Deposit Insurance for Decentralized Finance Projects

Project Details

Description

We want to develop a prototype smart contract implementing a decentralized version of a deposit insurance for token holders in the Ethereum ecosystem. Instead of a central entity controls market access in a decentralized system a token issuer or any other entity can lock any amount in Ether in a smart contract that is distributed to the addresses holding a particular token after the token has met a pre-defined failure condition. An example failure condition is when the exchange rate of the token versus below a threshold defined when the financer sets up the respective token value insurance scheme. Important considerations include: addressing moral hazard problems arising when the value of the collateral exceeds the targeted insurance amount, e.g. by capping payouts at a maximum fraction of the ensured value. Contrary to the FDIC insurance, a common risk pool seems problematic, as the prices of cryptocurrencies are highly correlated and attacks on pools of competing tokens are possible. In our initial design, we will therefore only incorporate isolated pools. The distribution of the insurance to the token holders is complicated by the presence of accounts that aggregate different holders like exchanges and the possibility to split accounts. One option is to separately deal with known accounts of exchanges and use ZK proofs of humanity, POAPs/SBTs for personal accounts. A simpler option is to apply a function concave in the token holdings to all accounts or to use a linear function.

Financing body

Ethereum Foundation
StatusActive
Effective start/end date7/08/2231/12/22

Austrian Classification of Fields of Science and Technology (OEFOS)

  • 502050 Business informatics