Emilie Raffo - Slashing insurance - current landscape and sustainability

Transcript

okay thank you guys for joining us um I'm here to introduce you to Emily rafo who is the um co-founder founding partner and head of uh sales at chain security thank you for joining us Emily thank you hello hello everybody um so can I take this no that's not going to work um thank you very much for coming it's the end of the day and you know I know that Darren is speaking over there and still you chose me I'm incredibly thankful um I'm going to put a timer here oh hello oh amazing um so today I'll be talking to you about slashing insurance first of all I have to apologize the title uh says

sustainability and uh I didn't mean environmental sustainability I meant sustainability of business model so if you're here to talk about the environment I wouldn't be offended if you if you leave because there's no environment in this presentation um um so you might wonder why a smart contract auditing company would be talking about insurance and like clemont just said before um it's because a lot of people are asking us if uh you know we're planning to offer Insurance products so we started looking into you know uh would it make sense should we kind of start having the suffering also um the answer is no we're not going to do that um because it is indeed uh you know you have to insurance

is not such an easy thing as you guys might know uh you need to be a risk professional you need to raise Capital you need to do all these things and we prefer to keep focusing on what we do best the smart contract audits um but uh we still kind of interviewed a lot of people did some research and then I kind of found an interest to this insurance sector so this is why I'm going to be talking about this today and we also have some staking clients so this is also interesting for me in that sense um before starting I'd like to thank all the people who gave me interviews you have their Twitter handles there and if at the Q&A you ask me a question I can't answer I'm going to refer you to these people so you can ask me a question I'll I will ask them

um so yeah they give me interview so it's both on the kind of staking side and on the insurance side and uh yeah it was really uh invaluable for me to have their inputs and some of them are in the room today and I thank them again all right so um before talking about insurance I kind of wanted to uh talk about you know the different risks that you might want to insure and the different actors right so on the left um I've put the slashing risk on the right the downtime or offline risk um and so in terms of the slashing risk I kind of uh um have this kind of vision that as a solo Staker you're going to have less risk of slashing because you are less

likely to have this infrastructure for backups to avoid downtime so you're less likely to have this double signature right um so this is why on the solo side I've put the probability of slashing less but the probability of downtime of or being offline higher um for some of them for example for Rocket pool I've put kind of plus or minus because you can have professional uh stakers professional node operators and also solo so this is why it's kind of both um then in terms of the impact um so for solo stakers obviously the impact is fully assumed by the solo Staker um but then if you look and that's I think kind of interesting no operators like Lio or kind of this B2B so when I put no operator SAS so it's

taking as a service so kind of this professional uh stakers right um and there I've put the impact um a lot for Lio you're going to say okay but why it's not them who have the capital right so that's that's kind of strange but actually um in the fact um it seems that in order to preserve the reputation which is very important in the LI ecosystem right you have to perform otherwise you're is getting of boarded um so in the end uh there is kind of a higher risk that as a node operator you're going to have to pay back these slashing penalties to the Dow to kind of maintain your reputation and this is another side of the impact it's not only uh something that is financial it's also reputational and if you lose your reputation you lose your future ability

to earn because you risk getting of boarded or you risk getting limited um however for the professional nde operators more on the B2B so the saking as a service um so maybe more in a traditional business model offering these services to institutions and so on I've put the impact a little less um this is a personal take um because I I find that in a kind of traditional business model you have maybe a bit more stickiness uh when you know you have these business relationships that you create with people um and if you kind of cover the um you know the the penalties there is less chance I would say that uh you know your business partner kind of

leaves for for a few things whereas with Lio um you know there is a lot of um uh attention on you as a node operator and you really have to perform because you have all these dowo members who are going to be pushing to get you out if you don't perform um so for uh rocket pool I've put the impact as high uh because you know there is the collateral but there the reputational risk is less important and um for Diva you also have a collateral now in terms of the downtime uh so it's you know not a huge uh not a huge financial aspect of it um but again for Lio there is this reputation aspect um and also U most I I've looked at 11

no 10 cases of uh offline penalties and rewards missed and so on and also again it was the node operator who paid it back on a voluntary basis to maintain the reputation with Lio uh um and for Rocket pool and Diva I've put the impact not too high because there's less that reputation aspect and also these mrewards uh and the you know the penalties are socialized so all of this to say who would want to be insured in this whole thing so potentially the liquidity providers for uh you know uh rocket pool for Diva they wouldn't really want to be insured because they're insured by this collateral right so the people who are

taking this risk uh are the node operators they're the ones who have their collateral at stake so on this side potentially you know the they could be the ones who want to get insured now in terms of Lio and uh the you know the B2B staking providers it also depends on the contract and also sometimes the node operators take on that risk and take on these penalties even if they're not the ones you know contractually required to do so so in this case they might want to get insured but also the liquidity providers might want to get insured because maybe they don't trust the node operator to pay or or maybe they think okay this is too much of a risk to bear and the solo uh stakers might also want to get insured

because they have their stake there so um I compare these three um insurance providers uh it's obviously not the only three that exists um but you know it was kind of easy to find their data and to compare them um so yeah I took Nexus chain proof an in race and so the first thing uh obviously is the you know the fee so it kind of depends on the proposal so for example if you look at the uh Nexus proposal and the chain proof proposal for simple DVT for Lio uh you can see somewhere that went between 3 and 3.55% um but for example Nexus for figment offers it for 2.5% um what's interesting also is what

is excluded and I think that's kind of interesting interesting uh is that uh so the myrewards are quite often excluded but also if there's a widespread Network issue so more than 10% so so if you're looking to get insurance for a catastrophic event um you know this type of event might be uh might be excluded bugs of the client software are also often excluded from insurance um so yeah I think that's kind of interesting if you're looking comparing insurance providers kind of what is excluded is super important um the max available coverage is also very interesting um so this was the Max uh offered for again the simple DVT if you look at Nexus and chain proof and insurace is the Max uh

that is possible based on the capital that they have at the moment so you know in the other uh kind of defi insurances you've seen that um uh you know with the USD dpeg and all these kind of big events uh a lot of insurance providers had to pay very big premiums and kind of that wasn't great for the sustainability of their business model um so you have kind of these uh limitations in terms of risk that they want to expose themselves to because they want to be Diversified um so for example Nexus uh you can go up to 20% of their Capital pool to ensure one type of risk so I think that's like $ 56 million 27,000 e um it's in the next slide but um so yeah there are these limitations so that they would be

able to pay if the thing actually happens um the deductible is also super interesting because I said um if you have this huge catastrophic case maybe it's not going to be covered but also if you have this small case maybe it's not going to be covered because it's lower than the deductible right um so this is also something that's very important to to look at when you're picking an insurance provider something that's very interesting I interviewed uh you know these people and they haven't paid any claims yet so this is a very sustainable business model actually so um when you look at the rest of defi Insurance uh Nexus is actually the only insurance company in defi that has gotten more that has received more

premiums than they have paid um all the other insurance providers have paid more than they have received so it's a very very rough space and this is why we decided not to go in there um because people accept uh expect sorry very high returns uh if they invest you know in these Insurance Services um then the clients expect to pay low premiums and so it's kind of uh very very complicated to manage this this Tri trilemma also of keeping the funds safe of course um the kyc kind of interesting insurance doesn't doesn't request kyc um and then the other thing that's kind of very different is that chain proof is a uh a regulated Insurance um so if they don't

pay you can sue them so that's one thing whereas the other ones uh work on chain as we know kind of as Crypton native insurances um there's also realm there's also dsla uh there's also you know some insurance from BL demon with Munich Ray so there are other options but I kind of put these three because it was kind of you know three is a good number I guess um okay so who does what um Lio has opted for Self Insurance uh they used to be insured with UNS slashed and uh kind of the the conclusion of it is that it was quite expensive um so the the problem is that you know what I

showed you before this here so the yearly cost is in the percentage of the max value covered so it's not the percentage of what you make it's not the percentage of your profits so actually uh it takes quite a big chunk of your profits uh to ensure your your state e um so the Lio Lio kind of estimated that it was 25% of the revenue what they paid in insurance and they kind of thought that the risk wasn't really worth it to go with an external insurance provider so now they have this Self insurance so they have this fund um which covers uh these cases and uh we'll see afterwards a case and see how it was used and why rocket pool and Diva they have collateral so the not

operators deposit collateral um and then uh the B2B node operator so these taking as a service kind of these professionals more on the kind of a traditional business model um so uh it seems that often they suggest when you invest in them they suggest that you take an insurance um so you can take an insurance with figment or something with with some of these providers and then the liquidity provider is going to bear the cost of this insurance but you also see um in cases for example these cases here on top stake. us um it's a old slashing event um but it was their fault uh and they admitted to it and then they paid back their clients so we we can see

a lot of cases where where it's a trust-based business and when node operators commit a mistake it seems that they often pay for it um and then the launch node case so the two cases below are with Lio and um they're quite interesting so for launch noes it was quite recent it was last month and uh it was a mistake by launch nodes again double signing and so on uh because they had this backup that that was triggered and um they paid back again they paid back the dowo uh because it was their mistake and because they want to keep the relationship with Lio so there the Lio Insurance Fund wasn't even used it was the node operator Who Bore the cost of the slashing but with rock logic it was different so that happened in April

and um it was actually a bug uh in prism in the client software and there so it wasn't their fault U I mean some people argue with this but it was judged that it wasn't their fault um and there the Lio fund was used uh in this case because it was not the fault of the of the node operator so I think it's kind of interesting to compare uh these two where the insurance wasn't used um I mean the third part Insurance wasn't used and I think it's interesting to see okay what if they had an insurance with Nexus or inur race um again I took these two because it's kind of easy to uh to see the all the stats uh on chain um and

so what's interesting is that um first of with inace um there is a a maximum coverage right so if you look at huge node operators like launch nodes and rock logic who have you know hundreds of millions under the management um the max coverage uh wouldn't cover uh you know a big part they would only cover 0.24 eth per validator um some people might say it's enough some people might not say uh you know it depends on what how you see it but um in both cases with inace both events would have been covered um but the you know the fee I mean the kind of the claim that would have been paid back uh would not have been as much as the yearly cost of the insurance so uh

having a self Insurance could have been uh you know an alternative to this but interesting with Nexus The Rock logic case uh you know where it was a bug in the client software and then the Lio Insurance Fund paid for it um actually this wouldn't have been covered in the terms of Nexus um so I think that's kind of interesting to see um so this these are very rough calculations right I took e as 2K kind of you know just to kind of give a rough idea but I think it's really interesting to see okay uh am I am I ready to take this risk or no and is it worth paying for it um so if we look at number of slashings uh so it's from rated from this morning um you can

see that maybe it's I don't know so it depends you know kind of what is your risk tolerance um I'm very risk tolerant so I think I'm not sure but um you know the people I interviewed um they they kept mentioning that insurance is really and they think is for institutional actors it's for people who are regulated who want to offer um to their clients this extra insurance and maybe it's a little bux that should be ticked by the compliance team or maybe it's like car insurance where you know you sell car insurance because it's it's mandatory so um a few people that I interviewed kind of see the evolution of this insurance sector

for slashing to be connected with regulation and with the entrance of institutional investors and that maybe crypto natives kind of uh are dealing quite well with these um with these self-insurance Solutions so I'd like to thank again all the people who helped me with this and who gave me their insights and thank you guys for being here at the last presentation great so we have some time for a couple of questions if anybody wants to ask questions questions all right I actually have one um do you see uh Insurance kind of Disappearing as things can get

built-in protocol and like so if if Regulators in the future expected something inspected um some kind of insurance to be uh to come with some sort of protocol do you you think that that could be built in in a way that insurance wasn't necessary so having regulated Insurance built into the protocol um so I think there you would have to have Dows recognized by the authorities as a kind of regulated Insurance entity um for now there are not that many kind of Crypton native insurances that are regulated so yeah in the future where Dow our legal entities that are recognized I could see that yeah cool thank you very much thanks for

coming thank thank you [Applause] guys uh we have a five minute break and then we're going to have Jorge ar ar