[For Discussion] Alpaca Insurance Plan

Background

With the upcoming change to the Government Vault (AIP-24), there could be an impact on behavior of stakers with the new locking / unlocking mechanism. We want to make the community aware of these potential dynamics and decide whether to make any adjustment to the insurance plan.

Rationale

The Alpaca Insurance plan funds the coverage through the portion of the protocol revenue that would go to the Governance Vault stakers. As it would currently work, if there is a large amount on the insurance plan to be paid, the first order effect would likely be for some users to unlock and sell ALPACA due to the anticipated lower yields.

Please note that this is different from the old format because with the new Governance Vault staking format, users only require 21 days to unlock.

The above effect will continue until the new equilibrium is reached, which would likely be a lower staked APR% and selling pressure on ALPACA from people who exited their positions.

Execution

We list below potential approaches we can take as a basis to kick-start the community discussion

Keep the plan as is

  • Leave the plan as is and let the market force plays out if insurance plan is activated

Establish an active insurance fund

  • Instead of paying the cover through future revenue, establish an active reserve to pay out in the event where insurance is activated
  • Note that for this option to work, we would need to build up the reserve and might require some adjustment in how the current protocol revenue is distributed - e.g. redirect a portion of the burn to build up reserve

Reduce a cap on the max amount and/or duration we would payout

  • The current Insurance Plan would pay out up to 1 year.
  • This option would reduce the duration of the payout and/or put a cap on the max amount to be paid out for a given incident

Increase the penalty / time for withdrawal if the insurance plan kicks in.

  • Might not fully solve the problem as people can still front run prior to the finalization of the Governance vote to activate insurance plan

Abolish the Plan

  • Eliminate the insurance plan entirely, and let users purchase their own cover as offered by 3rd party protocols
4 Likes

Iā€™d personally vote to abolish at this stage.

Insurance is a good idea and works well optics-wise, but it also introduces controversy within the community.

And - as you mentioned - there a lot of companies that offer the service if someone wants to purchase it

3 Likes

Eliminating or creating an active insurance fund with burn reserve seems like decent options to me.

This topic has now been created into an AIP for voting. Any additional comments can be made in the new thread:

1 Like