providing an affordable coverage service? If so, liquidity providers should be incentivized through rewards. Some protocols are already rewarding Cover LPs (here). We should explore the effectiveness of such rewards on liquidity providing, as deposits vary from 100k DAI up to 10 million DAI (excluding BoringDAO, the average is 372k DAI). If we decide to take this path, a further cost-benefit analysis should be made.
  2. Are there other coverage protocols that can ensure affordable coverage without having to issue rewards? (e.g. that is running its own liquidity mining program)
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I think coverage seems really good, especially in light of the yfi hack (I lost 31 dai!). However personally I wouldn’t want to spend more than 10% of my yield to insure it. In practice that means ~1.5-2% of the total value of the investment (plus gas is expensive). I will look into it, but I’m also concerned that I don’t have any easy way to know how reliable this insurance is.

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Offering shield mining rewards is a good idea for bootstrapping the liquidity on the cover protocol. However, I think with any type of incentivisation program, it is important to think about liquidity retention. Perhaps we can do what indexcoop has been doing with the incentive program for staking DPI/ETH, where they keep renewing the liquidity incentives, but with lower rewards after each period.

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I would like a kid explanation how a coverage solution now would fit tranches development later?

I may be wrong, but my understanding is tranches help users manage risks related to Idle’s backend protocols, but any smart contract risks of Idle itself would benefit from loss protection that is independent from it.

Speaking of providers, I really like Armor’s vision. They’re quite new though and the product is not fully built yet, but that could also be an opportunity for early partnership. Protection is not a must-have feature in DeFI yet and Idle is not exactly under market pressure to deliver it.

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For those of you that want to try this new feature, we have now enabled Cover protocol in the Idle beta website!

In the tool section, you can try to buy coverage protection or become a liquidity provider.

Coverage purchases are then listed in the user dashboard and claims can be filled with a few clicks.

While we continue to discuss the long-term coverage approach here below, we would be thrilled to know your feedback on this experimental interface (some minor improvements affect fiat-onramp and token swap UX).

That’s a good question @unicorn, and @idal correctly presented the differences between coverage solution and tranche systems.

Despite those products having different use cases, they can provide similar coverage protection in some scenarios.

Here are some risks that an Idle user would face today:

Cover protection Tranche A protection Not covered
Funds completely locked/stolen due to Idle smart contract bug X
Funds partially locked/stolen due to Idle smart contract bug X X
Funds completely locked/stolen in underlying protocols X
Funds partially locked/stolen in underlying protocols X
Underlying asset default X

The loss of the entire pool’s TVL would be the worst-case scenario and it would be covered only by an insurance policy. No products are currently covering loss of funds in underlying protocols, but Tranche A could do this.

Furthermore, I’d like to share with you this personal thought: we need to allocate some hundred thousands $IDLE to incentivize deep liquidity provision in Cover to make economically sustainable the coverage purchase (e.g. the premium should be lower than 2%, so supposing an average Idle APY of 10%, the net user profit would be 8%). Liquidity does not come all together and premium adjustment would require some time to reach an affordable cost.

If we implement the tranche system, the end-user might get the same profit by buying Tranche A, which provides the average APY minus a premium (10%-2%=8%). The premium is addressed to Tranche B, but this “hidden” cost in Tranche A is equivalent to the purchase of a coverage solution.

The goal of Tranche A is the embedding of a sort of coverage protection, and everyone can directly buy that product to get that feature. The protocol does not need to incentivize LPs with $IDLE rewards.

Idle is in its early stage and we might think twice about capital allocation across deliverable tasks.

I agree with @ETM612 on this statement:

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