THORChain plans to create a Protocol Insurance Fund that will both protect LP capital in unknown events, and act as a protocol controlled reserve benefiting token holders.
While builders and users can't prevent the unexpected from happening, we can get some protection in the form of insurance.
As many know, insurance is a financial product to safeguard you and/or your property against the risk of loss, damage or theft.
Third-party insurance is not ideal since it creates a complex dependency outside the network, and with a huge TVL, is prohibitively expensive.
To address this, THORChain is planning on implementing self-insurance in order to create a treasury of protocol-controled-value that can also act as an insurance fund in the event of an exploit.
The Reserve does backstop IL (Impermanent Loss) Protection, but it has a 100 day limit, is only in RUNE, and is not a dedicated fund that can be set aside specifically.
In addition, the Protocol Reserve is a static capital account that does not earn yield.
Add a Protocol Insurance Fund that in the first instance is reserved to protect LP capital in unknown events such as exploits.
The insurance fund is topped up by a small portion of the block reward (10%), and makes the protocol its own liquidity provider.
In addition, since it is yield-generating, the Insurance Fund can be used by the protocol:
The following methods are considered: