In a largely celebratory community call devoted in part to commemorating lending protocol Aave’s January 8th “Aaveversary” — a full year of Aave on Ethereum mainnet — there was also a look into Aave’s possible future: a proposal from Delphi Digital seeking to fundamentally alter Aave’s Safety Module and create a new insurance product offering.
Currently, $aave governance token holders can stake their tokens in the Safety Module, a pool of liquidity designed to help insure the protocol against a “shortfall event” such as a smart contract exploit. Stakers risk up to 30% of funds they lock in the Module, but earn a yield in return (currently 4.66%). The Safety Module pool has attracted nearly $375 million in deposits, comfortably the largest decentralized insurance fund of its type.
However, according to Jose Maria Macedo and Jonathan Erlich, a partner and an analyst respectively at Delphi Digital, there are a variety of flaws with this current system. For instance, the Security Module covers the entirety of the platform, meaning it’s difficult to determine market appetite for coverage; there are additional systemic risks with each new project listed on Aave; and Safety Module depositors are covering all projects at different individual levels of risk at the same rate.
The Delphi Digital proposal seeks to overhaul the Safety Module system and create a market-based solution to these flaws.
“In our most recent proposal, rather than insurance being bundled in with all deposits, it is instead offered as a separate product on the demand side,” said Macedo and Erlich in an interview with Cointelegraph. “This makes it possible to compute cover demand and capacity precisely and thus price risk using market mechanisms.”
Their proposal would add an option for depositors to have a covered deposit or an uncovered one, with the covered deposits offering a lower interest rate in order to account for the cost of the insurance. This would…