Approach for a Safety Module

DAO Discussion V2
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Hello everyone,

while we are still waiting for some input from the team, I took the liberty of finding out what an SM could look like. I mainly did this to understand what an SM is and what it’s supposed to do, but I would still like to share it. I would be very happy to receive input and suggestions, as I think it is a very exciting topic and an important point to ensure the long-term success of Lenfi and i would like to help with that :slight_smile:

1. WHY?

The establishment of a Safety Module could help build trust in LENFI by demonstrating that the protocol proactively takes measures to minimize risk and protect users.

It would also encourage community engagement and participation in the protocol

2. Purpose

Insurance-like structure: The Safety Module function is similar to an insurance policy, with stakers acting as insurers and receiving rewards in return for taking risks.

A decentralized staking pool is set up to collect funds to serve as a safety net in case of financial loss due to bad debt, smart contract vulnerabilities or other unforeseen events.

Particular emphasis is placed on the case of bad debt, as it is the most likely case when the SM will be needed

3. Which pools should be protected?

In my opinion it has to be weighed up whether there are more risks with different pools for the beginning I would suggest to protect only LENFI pools and to be able to choose new pools with a Governance vote on it

Maybe only users who have tokens in SM should be allowed to vote on this ?

4. Token

Users can stake LENFI tokens or LENFI/ADA LP Tokens (or specific other Cardano assets) to contribute to the security of the ecosystem

Diversification would certainly make sense here. Nevertheless, I would not initially allow any other tokens to be used in order to strengthen the use of LENFI / LENFI/ADA itself

IInstead of selling the tokens on the open market, there could also be a public sale where SM can sell the tokens directly to users at a price determined by the dao to avoid further price effects

5. Rewards

Stakers in the security module would receive rewards in the form of LENFI tokens or other incentives to compensate them for the risk of potentially using their funds in the event of a loss event

Dynamic incentives: Reward rates could be dynamically adjusted based on the current security needs of the protocol and the amount of funds staked to ensure sufficient security

How can the SM generate rewards?

  • Use the locked tokens to set up your own LP pool on spectrum with higher fees (for example, as SNEK has recently done).

  • Protected Pools paying % of their generated yield to SM

  • The Dao pays Lenfi to the SM to make the staking in the SM more attractive

6. Activation mechanism

The SM could trigger a Governance Vote in the event of a necessary compensation for a pool

The decision to use funds from the Safety Module should be made by a vote of the LENFI governance, to ensure transparency and agreement with the community.

7. Conditions of use

Clear guidelines and conditions are needed to define the circumstances under which the Safety Module is activated, including specific scenarios or loss thresholds

It must also be determined what the maximum of the funds deposited in the SM can be used.

Maybe we could offer different options for the staker to choose his own risk and get more or less rewards with this. Steps could be 30% / 40% / 60% loss risk

8. Locking / Cooldown Period

A period must be set that it takes to withdraw tokens from the SM. Otherwise, users could simply withdraw their tokens in the event of a shortfall event to avoid the loss caused by the compensation for the pool. Here we should pay attention to how quickly a vote can be held after an incident and how long the decision takes.

So maybe full 3 epochs cooldown would be appropriate

9. Risk for stakers

The stakers in the safety module must be informed that they could lose some of their staked funds if the module is activated. This risk is the price for participating in the protocol’s safety.The compensation for this risk is achieved by receiving rewards from the ecosystem.

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Users can stake LENFI tokens or LENFI/ADA LP Tokens (or specific other Cardano assets) to contribute to the security of the ecosystem.

I suggest only lenfi be used. The more tokens used for SM you are diluting the value of lenfi token. I do recommend other projects could secure their pools by purchasing the SM with their tokens and Lenfi staking those tokens for further growth.

Diversification would certainly make sense here. Nevertheless, I would not initially allow any other tokens to be used in order to strengthen the use of LENFI / LENFI/ADA itself

IInstead of selling the tokens on the open market, there could also be a public sale where SM can sell the tokens directly to users at a price determined by the dao to avoid further price effects
[/quote]

Don’t see the need to sell additional tokens as a means of establishing the SM. It dilutes the value of the lenfi token itself.

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Reading the rest of your ideas is a great starting point for the dao as well as the team.

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Don’t see the need to sell additional tokens as a means of establishing the SM. It dilutes the value of the lenfi token itself.

You got that wrong. The SM has to sell tokens to compensate the pools in the event of damage. This can be maybe done directly to users so that they SM don’t have to sell them on the market. That’s what I meant. don’t sell new tokens

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Ok I understand this point it can be done if and only if there are not enough funds to cover the shortfall. I thought you were referring to initial set up of the SM

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This is well thought out! i like it! i do think if we combine this with mantas proposal we have the perfect safety mec!

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just to let you know we will have a token buyback active soon

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3. Which pools should be protected?

In my opinion it has to be weighed up whether there are more risks with different pools for the beginning I would suggest to protect only LENFI pools and to be able to choose new pools with a Governance vote on it:

Protecting only Lenfi pools has 2 major flaws in my opinion:

  1. Protecting Lenfi with Lenfi would mean that if Lenfi price drops lets say 50% and ends up with bad depth, your cover will also drop by 50% simultaneously, so it may not be real protection at this point;

  2. We need to look at the SM also as a way to grow/promote Lenfi within Cardano ecosystem. Protecting only Lenfi - we are saying to the community - “we are mostly interesting in ourselves and don’t care that much about growing our usage with the other tokens on the market.” This is not a sustainable way to grow and in this way you only encourage Lenfi holders to use the platfotm to leverage Lenfi, which results in cascading liquidations, something we have seen very recently.

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Hello Ivo, thank you for your answer.

Two very important points in my opinion, I don’t know what the optimal solution would be here, but I have given it some thought.

  1. Protecting Lenfi with Lenfi would mean that if Lenfi price drops lets say 50% and ends up with bad depth, your cover will also drop by 50% simultaneously, so it may not be real protection at this point

→ that’s why i had the idea not to sell on the open market but to sell the tokens in a kind of auction. For example, if there is a bad debt of 1500 ada and the SM has to compensate it, it can sell 500 lenfi at the price of 3 ada via an auction to users and there is no further direct sales pressure on the market.

  1. We need to look at the SM also as a way to grow/promote Lenfi within Cardano ecosystem. Protecting only Lenfi - we are saying to the community - “we are mostly interesting in ourselves and don’t care that much about growing our usage with the other tokens on the market.” This is not a sustainable way to grow and in this way you only encourage Lenfi holders to use the platfotm to leverage Lenfi, which results in cascading liquidations, something we have seen very recently.

→ I have to agree with you here too, in my opinion it makes sense to protect all pools that meet certain criteria, but I thought it would be easier to start with LENFI protected pools until we have reached a certain value in the SM to extend this protection. If we only have say 50000 ada worth of deposits in the SM we can’t protect 4 million ada in pools

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More security if a good incentive for the ecosystem.

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More security is always a good thing.

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Could rewards for holders be a better option rather than a buyback? Hard to project how much buying pressure more rewards for holders would bring but if projections were above buyback amount it might be something to look at?