10.4 Collateralization Risks

Disclaimer：By participating in InsuranceDAO.World, users acknowledge that the platform is subject to the inherent volatility of cryptocurrency markets, including fluctuations in the value of SOL. While the platform employs measures to mitigate risks, such as overcollateralization and liquidation thresholds, users should be aware that market conditions can evolve unpredictably. The liquidation of assets to maintain collateral ratios is a necessary process in ensuring the platform’s solvency; however, it may result in losses for users whose collateral is liquidated during market downturns.

Users are encouraged to assess their risk tolerance carefully and understand that the decentralized and blockchain-based nature of InsuranceDAO.World carries unique risks that differ from traditional financial models. By engaging with the platform, users accept these risks and agree that the platform, its operators, and associated entities are not liable for losses resulting from liquidation, market volatility, or changes in collateralization requirements.

1. SOL Collateral and Liquidation:

arrUSD is collateralized by SOL with a collateralization ratio of 125%. While this ratio is designed to maintain a secure backing for arrUSD, the volatility of the SOL market introduces potential risks, particularly if the value of SOL experiences a sharp and significant decline. In such circumstances, the collateral backing arrUSD may become insufficient, potentially impacting the platform’s ability to maintain the 1:1 peg required for arrUSD.

Potential Impact on Insurance Coverage:

If the value of SOL falls below the required collateral threshold, the stability of arrUSD may be compromised, which could adversely affect the platform’s ability to fulfill insurance claims and payouts. This could result in delayed or reduced payouts for users whose claims rely on the value of arrUSD.

Liquidation Process:

To preserve the value of arrUSD and maintain solvency, the platform may be compelled to initiate a liquidation process if the value of SOL falls below the required collateralization ratio. This liquidation may involve the automatic sale or conversion of assets to restore the collateral balance. While this process ensures that the platform can meet its obligations, it may lead to losses for stakers or collateral providers whose assets are liquidated.

Liquidation Threshold:

The specific threshold for liquidation is determined by the platform’s predefined collateralization ratio and the real-time market value of SOL. If the collateral ratio drops below the necessary level, liquidation will be triggered to maintain the solvency and stability of the platform. Users should understand that, in such cases, assets may be sold at market prices that may not reflect ideal conditions, potentially resulting in financial loss.

2. Overcollateralization:

While InsuranceDAO.World maintains an overcollateralization ratio of 125% to ensure that arrUSD is sufficiently backed by SOL, it is important to acknowledge that extreme market fluctuations, liquidity crises, or unforeseen economic shocks could require even higher collateral levels to maintain the platform’s operational integrity.

Implications of Overcollateralization:

In periods of severe market volatility or significant liquidity stress, the platform may require higher collateral levels than the current 125% ratio to sustain the stability of arrUSD. This could result in increased staking requirements or higher pressure on liquidity pools. Such changes could have significant implications for platform participants, including:

• Increased Capital Requirements: Users may need to provide additional collateral or stake more assets to avoid liquidation or to ensure the continued validity of their positions and coverage.

• Liquidity Pressure: In periods of heightened collateral requirements, participants may face difficulties in maintaining adequate liquidity, potentially leading to delayed transactions, premium payments, or claim payouts.

Risks to Participants:

It is essential for platform participants to understand that while overcollateralization is intended to provide an extra layer of security, extreme fluctuations in market conditions may require actions that could affect platform participants’ liquidity positions. Users should consider the potential for additional staking requirements or liquidity pressure as part of their overall risk management strategy.