In a largely solemn appeal from the community, which is partly dedicated to the commemoration of Aave’s January 8th “Aaveversary” credit protocol – a full year of Aave on the Ethereum mainnet – a look at the possible future of Aave was also thrown: a proposal from Delphi Digital to transform the security of Aave. Modulate and create a new insurance product offering.
Holders of $ aave governance tokens can currently use their tokens in the security module, a liquidity pool that is used to secure the protocol against a “false event” such as an intelligent contract exploit. Stakers risk up to 30% of the funds they lock in the module, but earn a return (currently 4.66%). The security module pool has attracted nearly $ 375 million in deposits in what is arguably the largest decentralized insurance fund of its kind.
However, according to Jose Maria Macedo and Jonathan Erlich, partner and analyst at Delphi Digital, there are a number of shortcomings with this current system. For example, the security module covers the entire platform, which means that it is difficult to determine the market’s appetite for coverage. With every new project listed on Aave, there are additional systemic risks. and inserters of the security module cover all projects with different individual risk levels at the same rate.
Delphi Digital’s proposal is intended to revise the security module system and create a market-based solution for these deficiencies.
“In our latest proposal, the insurance is not bundled with all deposits, but offered as a separate product on the demand side,” said Macedo and Erlich in an interview with Cointelegraph. “This makes it possible to precisely calculate the demand and capacity for cover, and thus the price risk, using market mechanisms.”
Their proposal would add an option for depositors to have a covered or uncovered deposit, with the covered deposits offering a lower interest rate to account for the cost of insurance. This would allow the development of a more robust and complex market between security modules operating in different risk tranches and depositors to increase capital efficiency as they can decide what level of insurance they need.
“We believe [this] Design is more efficient because it does not impose uniform insurance costs for all Aave money markets, but can instead value any asset regardless of the specific risks involved, ”said Macedo and Erlich.
Perhaps most excitingly, this system is becoming a “general insurance product” from Aave to compete with projects like Cover and Nexus Mutual.
“With existing insurance solutions, users must purchase cover in advance that entitles them to be insured according to a specific protocol for a specified period of time (usually at least 6 months). With DeFi as it stands, most users don’t know where their capital will be next week, let alone in 6 months […] With our architecture, users only pay for insurance while they’re using it, and the buy / sell process is completely abstracted. “
VCs in DAOs?
The proposal is notable not only for the potential introduction of an entirely new line of products into the Aave ecosystem, but also for those who developed it: while Delphi Digital offers research and advisory services, Delphi Digital also hosts a venture capital wing.
Because of their open, permissionless nature, DAO-driven projects like Aave can accommodate all types of members, including VCs. However, many observers have criticized projects that used venture capital prior to governance decentralization, arguing that the influence of centralized entities can run counter to the vision and goals of a wider community.
However, in Delphi’s case, they may show how VCs can help move a project forward.
“Crypto is abundant. When we invest in a project, our goal is not only to invest money, but also the intellectual capital and the time our team has to put it forward,” said Macedo and Erlich. “We are currently working on several proposals and we have a long backlog of ideas for suggestions and changes that we would like to make to others.”
While this type of activism undoubtedly benefits the bottom line at Delphi, it’s also a bigger bet on the future of DAOs in general.
“In terms of DAOs, we see them as the next evolution in human coordination. In the long term, we believe the long tail of organizations will be structured as DAOs, taking advantage of their internet-native, limitless nature and the efficiency / automation advantages that they offer. ”