Governance Vault Part 2 Is Here! Early Withdrawal, Governance & Insurance Plan!

Dear alpacas,

We senior alpacas want to thank all of you for the votes of confidence you’ve given us by locking your ALPACA in the Governance Vault. In less than 1 month, you’ve locked 32% of the circulating supply(~49.5M ALPACA) for an average lock time of 36.6 weeks!

https://gov.alpacafinance.org/

Now that’s some solid belief in us, and we appreciate it. However, until now, we’ve only implemented the first part of the Governance Vault: revenue sharing. Yet, there’s a lot more on the way.

Today, we’re going to explain our plan for how we’ll help you turn your votes of confidence into real governance votes. Below, we’ll introduce three new aspects of the Governance Vault that we plan to implement soon:

1. Early Withdrawal(with a penalty)
2. Governance(Proposal Creating and Voting); and
3. Alpaca Insurance Plan

🕐Early Withdrawal

During our discussions with the Herd, some of you requested an early withdrawal function(with a penalty) from the Governance Vault in order to give some flexibility during emergencies and to make the positions more liquid. Since listening to our users is one of our team’s most valued tenets, we’re going to build this feature for you.

Early withdrawal will be possible, which will give more confidence to ALPACA holders who have not yet locked up, and should further increase the % of locked tokens and the average lock time, effectively decreasing potential selling pressure on the open market, and boosting ALPACA price.

Of course, there needs to be a sufficient penalty so that those who would consider early withdrawal could not game the mechanism by choosing a long lockup duration for higher APR, and then withdrawing early. We need to keep it fair for all participants. After all, the substantial platform revenues shared to the Governance Vault are meant for loyal ALPACA holders. As such, the penalty for early withdrawal will be 0.75% of the withdrawn amount per week of remaining locked time.

Half of the penalty will go towards weekly burn while the other half will be distributed as rewards to the Governance Vault’s stakers in the following week.

Example:

Alice wants to perform an early withdrawal of 100 locked ALPACA from the Governance Vault, but her position still has 65 days locked time remaining. Alice will have to pay:

Penalty = 0.75% * roundup(65 / 7) = 7.5% of the withdrawn amount

And she will receive: 100 ALPACA * (100% — 7.5%) = 92.5 ALPACA

A user who withdraws early would still be entitled to earn their final epoch’s rewards distribution.

Although we hope none of you will ever have to use this feature, it’s always good to have extra options, and now that we’ve presented the appetizer, it’s time to get to the main course.

🎫Governance(Proposal Creating and Voting)

The next step in decentralizing our protocol has arrived. With the launch of Governance part II, the Herd will have a chance in shaping Alpaca Finance’s future through the open governance process.

Governance Process

Phase 1: Discussion
We will create a Forum Page on Discourse for proposal discussion where community members will be able to discuss various potential proposals. Topics or proposals that gain traction among the community members will proceed to Phase 2.

Phase 2: Request for Feedback (RFF) / Draft AIP
We will create a dedicated thread where the community can comment on the Draft Alpaca Improvement Proposal (AIP) to consolidate the discussion on a specific topic. Following the discussion, a more extensive draft AIP will be circulated for a period of debate and refinement. The process from the creation of the draft to a Final AIP, which will be put up for a vote, will last for at least three days to ensure there will be enough time for community members to react. An AIP will need to receive at least 5% upvotes(Quorum) from the total number of Forum members to be put up on Snapshot for voting.

In the first iteration of the Governance Process launch, we will establish a council that will help facilitate the curation of topics that will be put up for voting. These topics will come from either the core team or community members.

The AlpaCouncil members will be 3 members from the core team and 6 from the community.

Core Team:

• SpicySquid — Head of Engineering (Telegram: thiranai)
• HuacayaChief — Head of Product (Telegram: crypto717)
• Samsara — Head of Marketing & Strategy (Telegram: notallama1)

Community:

• Moonkitty11 (Telegram: Moonkitty11): a long-time member of the Herd, Moonkitty has deep blockchain knowledge and has co-authored a paper on the energy cost of PoS vs. PoW with Vitalik.
• tripaw3 (Telegram: tripaw3): a long-time and active member of the Herd, tripaw3 has strong DeFi and crypto knowledge, and also works in the space as a consultant/developer with a focus on algorithmic trading.
• Ariel (Telegram: ariel_moon, Discord: ariel777#7516): Alpaca’s Director of Community, Ariel has been at the center of most of our communities, and tracks the pulse of the Herd’s conversations, sharing users’ sentiments, opinions, and questions through campaigns like #AskAlpaca and regular discussions with the core team/
• Silent_JJ (Discord: Silent_JJ#9397): One of the Discord Herd’s OG community leaders and moderators. JJ is always enthusiastically helping members.
• crypt0non (Discord: Crypt0non#2787): Another Herd OG who actively supports new and old alpacas, helps with Twitter and manages the Alpaca Reddit. He’s also an ambassador for Nexus Mutual.
• Nikita (Telegram: @Ghost_of_ChakChak, Discord: ChakChak#1586): A leader in the CIS Alpaca Herd, Nikita is always coming up with great community events and showing newbies the path of Alpaca justice.

Note: Over time, we intend to gradually decentralize this process by allowing the community to vote on members on the AlpaCouncil. However, we believe it’s in the best interest of the protocol for the AlpaCouncil to vet potential proposal topics at this time. For example, proposals considered to be obvious attacks / damaging to the protocol, not implementable or unrealistic should not be considered.

Types of proposals you can expect to see:

Product/feature/partnership additions:

• Adding Grazing Range partners
• Adding new farming/lending pools
• New product/feature ideas
• New partnership ideas
• Selecting priorities of building various features
• Uses of Warchest Fund; proposals to mint Warchest Fund beyond the monthly allocation for strategic initiatives

Changes in protocol parameters:

• Interest rate model
• ALPACA rewards allocation
• AUSD collateral factor, max debt limit, etc.
• Max leverage, liquidation threshold

Phase 3: Snapshot Vote

• The council will create a Snapshot Proposal for voting
• Voting will be open for 72 hours
• 1 xALPACA = 1 vote
• A simple majority vote is required for a proposal to be accepted (50% + 1 vote); no minimum participation will be required.

Successful proposals will then be implemented by the team.

We hope we’ll see many of you Herd members actively participate in the Governance Forum to help shape the future of Alpaca Finance with us. As for the team, we are here to listen, learn, and grow the Herd together!

🔒Alpaca Insurance Plan

When we senior alpacas hang out in the barn and discuss how to grow the Herd, one challenge we always think about is: how do we onboard casual users into DeFi?

As many of you know, it isn’t easy. The UX and tech barriers complicate the learning process for new users. To use most DeFi products, a new user has to onboard their fiat to crypto, set up a Web3 wallet, learn about and buy gas, and more, and that’s before they even touch a DeFi protocol. We’re working on how to abstract some of the complexities of DeFi, with one example being our upcoming Automated Vaults, which will simplify high-yield liquidity provision into a low-risk, one-click and stake type of product. However, there are additional things that concern DeFi newbies.

One major topic of concern we’ve heard time and time again from prospective users, both individual and institutional — is safety. In fact, that is a loaded term. There are a few parts people think about when they evaluate safety.

The first part is: how can they know that their funds will be safe at Alpaca Finance?

We’ve done our best the past year in solidifying our place as one of the most secure protocols, having received an industry-leading 17 audits and possessing a spotless track record of no security issues. So we’ve done our best in this aspect. Even so, it’s not always enough to convince new entrants to deploy into our DeFi platform. They have other concerns, which brings us to the second part.

The second major thing prospective users care about is: if there was a security event that caused a shortfall event, what insurance or follow-up protections would be available to cover their loss?

We’ve instituted partnerships with Nexus Mutual and InsurAce to provide optional cover for users of our platform. Even so, these products add another layer of complexity to new users who are already struggling with the complexity of the base DeFi products they’re considering investing in. As such, many prospective users find this lacking, and as a result, we’ve come up with a simpler solution — the Alpaca Insurance Plan.

Insurance Plan vs. Insurance Fund

Insurance funds are a well-known security fallback mechanism used by CEXs and financial institutions. While insurance funds have their place, we believe there is a better solution. It can take a long time to build insurance funds, during which time there is no proper plan in place, and when they are ready, the capital sits around without being put to use, which is inefficient.

Instead of event response, we prefer focusing on event prevention, which is why we build with a security-first focus. With our thorough processes and around-the-clock monitoring, the chance of a shortfall event is already minimized as much as possible, and given that’s the case, we believe it’s better to have a conditional Insurance Plan that would only activate once a shortfall event occurred. A shortfall event would be when there was a deficit in the money markets that belong to Alpaca’s ecosystem.

As for where the funds will come from to cover losses, it will be from future revenues. To be specific, in the case of a shortfall event, up to 50% of future Protocol Revenue going to the Governance Vault would be available to pay back users who lost funds, for up to a period of 1 year, meaning there would be at least 7 figures of potential cover.

For the Alpaca Insurance Plan, we took inspiration from Aave’s Safety Module, except we did not want to sell ALPACA for cover like they sell AAVE, opting to instead use future earnings coming in as Protocol Revenue.

Users’ principal ALPACA locked in the Governance Vault will not be touched, only a portion of future Protocol Revenue, and that’s only in the case of a shortfall event. Hence, in the worst case that a shortfall event is deemed to occur, ALPACA governance stakers will still receive ALPACA emission rewards, Grazing Range rewards, and 50% of Protocol Revenue. Furthermore, the interpretation for the occurrence of a Shortfall Event will be subject to a Protocol Governance vote. So governance stakers will have the final say on the distribution of the Insurance Plan funds.

The Alpaca Insurance Plan exists to provide some peace of mind to would-be investors in any of the products within our platform. Although in the unlikely case of a shortfall event, a portion of Protocol Revenue would be redistributed, we believe the presence of the Alpaca Insurance Plan will have a greater positive effect, encouraging more users to deploy capital into the Alpaca platform, particularly high net worth individuals and institutions, with whom we’ve had many conversations over the recent months regarding what it would take for them to use or integrate Alpaca Finance. As a result of their participation, the Insurance Plan will deliver higher Protocol Revenue to governance stakers, as well as boost the price of their ALPACA tokens through more buyback&burn.

What the Alpaca Insurance Plan covers

It will cover any shortfall event for which Alpaca Finance’s code or infrastructure is responsible, including: bad debt for lenders, smart contract risk, exploits, economic design failure, severe oracle integration failure, etc.

What will not be covered:

• Individual liquidations due to network or UI issues
• Losses due to phishing, private key security breaches, malware, etc
• Loss events localized to integrated protocols (ie. Pancake if you are in an Alpaca PCS farming pool on BNB Chain)
• Loss events on partnership projects such as Grazing Ranges
• Losses due to devaluation of assets, regardless if such devaluation is related to an attack
• Losses after a hack/bug became public
• Any events where any other external interoperable or interactive smart contracts are hacked or manipulated in an unintended way, while Alpaca’s designated smart contracts continue to operate as intended
• Any event where external inputs (oracles, governance systems, incentive structures, miner behavior and network congestion, etc.) are manipulated, while the Alpaca designated smart contracts continue to operate as intended
• If a user provides false information or tries to hide, lie, or mislead

If any shortfall event triggers the Insurance Plan, it will not be the case that there will be individual claimants. This is protocol-wide cover on all of our products. So if there is a shortfall event, a proposal will be instituted to repay the pool of affected users; For example, if there was bad debt in a lending pool, we would send funds back into that lending pool to cover the debt. We would not necessarily do any individual reimbursements, and will not be held responsible for users who withdrew their capital from the pool before repayment occurred.

The aforementioned list is not exhaustive on what is and is not covered, nor is the method of reimbursement or the parties who would get reimbursed in a shortfall event set in stone. The ultimate decision of eligibility for any reimbursement from the Insurance Place will be in the hands of governance voters.

⏰Timeline

We plan to start implementing these features after we finish the Automated Vaults, though some aspects such as the Forum may be online sooner. We’re aiming to release the early withdrawal feature around the end of Q1 2022. The Insurance Plan will become active after the governance voting is online.

Well, these are the three major initiatives coming to the Governance Vault, all intended to make our platform more decentralized, flexible, and secure. We believe each of these items will have a significant long-term impact on our Herd, growing it, making it richer, and just maybe, allowing us to eat more imported grass. We can all cheers to that, right?