We are particularly aligned with the concerns you raised here. That’s the main topic we wanted to discuss with @Thyborg as this pose a critical asymmetry in the risk/reward balance. This is probably the only critic we have regarding the proposed design. The identified issue essentially mirrors an uncollateralized loan offering, where the borrower pays a modest upfront fee, yet the capital itself faces substantial financial risk contingent on the deployment.
In navigating this challenge, we perceive limited maneuvering space. It boils down to either accepting that private rewards can coexist with public risk (privatized reward alongside socialized risk), or they cannot. From our standpoint, there are only two tenable compromises for such a disparity in risks and rewards:
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Financial Risk Committee: A body comprising financial risk managers and individuals with ample experience, tasked with monitoring proposed offers and possessing the authority to veto those falling below the minimum acceptable risk profile. This committee would be answerable to the entire Hub community in case of failure, necessitating a public report for every veto.
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Skin in the Game: In the event of non-repayment or partial repayment, the protocol should have the capability to freeze the LST deposits of all accounts that voted for the compromised allocation. If there’s a partial loss of capital, the difference should be deducted from the holders, with the degree of loss proportionate to their vote. Those who voted ‘Yes’ for this allocation should bear the most significant loss, ‘Abstains’ a lesser loss, while ‘No’ voters should remain unaffected as they opposed the initial risk.
Both solutions present substantial drawbacks. One relies on the competence of identifiable individuals for filtering, while the other necessitates increased protocol complexity. It also requires voting capital to remain under protocol custody throughout the entire allocation, releasing only when fully returned. This would bring about multiple changes to the proposed design, where the user is bonded for a duration of their choosing.
Before the AtomWars proposition, we intended to unveil our vision for PoL allocation. We encountered this issue during our design research and were unwilling to compromise on this situation of private risk and social loss. To achieve a balanced risk/reward mechanism, each liquidity bucket must be isolated in a separate contract. Cross-collateralization can be assumed to a certain extent to guarantee minimal community fund risks.
Certainly, we are open to exploring any alternative options the community deems suitable to address this asymmetry problem.
Thanks for reading,
Govmos.
