Eminance has nothing to do with YFI. Anyone who lost money in eminance would still be out of luck because it is not like YFI should protect holders of alternative coins. Or is anything Andre related now our responsibility as well? This is what I mean about people have to self-insure because this is the wild west. And I think it is extremely foolish to try and replicate FDIC insurance for DeFi when nothing in DeFi is safe. The funds that you hold on reserve can become worthless over night. Everyone who wants to buy into a vault or the YFI token should know that all money at risk is subject to TOTAL loss. No mincing words about it.
4 Likes
Your points about Eminence having nothing to do with YFI are extremely debatable. Regardless, it was just an example. Anyway, the whole point of vaults is that they are supposed to be safe, delta neutral ROI for users, so including this protection actually does make sense imo.
Again, I donât understand why you guys seem to think there is immediately going to be a 100% loss of all YFI user funds that will need to be covered. With that said, this would likely need to be implemented once we have more rewards flowing to governance. Right now the cash flow is not enough. I agree on that part.
1 Like
I just updated the model with the new AUM suggestion which leads me to agree with @hellomoon54321 and @ejbaraza , the fund could never cover a significant part of TVL. (3.3% after 15 years)
However, I still believe that some sort of capital pool that serves the saftey of users is a good way to build a moat and get more trust.
Different approach:
We could offer vault-specific, optional insurance to users, where they pay an affordable premium. Right now with yCover you can insure against external smart contract risk, so we would not even compete with NXM and our yCover product.
The goal should be to provide affordable and available insurance for isolated vault risks (especially important for new vaults). The pricing is dynamic and depends on how much of the insurance pool is already blocked for coverage. (a range of 1-10% annualized premium appears reasonable to me, following some utilization curve. Doesn´t have to be linear, we could get inspiration from mechanics in Aave lending.)
This pool would be funded again by YFI holders, vault creators, the premiums of users and autonomous growth by investing unused capital into some strategies (lending and selected vaults - determined by YFI governance).
The insurance fund ceiling would be determined by YFI governance and can be increased/decreased by voting. Again, the spillover kicks in when the pool is overfunded by a certain margin. At fully funded state, the insurance âtaxâ on vault creators and YFI holders is lifted until it becomes underfunded again.
What do you guys think?
Edit: I will come up with an excel simulation later if there is interest.
It seems like weâre risking re-inventing the wheel somewhat. Forgive my naivety, but can we not gett insurance from NXM now if weâre concerned about the risks?
I think the primary benefit here is that YFI would gain a âmoatâ that would make users feel slightly more secure using Yearn products.
I think the nature of Yearn products is heavily reliant on other projects, so a bug/exploit in one of their codes could negatively impact Yearn.
Then we have the matter of voting when there is something negative that happens, would the the community vote to cover losses when it would cost them personally? Or would they vote not to cover the losses and potentially give yearn bad PR?
I donât think the insurance route is a bad thing to be looking at, but i wonder if we could potentially look at working with NXM (or COVER/ARMOR?) more and letting them do what theyâre good at while the Yearn team focuses on what theyâre good at?
1 Like
I think we can kill two birds with one stone using Cresco Finance. They offer an insured risk-free rate of return which can be the reserve asset for DeFi. Then all of the money legos are built on top of it. This would increase ROI and reduce the psychological barrier to entry (i.e. high-risk). Check them out at: https://defi.crescofin.ch/replacing-banking-with-code/
I keep my answer short this time:
- If you partner with NXM, there is no moat. Anyone can do that.
- We can offer different / better rates, making the service attractive
- it increases YFI income
- it is a complementary service to NXM insurance, covering a distinct risk
- Even in the traditional world there is a bunch of different, large insurance companies. Not just one.
- YFI holders would be utterly stupid to reject a valid claim. Losing trust in a heartbeat costs more than any insurance payout. I don´t think we are stupid.
1 Like
First of all, they are not decentralized yet. Why should we go backwards? If they become decentralized one day in the future, new possibilities open.
Next thing, they offer lower interest rate for depositing the same asset that you deposit in yearn. Dai for example at 3%.
There is only 1 upside: Insurance. (Funny, they even talk about institutional clients. Haven´t I said it´s important to bring yearn to the next level?)
They have 3 downsides: centralization + lower yields + yet another layer of external smart contract risk.
Clearly not the way to go. But we should learn about what new players bring to the table and adapt fast. Safety, safety, safety.
1 Like
I personally think the absolute best use of funds is on hiring the brightest minds in crypto to work on yearn. The best developers (e.g. bantg, the guy from maker who moved over but I canât remember his name), the best security experts (e.g. the one yearn wants to poach to start the audit academy) and the best marketers (e.g. bluekirby, chainlinkgod).
These investments in the very best people will compound over time and should give users comfort in the product quality. As has been witnessed in the recent defi craze and silly EMN saga, people will ape into things regardless of audits, insurance or even any due diligence so letâs not waste money on a non-existent problem that we canât even scratch the surface of.
1 Like
I think this entire thread come down to this: âpeople will ape into things regardless of audits, insurance or even any due diligence.â We should not waste precious resources on protecting degens because they have no loyalty to the protocols they use just to the profit they generate. As such, we should just focus on being the most profitable and relatively easy to use yield farm in DeFi.
I think that´s a short term mindset. Having the degens in the beginning is nice for bootstraping. But when we talk about getting TVL to 100x of today we need to focus on a different user group.
Trust me, big capital is entering the space. We already see it in BTC purchases by big companies. Why do they buy BTC but nothing else? Safety.
If we don´t build systems for them, they will build their own systems. And we lose out long term.
The two major purchasers of bitcoin are known bitcoin maximalists. The reason that they bought bitcoin is because it is a PoW blockchain and eth is PoS. Claiming that because they are buying bitcoin that it will somehow lead them to buy eth down the line is disingenuous since you are comparing apples to oranges. The large institutional money like Paypal, Visa, Mastercard, Chase, etc. are not going to buy into anything eth related because eth renders them obsolete. They want to buy bitcoin to be able to build payment rails that they can monetize/monopolize. Eth represents an existential threat which is why they will never jump on board to their biggest competitor. Also, if we really want to insure peopleâs funds why not just use the aforementioned wCRES token as a reserve asset instead of yUSD. In other words, Yearn would yield farm CRV or some other token and dump for the sake of buying wCRES tokens. This way everyoneâs profit margin is guaranteed to only go up. Regardless of a smart contract hack, the principal plus interest is guaranteed by Lloyds. We donât have to get directly involved with any underwriting or set aside funds to insure deposits. Personally, I would like to have the option of having vaults that accumulate the same token as the one deposited (e.g. yETH) and another vault that uses the same strategy but sells ETH for accumulating wCRES. This would give people the flexibility to take more or less risk. Similar to a AAA-rated bond and a BB-rated bond.
Guys,
There is definitely value to having some form of insurance associated with yearnâs brand - this would help emphasis our focus on safety.
If us allocating a small section of the revenue over time does not cover any meaning full portion of the TVL. How about we keep an eye out for promising insurance protocols like COVER,ARMOR etcâŚand see if any of them have interesting solutions to address these issues and if any of them show promiseâŚuse the funds we have earmarked/or come up with a vault strategy to acquire one of these upstartsâŚ
âŚif we keep our eyes and ears openâŚmay be the solution to this problem comes in an unconventional wayâŚ
I was thinking again about the prospect to partner up with existing insurance protocols. After listening to a few interviews with Andre - what a briliant guy by the way - one of his sentences struck me. I´m paraphrasing but he basically said, work with the guys who are already good at it and let them do their job (different context but applies here as well).
I see 4 major challenges:
- yearn can´t amass enough capital fast to cover a meaningful insurance for all users out of our poket
- External insurance liquidity for new smart contracts is generally low, causing high premiums.
- Just integrating external insurance protocols doesn´t build a moat
- This feature should be a long term driver of YFI profits, not a money sink
New solution:
- make this feature optional and integrate it on the front end at a prime location so people see it (like directly next to the vault deposit button)
- partner with [insert name] insurance protocol to set up the infrastructure for individual vault insurance. Or just expand the partnership with NXM.
- use a portion of the YFI rewards to build an insurance capital pool
- use this capital pool to stake on our vaults within the partner insurance protocol, i.e. providing insurance liquidity
Advantages:
- less overhead because we partner with experts
- cross-selling / cross-marketing opportunities
- the more capital we stake on our vaults, the lower the insurance premium for users
- Profit machine: the pooled capital is put to use and generates interest for YFI holders
- because of herd mentality and a kind of âsocial proofâ, bigger insurance pools draw even more external capital. Again reducing the premium for our users by âleveragingâ our capital.
- Moat: given the current dynamics, no yearn clone could offer insurance rates on their platform that can compete.
Classical win-win-win situation
Do you guys see any other challenges that need to be adressed? What do you think?
PS: @hellomoon54321 I agree that having the best people in the space working on this project is invaluable and should be first priority. Still, we should always think about how to add value for users and how to build additional moats. Why not build a Fort Knox business model if we get the chance to? 
2 Likes
Awesome!! that is a great summary. This kills many birds in one stone! Build a moat, earn from it, help other protocolsâŚwhile also getting the insurance that we need! 
2 Likes
An economic model that grows the ecosystem in a rewarding and sustainable fashion;
2. a capital model that effectively utilizes capital while maintaining solvency;
3. a pricing model balancing the supply and demand curves while adjusting dynamically to macro conditions.