Traditional (Underwriter) Coverage
Traditional Coverage protocols operate off of a few key principles
- Large initial funding of capital required to underwrite coverage.
- Premium based model, pay a % value of the covered assets for duration of policy.
- Immutable – once terms of contract is set, they remain the same for the duration of the policy.
- In the event of loss, user must submit proof of loss to policy provider, in which they decide if claim is paid out.
In short, traditional coverage requires large amounts of startup money for the company, and incurs large recurring fees on the user, that don’t necessarily guarantee the pay out of a claim.
RCA coverage is a DeFi native model that leverages the strengths of the blockchain to the benefit of the user
- No large amounts of initial funding required. Fund’s in the ecosystem underwrite themselves.
- No premiums for users, a payment only occurs in the event of a hack.
- No policy contract, once the the ecosystem user funds are covered in perpetuity, for their exact value.
- No proof of loss required. If a hack occurs, the DAO votes to recognize it, and other vaults in the ecosystem are automatically liquidated proportionally to the loss that occurred. No action needed by the user.
In short, RCAs require very little startup capital and reduce the burden on the user by removing, premiums, contracts and the need for proof of loss when a hack occurs.
A Closer Look: Black Swan Event
An event no one hopes to see, but one that should be prepared for, lets take a look at how each model handles such an event.
- For risk assessors (users who provide the underwriting funds) to make a profit on their risk, most protocols allow them to stake utilizing leverage (an upwards of 20x on some traditional protocols)
- With 20x leverage, this means there is only 5% value actually staked of the total available cover capacity being sold to users.
Meaning, if a black swan event that caused a loss equal to that 5% of the total cover capacity. The underwriters would be at risk to become insolvent. Also, most of the risk providers are also those who vote on whether to pay out claims. This creates a direct disincentive to pay out claims, as they are voting to bankrupt themselves.
- RCA’s don’t have underwriters, since the funds in the ecosystem provide the collateral. Also, with no premiums ever charged, a leveraged position is not needed to generate profit.
Meaning, in the event of a black swan event the ecosystem would never be overleveraged versus what is lost in a hack. Since risk is shared proportionally between the userbase, a larger hack results in larger payouts by users, but will never result in complete solvency like in a traditional model, creating a much more resilient coverage model.
In short, RCAs provide a much more resilient coverage model against black swan events, where a traditional model runs the risk of bankruptcy due to the need of providing leverage to risk assessors to ensure enough profit is generated.