Fractional DeFi Insurance

FIF is Web3-native and the first purpose-built insurance coverage for liquidity insolvencies, rugs, and smart contract vulnerabilities. The first coverage is liquidity insolvencies, liquidity risk events possibly occurring due to insufficient or poor liquidity in DEXes so that MEV bots can attack, and liquidity drains by third parties. The second coverage is rugs, a malfunctioning of protocol or team, causing significant market downturns. The final coverage is smart contract vulnerabilities, unauthorized, malicious, criminal attacks, hacks, or exploits of any malfunction or programming flaw. The insurance protocol coverage lasts up to the latest token vesting unlock that’s offered to platform investors. If the financing round was a public sale with a 3 months cliff followed by 12 months of linear vesting monthly, then FIF coverage ends up in the fifteen months of the token generation event.
How Protocol Works
We deduct fees as “premiums” to form an insurance claim pool from staking vaults. This pool is also reinsured by the reinsurance pool, which is 10% of our token reserves. These fees are automatically collected from staking vaults written in the smart contracts. The fee model is a 2% deposit and 2% withdrawal fee with 0% management fees. 50% of the collected fees will be circulated to the insurance claim pool and 50% of the collected fees will be split up into 2 as 10% burning and 90% treasury. This is how we collect “ghost premiums”. As the protocol’s name implies, it’s a fractional insurance model, targeting a minimum claim rate of 60% of the principal lost. If the insurance claim pool will be insufficient to cover the insurance claims themselves, then the reinsurance pool will be triggered to provide the remaining liquidity.
Unlike DeFi-native insurance protocols such as, the insurance policies are not for sale. Hence, OpenPad is not an insurance policy seller and users are not policy buyers, which makes the whole system risk-free in liquidity terms as no users have been guaranteed a certain rate of coverage payout. For users, it’s risk-free since they are not directly purchasing insurance policies. Moreover, since we’re not selling direct insurance policies and providing a guaranteed percentage of an insurance claim, there is no insolvency risk for the protocol as well. This is the effect of ghost premiums.
How Underwriting Works
As there are no insurance policies for sale, the underwriting process doesn’t end up with pricing the risk and policies. As OpenPad Labs, we have access to the company's due diligence information and require Web3 projects to meet certain criteria, such as an audit from a notable security firm (for smart contract vulnerability coverage), an official disclosure of company shareholders in both KYC-like verification, KYB checks and anti-money laundering (for rug coverage) and liquidity lock by a verified third party (for liquidity insolvency coverage). As those financing policies and criteria are needed from our end for projects to access financing and we’re scoring a risk based on our general due diligence, we’re capable of measuring the risk that others can’t do. This puts us in a very strategic position to assess risk and provide insurance.
Insurance Treasury Management and Revenue
As in the traditional insurance world, where revenue is generated either from non-claimed premiums or investments, we’ll be generating revenue in the exact same ways. In terms of investments, the current insurance investment protocol is the usage of bonding, selling OPN tokens at a discount to effectively access cash in stablecoins, and then putting them in short-term yield providers. As no payout is guaranteed to users, any flaw in insurance pool management won’t end up in any liquidity insolvency for users.
Insurance Claim
As insurance claims will be mostly paid out in OPN tokens, the 30-to-90-day vesting terms may apply to don’t shock the market. The insurance claims will be only claimable in pre-announced periods and any unclaimed tokens will be circulated back to the insurance pool for future claims.
FIF is natively integrated into tokenomics as a core token utility that makes tokens like insurance tokens. As FIF is a token demand driver, the “premiums” are like incentives to the platform. As FIF is only accessible to stakers and long-term project token holders, it incentivizes users to stake OPN more and hold project tokens more, promoting the long-term growth of OpenPad and the funded projects.
Who can claim insurance, and how is the insurance claim rate determined?
As FIF is more insurance-integrated tokenomics than traditional insurance provisioning, OPN is effectively used to access insurance. To be eligible, users should have invested in the staking round, an investment round only for OPN stakers. Users investing in the public round, an FCFS round if there are any unsold tokens, won’t be eligible. After the insurance claim triggering confirmation (details below), the insurance registration period will be open. Users claiming a principal capital loss should demand an insurance claim in the insurance registration period by signing an on-chain message reflecting their claim in the FIF. Then, to reflect the seriousness of the user and drive demand for OPN, users have to stake $100 worth of OPN tokens and lock them for a minimum of 30 days in the insurance registration period. After the registration period closes, our off-chain insurance engine will be calculating the total principal lost and corresponding users by filtering those who have invested more than $100 and whose capital loss is more than $100 based on the on-chain TXs as investors might sell tokens at any period between investment and FIF confirmation. Only buyers who still hold project tokens fully or partially will be eligible for the insurance. For example, if users flip the token after the token generation event fully, even she/he purchases another bag of the same tokens in the market, they won’t be eligible for it. Hence, only the principal loss in the OpenPad platform should be considered as a capital loss.
After the calculation of total capital loss and corresponding users with satisfying conditions, 60% coverage of the total capital loss will be regarded as the base and target payout. After the comparison between the insurance claim pool and the targeted payout to the users, if 60% is not achieved, then the insurance pool will be triggered to provide the remaining liquidity to cover 60%.
Insurance Vesting
Assuming that insurance payout in the form of OPNs will be directly sold off, to not shock the market, the 30-to-90-day vesting may apply if the total payout is higher than the 5% of the circulating supply at that moment.
How to decide on an insurance-triggering event?
It’s a three-stage process, starting with the community insurance declaration, followed by the 1-week-long insurance committee (advisory board) and final voting between OpenPad Labs and the advisory board.