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The proposal aims to redesign Aave’s $ 375 million security module

In a largely solemn community appeal, partly dedicated to the commemoration of Aave’s “Aaveversary” credit protocol from January 8th – a full year of Aave on the Ethereum mainnet – there was also a glimpse into the possible future of Aave: a Proposal from Delphi Digital aiming to fundamentally change Aave’s security Modulate and create a new insurance product offering.

Currently, holders of $ aave governance tokens can use their tokens in the security module, a liquidity pool that is intended to help secure the protocol against a “shortfall event” such as a smart contract exploit. Stakers risk up to 30% of the funds they tie up in the module, but in return achieve a return (currently 4.66%). The security module pool has attracted nearly $ 375 million in deposits, by far 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 needs for the coverage; there are additional systemic risks with every new project listed on Aave; and security module inserts cover all projects with different individual risk levels at the same price.

Market solutions

Delphi Digital’s proposal aims to revise the security module system and create a market-based solution to these deficiencies.

“In our most recent 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 use market mechanisms to precisely calculate coverage requirements and capacities and thus the price risk.”

Their proposal would add an option for depositors to have a covered deposit or an uncovered deposit, with the covered deposits offering a lower interest rate to take into account the cost of insurance. This would allow the development of a more robust and complex market between security module stakers working in different risk tranches and depositors with greater capital efficiency as they can decide for themselves 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 value any asset regardless of the specific risks involved, ”said Macedo and Erlich.

Perhaps most excitingly, this system could become a “generalized insurance product” from Aave to compete with projects like Cover and Nexus Mutual.

“With existing insurance solutions, users must purchase insurance cover in advance that entitles them 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 buying / selling process is completely abstracted. “

VCs in DAOs?

The proposal stands out not only for the potential introduction of a whole new line of products into the Aave ecosystem, but also for who designed it: Delphi Digital, while providing research and advisory services, also hosts a venture capital division.

Because of their open, permit-free nature, DAO-driven projects like Aave can accommodate all types of members, including VCs. However, many observers have criticized projects for raising venture capital prior to the decentralization of governance, believing that the influence of centralized entities can conflict with the visions and goals of a wider community.

However, in the case of Delphi, they may demonstrate how VCs can help move a project forward.

“Capital is abundant in crypto, and when we invest in a project our goal is not only to invest money, but also the intellectual capital and time our team has to move it forward,” said Macedo and Erlich. “We’re working on several proposals right now, and we have a long backlog of ideas for suggestions and changes we’d like to make to others.”

While this type of activism undoubtedly benefits Delphi’s profits, it’s also a bigger bet on the future of DAOs in general.

“In terms of DAOs, we see them as the next evolutionary stage in human coordination. In the long term, we believe that the long tail of organizations will be structured as DAOs, making use of their internet native, limitless character and efficiency. “/ Automation advantages they offer.”

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