Third Wall is a new risk-management platform focused on protecting users from smart contract vulnerabilities. We are a team of 6 out of UC Berkeley.
Here is our litepaper: www.thirdwall.co/litepaper.pdf. The most relevant portion is the “Optionality Architecture” section.
We currently are deployed on the Ropsten testnet, and we plan to deploy on mainnet on multiple EVM chains within the next 6 weeks. We will start by deploying coverage pools with our “optionality architecture” and are in discussions with many protocols interested in coverage.
We think it would make a lot of sense to create coverage for Rari’s suite of products. Providing the option to buy simple, cheap, and trusted protection could greatly improve adoption among whales and more conservative users. This would increase TVL and liquidity in the lending pools resulting in a substantial increase in $RGT’s valuation.
Our coverage will be the most straightforward and trustless option on the market -- with our architecture there are no centralized/privileged parties and no voters that you have to trust to accurately judge claims. Our focus on decentralization/trustlessness is in line with Rari’s principles.
Risks Rari Users Might Want to Protect Against
Yield aggregator is hacked and the underlying tokens are drained from the pool.
Fuse pools are hacked and the underlying tokens are drained from the pool.
We could use our “Optionality” architecture to cover the risk of these smart contract exploits.
How it Works: Yield Aggregators
We will deploy one coverage pool for each of the Rari Yield Aggregator Pools: USDC Pool, ETH Pool, DAI pool, and Yield Pool. Underwriters deposit capital into the coverage pool for the aggregator pool they want to underwrite for. Anyone can purchase coverage from this pool as long as there is the necessary underwriting capital. At any time while their policy is active, policyholders retain the right to trade their Yield Aggregator Redemption Tokens (RSPT, RYPT, REPT, RDPT) for underwriting capital at a fixed ratio.
In the event of a hack there will not be underlying assets the redemption tokens can be redeemed for. So instead, a policyholder will exercise their coverage and redeem their redemption tokens for underwriting capital with Third Wall. Our coverage policies essentially offer a second backup pool of assets to redeem your tokens.
This coverage can be thought of as a put option on Rari's Yield Aggregator Redemption Tokens.
The type of underwriting capital will depend on the type of pool token that is being covered:
Pool Token-->Underwriting Token
Down the line, we plan to allow underwriters to underwrite with productive, yield-bearing assets such as cUSDC instead of base-level assets such as USDC. This would allow underwriters to earn additional yields on top of premiums. However, because this could add some additional risk, we will be adding this feature down the line when we have the proper infrastructure to deal with this risk.
We also have a choice of strike price. A lower strike price will allow for lower premiums per pool token (because a lower strike price requires less underwriter capital per pool token).
The initial pool token exchange rate is:
RariFundManager.getFundBalance() / RariFundToken.totalSupply()
But the strike price for a pool could be for example 0.95 * initial pool token exchange rate. Would love some feedback on what the community would prefer regarding the strike price.
At a strike price of 0.95 * initial pool token exchange rate, policyholders would be protected if funds are stolen and the pool exchange rate falls below 0.95 * initial pool token exchange rate.
Fuse Pool Coverage
The same architecture described above could apply for Fuse Pools. Except with Fuse Pools, our coverage will allow policyholders to exchange fTokens for underwriting capital instead of yield aggregator redemption tokens.
However, there are more complexities around underwriting for Fuse Pools and we will need to talk more to the Rari team/community to figure out the best way to structure this.
The underwriting pools will be open for anyone to underwrite. Protection premiums will depend on the risk appetite of the underwriters. Underwriters set the premiums at which they are willing to underwrite and policy-buyers will purchase from the cheapest underwriter in the pool.
If we do launch with Rari Capital as some of our first pools, underwriters in these pools will receive significant liquidity mining incentives in the form of Third Wall governance tokens. Because of this, we believe that initially we will not have trouble finding underwriting capital. We can potentially also look to subsidize the cost of underwriting capital with a shield mining program with Rari Capital.
In the longer term, however, these liquidity mining incentives may be unsustainable. But down the line, we will introduce other initiatives to attract underwriting capital:
Allow underwriters to deposit yield-bearing assets
Allow underwriters to underwrite for multiple protocols with the same capital
These initiatives add risk that must be carefully managed--so they will not be included in the Third Wall V0.
Rari Capital Yield-Aggregator and Fuse Pool coverage could be one of our first pools when we launch on Mainnet. We would love to create a task force to make this happen. Additionally, it would be great if we could get our Rari-related code audited by Quantstamp as part of this collaboration.
Let us know if you have any questions and also feel free to hop on Discord or follow us on Twitter to join the community!
What are the Next Steps?
Get feedback from the Rari community:
Does this architecture meet the needs of the Rari Capital Community and how could it be improved?
Are there other vulnerabilities for which you think there is interest that we did not cover here?
Could this put option architecture also work in some way with Nova?
What would the community prefer regarding the strike price of these options--tradeoff between the extent and the cost of the protection?
Discuss potential shield mining incentives and easy integration with the Rari website (button to purchase Third Wall coverage as the user interacts with Rari’s yield aggregators/Fuse Pools) with Rari team
Third Wall deploys coverage pools!