Risks

InsureDAO’s depeg cover relies on Aave for the underlying liquidity layer to hedge stablecoin depegging risk, Chainlink to monitor stablecoins’ prices, Curve for exchange stablecoins, and USDC for the reserve currency. Here are some of the risks associated with a system that does not function or works unexpectedly.

Underlying Asset Risk

USDC is used as the reserve token, and that token is used when USD stablecoins depeg risks become obvious. If a target USD stable token’s value goes below 1 USD, the system can exchange USDC for a specified stablecoin. Since we assume USDC and target stable coins are traded at 1 USD, the following cases may harm the system.

USDC Depeg Risks: Since USDC is InsureDAO Depeg Insurance’s reserve currency, a depeg incident in USDC may result in a liquidation event on Aave.

A Stablecoin Overprice Risks: When a target stable coin price goes beyond 1 USD, this may result in a liquidation event on Aave.

It’s worth mentioning that USDC and some stablecoins are custodial, meaning which value is secured by real-world institutions like Circle. In the future, if an event that may freeze the transfer of USDC and other stablecoin stops InsureDAO functioning.

Money Market Risk

Aave is used to leverage InsureDAO Depeg Insurance’s short positions. While having positions, there are debt positions of stablecoins in InsuraDAO’s system. If the following cases occur, InsureDAO may not work.

Insufficient Liquidity: When there is not enough liquidity to borrow stablecoins, InsureDAO Depeg Insurance cannot build a short position.

High Interest: While having a short position, InsureDAO Depeg Insurance system needs to pay premiums to Aave. If the utilization rate of one stablecoin remains high for a long period of time, the underwriters may suffer a loss.

DEX Risk

Curve Finance is responsible for exchange of USDC and other stablecoins. InsureDAO Depeg Insurance utilizes a leveraged short position of other stablecoins. When one purchases insurance, we utilize and build a position. While building a position, we use Curve Finance.

When there is not enough liquidity to allow low slippage exchange of USDC and other stablecoins, the system may harm of large slippage.

Oracle Risk

Chainlink is a core component and used as the indicator of depeg events on InsureDAO.

If Chainlink fails to tell the latest stablecoins’ price to the system, the following risk may arise.

Unexpected liquidation on Aave: If Chainlink tells the latest price of a stablecoin wrongly, that leads to an unexpected liquidation event on Aave, which also uses Chainlink as the price oracle.

Cannot redeem a policy: If Chainlink doesn’t tell the depeg event, InsureDAO cannot initiate the redemption process for stablecoins.

Smart Contract Risk

The InsureDAO smart contracts have completed an audit, but it still may have a smart contract vulnerability which may result in a total loss of funds.