[Proposal] Integrate coverage options into vaults

[Fatusz]

Summary

Yearn vaults could come with cover options already integrated to further increase the trust in the yearn protocols. As vaults optimize returns by merging funds and therefore safing on gas fees, in the same way the purchase of coverage could be optimsed. The ROI of covered vaults could be adjusted up ahead, which would lead to performance transparency when comparing it to the uncovered counterparts.

Background

Nexus Mutual is offering smart contract covers for numerous protocols. As such Nexus Mutual is currently the biggest entity of that kind in the DeFi space. Members which purchase a cover can be compensated, if the underlying code doesnt work as inteded due to bugs, in the event of an economic attack, oracle failure or governance attack. The steady growing amount of active covers measured in USD illustrades the increasing demand for secured investments in the DeFi environment.

Source: https://nexustracker.io/

Currently members can purchase covers for seperate protocols on yearn. This proposal intends to offer an all-in-one solution for covered vault strategies as a whole, to attract security oriented user.

Motivation

There have been numerous cases of failed protocols or hacks resulting in large losses for users, even on yearn. Audits may increase the trustworthiness of protocols, but cannot provide complete security, especially as they are only snapshots of the current state of a code. Smart contract covers are a suitable solution for this problem, as they mitigate risks associated with the usage of protocols.

Problem

If a user wants to cover his funds on yearn finance, he would need to purchase a seperate cover for every underlying protocol of a vault, as yearn covers would only comprise losses incurring on the yearn protocol. Losses caused by an malfunctioning underlying protocols, that the yearn vault is exploiting, would not be covered.

Example: to cover the 3Cvr vault in full, a cover for yearn and curve must be purchased.
This complicates the process of covering investments and leads to increased gas fees costs, especially for smaller amounts.

Solution

Dedicated vaults could integrate covers for all underlying protocols in the strategy. If losses occure, the vault (represented by a yearn representative) would make a claim on behalf of its users and eventually recover losses.

Specification

Covered vaults could be marked as such and disyplayed next to their uncovered counterparts. Both vaults would direct funds in the same smart contracts. Additionally the covered vault would purchase covers for its assets either periodically or when a certain threshold is reached (whichever is more economic). The costs of the cover could be integrated and displayed in the ROI calculation. At the time of writing smart contract covers for the most important protocols (yearn, curve, aave) do cost 2,6% of the covered amount per year, which would allow most of the vaults to stay profitable.

The minted token for covered vaults would work in the same manner as the excisting token for the currents vaults with reduced ratios in proportion to the costs for the purchased covers. The “covered” token could have another prefix to indicate the cover of the underlying assets.

Currently only members of Nexus Mutual can purchase smart contract covers and make claims. Before considering an integration of smart contract covers in vaults as proposed, yearn would have to consult Nexus Mutual and clarify whether yearn as an organisation could purchase smart contract covers.

For:

• easier access to covered strategies by an all-in-one solution
• lower entry costs for security oriented users
• synergy effects from additional capital inflow into yearn and nexus mutual

Against:

• dependencies on another third party in addition to underlying protocols
• claims could get rejected by nexus mutual members and in result slash the trust in yearn finance
• the increased amount of vaults / options will further complicate yearns range of products

[Kent]

I’m a fan of this but unsure if the core team thinks the ecosystem is ready for this type of product yet.

Here is more information for options for today without this solution for anyone looking for a short term solution until something like this is available: What can you do with YFI?

In short, insurance needs to be purchased for multiple protocols (depending on the vault you’re in. For example for YFI v2 vault, you would need coverage for Yearn, MakerDAO, AAVE, and CREAM).

A long-term solution could also use tranches instead of insurance to provide some users with less risk for a more guaranteed return. I’ll leave it up to the big s to help figure out what’s best for a risk-adjusted opportunities for the community.

[Fatusz]

Another solution could be the “Yield Token Cover” that Nexus Mutual is currently working on. According to a medium post, users will be able to swap a yield bearing token (e.g. yDai) for the underlying currency, in case any of the underlying protocol fails:

Nexus is growing: Protocol Cover is live!

This would make my proposal obsolete, as users could cover a vault with only one product. According to the Nexus Mutual discord channel the yield token cover is in audit currently. It will be priced the same way as the single smart contract covers (depending on how many members are staking NXM).