Starting this thread to try to collect ideas & brainstorm on the Coverage pool, what is needed and what it will bring to the system, in one place.
Some links to relevant Discord discussions on this:
The functionality of coverage pool’s in tBTC v1 is to be a ‘buyer of last resort’. The coverage pools consist of different assets (details to be released) that can be provided by anyone. In return, asset providers receive KEEP rewards.
The coverage pool is forced to buy the auction after 24 hours, regardless of the c-ratio at that time, under the condition that it has the funds.
The big impact of this is that the BTC depositor no longer has to be protected by preventing that a c-ratio will ever go below 100%, but is protected by the fact that regardless of the c-ratio the auction will be taken after 24 hours. In other words, after 24 hours there is the guarantee that there will be >100% in ETH locked for his deposit again.
This in turn enables the CC and Liquidation threshold to be dramatically reduced, for example to 101%. What benefit does this give to the system:
- Bigger gap between start c-ratio and liquidation thresholds à less deposits will reach this state
- Lower liquidation signer costs due to reduced notifier fee à less need / drive to prevent liquidations à less signer work & stress, less signer churning cost
Eventually, because a liquidation is not so painful, it could lead to a reduction of start c-ratio → enable additional system growth. Also this would reduce signer cost in case of a time-out liq.
In practice, the c-ratio can go 3 ways after the liquidation phase was entered at 101%.
- The c-ratio increases above > 101% à it is likely that someone will buy the auction somewhere within the 24 hour auction timeframe
- The signers loose x% of the bond $ in auction, and 50% of the remaining bond to the notifier
- The c-ratio remains stable at 101% à the auction is either bought by someone or after 24 hours bought by the coverage pool
- The signers loose max 1% of the bond $ in auction and 50% of the remaining bond to the notifier, which is max 0.5% of the bond value $
- The c-ratio declines <101% à the auction is likely not bought, and the coverage pool will buy the auction at a loss. “the last resort”
- The signers gain x$ value in BTC, as they receive the BTC backing the deposit which has a higher value than the ETH bond
Conclusion: On it’s own the pool will loose value in the auctions, and this will need to be offset with rewards for what it is bringing to the system.
Initial goal: Determine what is needed to make the coverage pool float, as a factor of system volume *
- Incentives needed
- Pool size $
*The larger the volume, the more auctions will need to be bought by the coverage pools.
- Project the % of deposits that are expected to reach the liquidation phase based on assumed settings of c-ratio, Liq and CC thresholds and historical price movements
- Project the coverage pool cost, and the signer cost & gains in the following liquidation process (again using price development based on historical data)
- Have system volume as a factor here, so the effect of scaling is easily included