A new Delphi Digital proposal wants to alter Aave’s safety module and to create a new insurance product offering as we can see in our latest altcoin news today.
A lot of changes are coming to Aave and its $375 million insurance pool in what was a huge celebratory community call that was devoted to commemorating Aave’s anniversary which means it made a full year on the ETH mainnet. However, there was also a look into its possible future as the new Delphi Digital proposal want to make a few changes.
Right now, Aave’s governance holders can stake their tokens in the Safety Module which is a pool of liquidity designed to help ensure the protocol against unwanted events such as a smart contract exploit. The stakers risk up to 30% of the funds they lock in the Module but then they earn a yield in return which is now 4.66%. The safety module pool attracted about $375 million in deposits which makes it the largest decentralized insurance fund of its type.
According to Jose Maria Macedo and Jonathan Erlich, the analyst at Delphi Digital, there are a few flaws with this system. For example, the Security Module covers the entirety of the platform which means it is quite hard to determine the market appetite for coverage and there are also systematic risks with each new project listed on Aave. All depositors are covering the projects at different individual levels of risk with the same rates. The Delphi Digital proposal wants to overhaul this 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. This makes it possible to compute cover demand and capacity precisely and thus price risk using market mechanisms.”
Appreciate the written version was TLDR for many and we will be summarising the key points and takeaways today
See you there https://t.co/OMRRtZlPAe
— José Maria Macedo (@ZeMariaMacedo) January 8, 2021
The proposal will add an option for the depositors to have a covered deposit or if they want an uncovered one, with the covered deposits offering low-interest rates and to be able to account for the cost of the insurance. This will allow the development of a robust and complex market between Safety module stakers that work within different risk tranches and the depositors that have a bigger capital efficiency as they can choose the degree of insurance they need:
“We believe [this] design is more efficient because rather than imposing a uniform insurance cost across all Aave money markets, it can instead price each asset independently based on the specific risks associated to it.”
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