AMA Highlights — Tidal Finance
On Thursday 18 February, we welcomed Chad Liu from Tidal Finance into the Hillrise Group Telegram chat for an AMA. Chad is the CEO and a cofounder.
Tidal Finance is pioneering single and multi-asset insurance products, describing themselves as, “the first customizable smart contract cover marketplace for the Polkadot ecosystem.”
Tidal Finance allow users to gain exposure to multiple protocols at once, to leverage capital effectively and incentivizes auditors and LP’s to actively take part in the ecosystem–creating long-term economic viability.
Risks of exploits and hacks are still a present threat in DeFi and we’re excited to explore this novel take on smart contract insurance.
In this post, we have compiled key questions and answers from the event.
Daniel Dal Bello
Hi Chad and welcome! Looking forward to this conversation. Insurance has been a vertical of interest for us over the past several months and especially since Hillrise came on to support what you are building at Tidal.
Could we start with your background and how you came to be here leading Tidal?
Hi Daniel, Ray, Rowan. Nice seeing you guys here and thanks for organizing this.
A bit background about myself — I have a mathematics, engineering and finance background. I came into the cryptocurrency space in 2017 working in a venture fund and fell in love with the space.
The amount of creativity and innovation is definitely ahead of other industries. Around April last year, I started this company by realizing the DeFi space has a high demand for an insurance service.
A quick summary for Tidal — we are building an insurance marketplace to connect insurance sellers and buyers to cover smart contract hacks.
Tidal offers the functionalities to create custom insurance plans for one or more assets from multiple protocols. The main objective of the platform is to maximize capital efficiency and return to attract liquidity providers, while offering competitive insurance premiums to attract buyers.
Tidal offers the functionalities to create custom insurance plans for one or more assets from multiple protocols.
We have made a lot progress over the last couple months and will be releasing the prototype very soon.
Tidal describes that a healthy insurance infrastructure is the impetus for enabling more people to participate in DeFi, meanwhile the vast majority of the total value currently locked in DeFi is still uninsured (billions of dollars in value).
Who will be Tidal’s primary focus when it comes to attracting early adopters to your insurance solutions — and what is the strategy?
Well, we need to attract two sides — insurance sellers and insurance buyers.
On the insurance seller side we need to bootstrap capital — offering high yield by earning insurance premiums from multiple protocols, also with a liquidity mining incentive.
On the seller side, we are working on a lot partnerships with different protocol teams.
This is to firstly, increase their user safety and to convert their users into cover buyers. Secondly, protocol teams themselves will participate in buying covers to get their users protected.
A trend in DeFi space since I started the project last year is that we’re definitely seeing a lot more project teams demand the insurance service as hacking risk increases.
Do you think DeFi risks that have lack of insurance possibilities are an entry barrier to potential new participants in the space?
In my opinion there are two top barriers to entry, one being security risks and the other gas fees.
I won’t lie that for myself I’ve benefited a lot in my few years of participating in DeFi protocols. When I ask my friends to join these two issues always come up.
Daniel Dal Bello
There’s a growing need for innovative insurance solutions in the DeFi space and Tidal itself has mentioned that other parties — despite their growing attention — have failed to keep adoption of insurance solutions in line with the growth of the DeFi space.
How does Tidal differentiate itself from the others, making it more likely to get adoption growing?
We recently spoke with Hugh from Nexus so we’re curious about how you position differently.
In my opinion the current solution on the market lacks incentives for insurance sellers, and hence the insurance price is high too if there is not enough return for insurance sellers to make.
Nexus Mutual and Cover [Protocol] are two protocols on the market. Our competitive edge is to increase capital efficiency.
I always like to give an example of how people sell insurance in a traditional insurance world, if you have $1 dollar, and you want to sell insurance.
If you only sell $1 of cover (a reasonable insurance premium is pretty low 2% ~ 5%), you are only making a small return by putting all your capital at risk. No one would sell insurance this way.
What you want to do is to sell to 20 people, 50 people, and each person buys $1 from you, but at the same time managing the risk of claim payout to make sure you have enough capital to cover the losses.
This is how insurance funds make returns. Tidal’s core design is to implement this concept to increase the capital efficiency.
A major challenge for Tidal’s mutual cover products is risk assessment and mitigation. You describe a risk quantification process for each protocol to be covered in a mutual cover pool, deciding the risk exposure allowance to LP’s capital.
How will this risk qualification process be executed — and who is ultimately responsible for these assessments?
We have an auditor committee assisting the risk quantification process, auditing history, results. This is the basic requirement of the protocols getting insured.
On top of this, we have time factor and total locked value as 2 main indicators. The longer its on the market with hacks, the lower risk it becomes.
Regarding TVL, if a protocol attracts a large amount of TVL in a short period it will increase the risk, but locking large TVL in a prolonged period will decrease the risk. There are the main data points in our risk quantification framework. More details of which we will publish at launch.
Over time the framework will be governed by a DAO as well. I can see it would be a dynamic framework depending on hack events and how the whole DeFi space evolves.
Is there a specific mechanism that rewards these auditors?
Yes. Quantifying risk for each protocol right now is not a lot work and once the framework is set up the process is pretty straight forward for the platform to follow.
But, for the claim payout process the auditor committee is rewarded by taking a small percentage of the claim amount.
You’re building something which is a completely decentralised project open to anyone and everyone — however as of now no code has been published publicly.
Are you planning to publish / open-source your code? If so — from when could we expect that to become publicly available?
Yes. we are under the process of smart contract auditing. Testnet will be ready very soon and by that time we will publish the code. It is always a little debate within our team when should we publish to maintain a certain competitive edge in the space. Once we have a clear advantage and some momentum it would be a better time for us to do so.
It’s described that control algorithms will be put in place to prevent insolvency of the created mutual cover pools and these are automated and can be adjusted through community proposals.
However the payout decision on claims is community governed and assessed by the TIL holders on a claim-to-claim basis.
What is the benefit of this fully democratic approach and how can insurance takers feel secure in expecting a fair processing of their claims?
There are couple questions here.
To mitigate insolvency we have few approaches. First, we are re-basing the insurance reserve and cover amount on a weekly basis. For example, if one protocol gets hacked, the reserve will reduce right away, next week there won’t be enough cover due to the reduced reserve, and more cover can be generated once more capital comes in.
The reason for doing this is to prevent multiple protocols getting hacked under the same coverage period and there won’t be enough reserve to pay out. On top of this, we also have a Tidal token insurance pool for additional compensation in the case of insolvency.
Second, Tidal token holders vote for the payout of the interest of the platform. If all claims are rejected the token won’t have any value to it. Plus, the token holders are not necessarily reserve providers for the protocol that is getting hacked.
On top of the voting, we also have the third-party auditor committee to finalized the claim result.
Daniel Dal Bello
We’ve noted a lot of activity around partnership development — with 9 partners highlighted in January’s monthly review alone.
A lot of these names will seemingly be integrating Tidal’s insurance solutions into their services (such as Bandot, Cere Network, Knit Finance and more), what role do these partnerships play in Tidal Finance’s growth and what is your partnership strategy moving forward?
My intent is to bring protocol teams themselves in the insurance ecosystem.
- They can deposit their native tokens to backup their own protocol and earn some yield (like their own insurance treasury fund). During hack events, certain tokens will be paid out here as compensation to reduce insurance seller losses.
- The big benefit is that such a signal would attract liquidity providers (insurance sellers) on Tidal to be more confident taking risk in selling their insurance.
There are other benefits to having protocol team themselves in the game. For example, the payout process, understanding hack events, helping us to grow user adoption etc.
Also for Tidal to vet the team and code to increase the security of the whole platform.
Going forward, we will try to get as many partnerships as possible. Whoever has safety initiatives in mind, we are happy to chat and discuss. 🙂
Hillrise Group supports ambitious Web3 startups with early-stage venture capital and fundamental research.
Tidal Finance is building an open marketplace for programmable insurance in the Polkadot ecosystem.