Question[Proposal?] Insurance for DeFi protocols?

Some DeFI protocols, such as Aave or MakerDAO, have their token (AAVE and MKR) as a basis of their security model.

Example: if something goes bad with MakerDAO (i.e., unbacked DAIs are generated), some MKR will be minted and sold in the market to compensate for the loss. → This of course dilutes existing MKR hodlers.

The problem with this model, as experienced during Black-Thursday in 2020, is that when “something goes wrong”, the token price collapses. During B.T., MakerDAO had ~12m DAIs unbacked, but the MKR price collapsed from 600usd to 200usd in a few hours (a 400m markepcap drop caused by just 12m!).

QUESTION: I wonder if Perpetual could (eventually) design some security/insurance mechanisms to help these organisations.

What I am thinking is basically a well-managed short position (on MKR, for example), that acts as insurance. There are other platform developing call/put Options, but perhaps something simpler is possible in Perpetual?

I am not sufficiently educated in derivatives/finance to make a detailed proposal, but I feel there is the potential here at Perpetual Protocol. If well-executed, it would be a big hit with many customers: AAVE, MKR, etc.

I see your point and agree that insurance is an important topic for most DeFi protocols. There is certainly a big need. However, I´m not sure that your idea fits the need very well forthe following reasons.

As an example, let´s say Aave is a customer. They take a part of their transaction fees to open and maintain shorts on Aave/USDC on perpetual.

  1. this causes selling pressure on Aave through arb relations → token holders don´t like this
  2. If everything goes well and the insurance is never needed, the token likely apreciates. This causes losses on the short position, effectively burning insurance money.

In no case this works well for token holders.

However, there are other projects that have a more intuitive approach to this problem, like PTF for example. Essentially they build up a DAO that works as a liquidity backstop for centralized and potentially decentralized derivatives exchanges. I don´t see a reason why they couldn´t be a liquidity backstop for other protocols like Aave, Maker, etc as well. You provided a rational why the token holders of these protocols should actually want this kind of protection albeit giving up a portion of their fees for it. (i.e. token price over-reaction)