Insurance Fund
a governance based backstop for mitigating and re-aligning potential losses.
As outlined in the Notification of Risk Assumptions a delta-neutral position on-chain comes with multiple risk factors which may result in a loss. The insurance fund acts like a reserve pool in the instance that the protocol suffers any such losses.
solana pubkey: TBC.
The insurance fund by policy ensures it keeps the most stable forms of collateral, outlined below.
USDC
/
95%
Staked SOL
/
5%
The Reflect Insurance Fund is designed to sustainably grow over time to ensure protocol deposits are fully collateralised at all times at minimum. It does this via two primary pathways as outlined below.
Protocol Yield Take
Reflected Currencies have optional Tokenised Yield Bonds in which depositors can access - This pool is designed to pay out revenue from both native-stake and funding rate yields in redeemable rUSD.
As part of this yield distribution is a governance allocated percentage to growing the insurance fund. This will default to 50% of initial funding rate yield and 0% of native-stake.
Minor Composition of Growth Assets
The insurance fund as laid out in the composition tab holds a minor portion of growth assets with minimal risk. such as staked native Solana without taking additional LST risk.
The insurance fund operates on set principles for things like alignment payouts, on-market arbitrage balancing which are outlined clearly in the policy below - it is important to note that the fund is managed by a 4/5 Multisig on the Solana network.
Notice of Distributed Custodial Signer for Insurance Fund
Introduction
The Reflect Delta-Neutral Protocol is committed to ensuring the security and stability of its operations, including the management of risks associated with its innovative financial solutions. As part of our protocol, we maintain an insurance fund designed to provide an additional layer of security and confidence for our users. This document serves as a comprehensive notice regarding the distributed custodial signer structure of our insurance fund, detailing its operation and the associated risks.
1. Overview of the Insurance Fund
1.1 Purpose: The insurance fund is established to mitigate potential losses and provide a financial safety net for users in the event of unforeseen circumstances, such as smart contract exploits, DEX failures, or other operational risks.
1.2 Multisignature Wallet: To ensure the security and integrity of the insurance fund, Reflect operates a multisignature (multisig) wallet. This distributed custodial signer model requires multiple authorized signatures to approve any transaction, thereby reducing the risk of unauthorized access or single-point failures.
2. Distributed Custodial Signer Model
2.1 Structure: The multisig wallet is managed by a group of custodians, each holding a unique private key. A predefined number of these custodians must collectively sign off on any transaction involving the insurance fund. This distributed approach enhances security by ensuring that no single individual or entity has unilateral control over the funds.
2.2 Key Management: Custodians are responsible for the secure storage and management of their private keys. The loss or compromise of a key can impact the ability to access the funds, necessitating robust key management practices and contingency plans.
3. Risks Associated with the Distributed Custodial Signer Model
3.1 Coordination Risk: The multisig wallet requires coordination among custodians to authorize transactions. This can introduce delays or complications, particularly in urgent situations where rapid access to funds is necessary. Users must understand that the distributed nature of the custodial signer model may affect the speed and efficiency of fund disbursement.
3.2 Key Compromise Risk: While the multisig structure mitigates the risk of unauthorized access, the compromise of multiple private keys could still jeopardize the security of the insurance fund. Custodians must implement stringent security measures to protect their keys, including the use of hardware wallets, secure storage locations, and regular audits.
3.3 Custodian Risk: The reliability and trustworthiness of custodians are critical to the integrity of the multisig wallet. Any failure, misconduct, or collusion among custodians could undermine the security of the insurance fund. Reflect has implemented rigorous selection and monitoring processes to ensure custodian reliability, but users should be aware of this inherent risk.
3.4 Technical Risk: The multisig wallet relies on underlying smart contract technology to function. Any vulnerabilities, bugs, or exploits within the smart contract could impact the operation of the wallet. Despite extensive security audits and testing, users must recognize the potential for technical risks.
3.5 Regulatory Risk: The legal and regulatory environment for multisig wallets and distributed custodial models is still evolving. Changes in regulations or legal challenges could impact the operation and legality of the insurance fund. Users should be aware that regulatory developments could influence the availability and management of the fund.
4. Mitigation Measures
4.1 Security Audits: Reflect regularly affirms security audits of the multisig smart contract and overall infrastructure to identify and address potential vulnerabilities. These audits are performed by reputable third-party security firms.
4.2 Redundancy and Backup: Custodians must implement redundancy and backup measures for their private keys to ensure accessibility in case of key loss or compromise. This includes secure backup locations and encrypted storage solutions.
4.3 Governance and Oversight: Reflect has established governance protocols to oversee the management and operation of the insurance fund. This includes regular reviews, audits, and compliance checks to ensure adherence to best practices and mitigate risks.
4.4 Incident Response Plan: A comprehensive incident response plan is in place to address potential security breaches or operational failures. This plan outlines the steps to be taken in the event of a key compromise, smart contract exploit, or other critical incidents to minimize impact and restore normal operations.
Conclusion
The Reflect Delta-Neutral Protocol's insurance fund, managed through a distributed custodial signer model, provides our users with an essential layer of security. While this model enhances security and mitigates single-point failures, it also introduces specific risks that users must understand. These include coordination risk, key compromise risk, custodian risk, technical risk, and regulatory risk.
Operational Principles for Use of the Insurance Fund
Introduction
The Reflect Delta-Neutral Protocol has established an insurance fund to provide a financial safety net for users, enhancing security and stability within our ecosystem. This document outlines the operational principles governing the use of the insurance fund, ensuring transparency, accountability, and adherence to best practices. These principles are designed to inform all stakeholders about the protocols and procedures that multi-signature (multisig) signers must follow when managing the insurance fund.
1. Purpose and Scope of the Insurance Fund
1.1 Primary Function: The insurance fund is strictly designated to rectify losses and address market discrepancies if such situations arise. The primary purpose is to protect users against unforeseen events that could result in financial loss, such as smart contract exploits, DEX failures, or significant negative funding rate events.
1.2 Operational Restriction: Operators must explicitly minimize and restrict all activities of the insurance fund to its core functions of loss rectification and market stabilization. Any deviation from these functions is prohibited and must be immediately reported and rectified.
2. Governance and Community Consultation
2.1 Asset Allocation Adjustments: Should there be a need to adjust the percentage weights of assets within the insurance fund, operators are required to consult the Reflect community. This consultation should be conducted transparently, utilizing decentralized voting mechanisms whenever feasible, to ensure that any changes reflect the consensus of the community.
2.2 Community Engagement: Operators must actively engage with the community, providing detailed proposals and rationales for any suggested changes to the asset composition of the insurance fund. This engagement process is critical for maintaining trust and ensuring that decisions are made in the best interest of all stakeholders.
3. Reporting and Transparency
3.1 Monthly Updates: Operators are obligated to provide routine updates on the status of the insurance fund, including historical funding rates and proof of reserves snapshots. These updates should be published every month, with a maximum interval of 31 days between reports. This regular reporting ensures transparency and allows stakeholders to monitor the fund's status and performance.
3.2 Public Disclosures: All reports and updates must be publicly accessible, providing stakeholders with clear, accurate, and comprehensive information about the insurance fund's operations and status.
4. Prohibition of Personal Gain
4.1 Strict Prohibition: The insurance fund is strictly not for personal gain or for the benefit of the larger deposit set of Reflect. It is intended solely as a financial backstop to protect against losses and market discrepancies. Any attempt to use the fund for personal enrichment or other unauthorized purposes is strictly prohibited and subject to disciplinary action.
4.2 Conflict of Interest: Operators must avoid any conflict of interest when managing the insurance fund. All decisions and actions must prioritize the fund's primary purpose of providing financial security and stability for the protocol and its users.
5. Multisig Signer Protocols
5.1 Signature Announcements: Operators must publicly announce each time a signature is made on the multisig wallet. These announcements should include the purpose of the transaction, the amount involved, and the signatures obtained. This transparency is crucial for maintaining trust and accountability.
5.2 Approval Process: All transactions involving the insurance fund must follow a rigorous approval process, requiring multiple signatures from authorized custodians. This process ensures that no single individual can unilaterally access or manipulate the funds, providing an additional layer of security.
6. Additional Legal and Operational Considerations
6.1 Compliance with Regulatory Requirements: Operators must ensure that all activities related to the insurance fund comply with relevant regulatory requirements. This includes maintaining proper records, conducting regular audits, and adhering to any reporting obligations.
6.2 Security Measures: Operators are required to implement and maintain robust security measures to protect the insurance fund. This includes secure key management practices, regular security audits, and immediate action in response to any identified vulnerabilities or breaches.
6.3 Incident Response: In the event of an incident that impacts the insurance fund, operators must promptly implement the incident response plan. This plan should include measures to mitigate losses, investigate the cause of the incident, and communicate transparently with stakeholders about the actions being taken.
Conclusion
The Operational Principles for the Use of the Insurance Fund are designed to ensure the responsible, transparent, and effective management of the insurance fund. By adhering to these principles, operators can help safeguard the Reflect Delta-Neutral Protocol and its users from potential financial risks. We encourage all stakeholders to review these principles carefully and engage with us to uphold the integrity and security of our ecosystem.
Apply to Seed the Insurance Fund
Reflect protocol will host an IFO for decentralization options whereby 100% of the total raised will be used to seed the insurance fund. to access this opportunity, apply below:
Insurance Fund Seed Application <- apply here.
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