Smart contracts have enabled widespread innovation with blockchain technology, but flaws in their codes have led to hacks that saw millions of dollars stolen from users. It has become an unprecedented situation where market participants are underestimating the risk of protocols they’re invested in.
To overcome these unknown vulnerabilities, we need a sophisticated asset protection technique with no limitations to a specific project or event. We need a solution that can insure users without charging high premiums. Network staking can be a promising way to eliminate bottlenecks in the system and settle claims in a decentralized manner.
What is Network Staking?
Network staking is an evolution in DeFi cover liquidity. In this system, contributors stake the entire network, not a specific project. This allows contributors to hedge the risk of loss while participating as a cover provider. Since the stakeholder assets have been diversified, losses related to any particular project have little effect on their position. This low correlation of risk leads to improved capital efficiency, which drives staking rewards over time. The amount of diversification makes it possible to cover multiple chains, projects and loss types under a single cover offering.
The benefits of network staking are unmatched for both stakeholders and users seeking cover. This low risk, high rewards staking model provides the widest and most fair cover. Not only does this improve the cover offerings, the diversified model provides underlying protection for cover providers. In this system, it is possible to afford users the same benefits found in traditional insurance offerings, only democratized through the use of DAO.
But the question is, why do we need a new insurance model for DeFi?
Existing Problems in DeFi Insurance
Currently, DeFi insurance protocols are variations of the same risk model, “project pools”. Some have improved the tokenomics or elected to offer pools for different cover types, but the cover mechanism remains the same. In these models, it requires contributors to stake specific projects in order to offer cover. The concept is simple. In the event of a loss to the project users, stakeholders are liquidated to the amount of the loss. Which in extreme cases, could be a total loss of your staked assets.
Due to this high correlation of risk, project pools are capital inefficient as they require fully collateralized cover positions. The cover is limited to the amount staked into the pool, severely restricting the availability of cover and the amount of rewards that can be earned. Furthermore, if a pool has not been created for a particular project, no cover exists, leaving the users completely unprotected.
Leading Defi insurance protocols today use a “stake to vote” model when assessing claims in their system. Due to the project pool or liquidation model, stakeholders face a financial dilemma to vote fairly. If they vote in favor of a claim, they will be liquidated to cover the payout. This system puts in question the fairness of the claims process.
The Solution: Network Staking with a Cost Sharing Model
As a necessary risk management strategy for crypto holders, decentralized insurance has become a rising sector in the crypto space. Unfortunately, participation from contributors is low due to the high risk, low reward. While user demand for the current product offerings has proven there is work to be done. Network staking is a promising innovation that relies on elements of traditional insurance risk models to provide more inclusive cover and protects the stakeholder interest.
FairSide Network has pioneered network staking while introducing DeFi cover as a cost sharing model. Using this diversified staking model, FairSide has introduced blanket coverage, a cross-chain, cross-project, multiple cover approaches to protect the members of the network. One membership, one low fee. The community-based DAO depends on its members to guide the direction of coverage determining which cover types will be included in membership.
Having a membership in FairSide enables users to explore the opportunity of DeFi, while being protected from unknown threats facing crypto holders. FairSide has implanted an augmented bonding curve to self-regulate the solvency of the network. This important mechanism works to ensure access to available capital to cover cost share requests of its members.
Network staking has increased the capital efficiency to 10x. Capital efficiency is the ability of the network to safely leverage assets in the capital pool. This allows FairSide to offer more coverage and generate more fees (premium), when compared to the same amount of capital held by leading competitors.
This new innovation in DeFi cover not only solves the issue facing contributors, but the broad-based cover approach also fulfills the needs of the user. Network staking aligned with cost-sharing, could revolutionize the DeFi insurance market for the greater good.
The Ceiling for Network Staking in DeFi Insurance
The cryptocurrency and DeFi space have massive room for expansion. And when we reach mainstream adoption, it is paramount to have a reliable asset protection technique that ensures users in a decentralized way. Network staking can offer exactly that and more. With the DeFi insurance markets evolving, we can expect the capital models of these platforms to become even more efficient, which helps fulfill significant market demand.
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