DeFi Insight: Wallet Insurance by Solace

Challenges

DeFi insurance TVL is not catching up with overall DeFi TVL. One of the significant challenges in DeFi is insurance underwriting.

Figure 1: Top 15 insurance protocols on Ethereum ranked by TVL.
Figure 1: Top 15 insurance protocols on Ethereum ranked by TVL (source: https://defillama.com/protocols/Insurance)

Wallet Insurance

Solace offers a crypto wallet insurance policy with a unique technical design. Wallet insurance offers the possibility to cover the user’s entire DeFi activity with one insurance policy. The risk rating of the policy is dynamic, and the protocol’s risk engine determines it. If the user’s positions are in safer investments, they will be charged less than someone investing in high-risk protocols. Solace utilizes an in-house developed rating system for protocols. Depending on the risk profile of each protocol Solace determines what insurance premium each individual must pay. The rating engine assesses each protocol’s risk, the portfolio’s value, and the positions’ diversity. For example, someone who is invested in Aave will have to pay less for insurance compared to a user investing in Popsicle Finance. Users pay the policy coverage in a similar way to pre-paid sim cards. A user can pre-load a balance(for example with DAI) for their policy starting from one week. Once the balance is pre-loaded, Solace starts covering the wallet while the user continues to trade and use the wallet. The risk profile gets adjusted every week.

Solace’s four risk ranks: S,A,D,F
Figure 2: The Solace Rating Engine has four risk categories. (source:https://www.solace.fi/)

Solace Native

The latest product Solace offers is Solace Native, and allows any protocol, no matter the size, to get covered with Solace Native. Solace Native insures protocols against smart contract risk. Solace also helps these protocols with bug bounty sponsorships, audits, smart contract monitoring, and coding best practices. The protocols bootstrap the needed capital for Solace’s risk pool by depositing native tokens and getting coverage limits in stablecoins.

Figure 3: Solace Native: coverage capacity model (source:https://www.solace.fi/)

Bonding, staking and governance

Solace protocol is powered by an ERC-20(SOLACE) token on the Ethereum network. The SOLACE token is used for bonding, staking, and governance. One way to get SOLACE is through bonding. Users purchase SOLACE vested over five days with various assets, including ETH, USDC, and DAI. By bonding, users fund the Underwriting Pool in exchange for discounted & vested $SOLACE tokens. The bonding mechanism doesn’t depend on the market price of SOLACE, so it can have a positive (bond is at a discount compared to the open market value) and negative ROI. Bondholders can choose to stake their SOLACE for money from policy sales, investment activity in the pool, or any new token emissions. As of today, SOLACE is a centralized protocol run by a company. The plan is to gradually transition the protocol to a DAO structure and use the SOLACE token as the governance token.

Classifying SOLACE according to the ITC

Figure 4: ITC Classification of TOKE (Source: https://itin.itsa.global/)

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

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International Token Standardization Association

International Token Standardization Association

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The International Token Standardization Association (ITSA) is a not for profit organization working on holistic market standards for the global token economy.