Report said that a proposal from Delphi Digital is seeking to alter Aave’s Safety Module and create a new insurance product offering, as a full year of Aave (Aave’s January 8th “Aaveversary”) on Ethereum mainnet, there was also a look into Aave’s possible future.
It has been reported that $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.
However, stakers risk up to 30% of funds they lock in the Module but earn a yield in return. The Safety Module pool has attracted nearly $375 million in deposits, comfortably the largest decentralized insurance fund of its type.
According to Jose Maria Macedo and Jonathan Erlich, a partner and an analyst 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 the 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 report said that the Delphi Digital proposal seeks to overhaul the Safety Module system and create a market-based solution to these flaws.
Macedo and Erlich said:
“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.”
Likewise, 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 allow the development of a more robust and complex market between Safety Module stakers working within different risk tranches and depositors greater capital efficiency as they can decide what 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.”
Furthermore, this system could become a “generalized insurance” product from Aave designed to compete with projects like Cover and Nexus Mutual.
Macedo and Erlich said:
“With existing insurance solutions users have to purchase cover upfront which entitles them to insurance on a given protocol for a set amount of time (generally at least 6 months). With the current state of DeFi, most users don’t know where their capital will be next week let alone 6 months from now […] With our architecture, users only pay for insurance while they use it and the process of buying/selling is abstracted away entirely.”
Thus, they concluded:
“In terms of DAOs, we see them as the next evolution in human coordination. In the long-term, we believe the long tail of organisations will be structured as DAOs, taking advantage of their internet-native, borderless nature and of the efficiency/automation advantages they provide.”