Dear dFund Community,
We are happy to present to you the concept for dFund Insurance Pools — a new feature which we aim to integrate into our next-gen DeFi platform to make it even more all-encompassing and advanced.
As with each and every one of our features, this one too possesses numerous use cases, real world utility, usability and scalability that it could be a standalone project on its own, in line with our vision to build an all-encompassing platform with such a wide palette of features which will be a one-stop-shop for all DeFi enthusiasts and even strive to make all other DeFi projects obsolete. So without further ado, let’s dive into more detail!
The Concept:
dFund Insurance Pools are a novel way of solving the borrower default risk problem in the lending industry, and particularly in crypto & DeFi loans, which are pretty novel concepts in and of themselves. This is basically dFund’s way of approaching loan insurance (or crypto loan insurance, to be more specific), and we chose to do it in the same way we approach everything else — with a focus on making it as user-friendly and user-centric as possible. As a community oriented project, making complex concepts and features easy to not just understand, but more importantly use and utilize, for the everyday man, is high on our priority list.
This feature will allow everyone to start an insurance pool and thereby become an Insurer on the platform, offering an insurance service to the Lenders on the platform who are afraid that a Borrower might default on a loan with that Lender and who want to protect their assets; this of course is particularly useful if the loan in question is undercollateralized, meaning that the collateral requirement for the loan is under 100%, and the Lender faces the possibility of a financial loss if the Borrower defaults.
The Insurer will charge a fee for providing the insurance for the loan, which will be a certain percentage (%) of the loan amount, paid on a monthly basis. The Insurer will be able to set the exact percentage they charge, which will be on a case-by-case, that is, loan-by-loan, basis, and not a figure set in stone, so for example an Insurer might set a 1% monthly insurance fee for a Lender who wants to protect their loan that has a 90% collateral requirement and was given to a Borrower with an A+ credit rating, while the same Insurer would charge a 10% of loan amount monthly insurance fee for insuring a loan with a 50% collateral requirement given to a Borrower with a B credit rating. The Insurer will be able to see this information before setting the insurance fee for the specific loan, so Lenders and Insurers will actively communicate on-site to apply for insurance and negotiate costs, just like in real life.
As most insurance companies in real life operate on a “fractional reserve” principle, meaning they insure a higher amount of money than they would actually be able to cover with the amount of cash they have, we want to make the concept of loan insurance in DeFi as transparent and safe as possible, so for now, the plan is to forbid insurance pools from insuring more loans that what they could actually cover, but other ideas are also being explorer, such as to make it possible for Lenders to see the total amount or range of DFND tokens and other assets (such as ETH, DOT, USDT) an insurance pool has in reserves before they select which insurance pool they are going to approach to insure their loan, in this case insure pools with a positive cash in hand vs total combined insured loans value ratio would charge a higher monthly insurance fee percentage, as there is no risk, while insurance pools with a negative cash in hand vs total combined insured loans value ratio would charge a lower monthly fee, but in the case that every one of the loans they insure defaults and they are not able to cover, the Lender insuring their loan with them would face a clear financial loss. Both options are being explored and we will share more details and make a firmer decision closer to the feature launch.
The process:
- Insurer creates an insurance pool, deposits and locks up DFND tokens in it as reserves.
- Borrower takes a loan from Lender
- Lender is afraid that Borrower might not pay back, so he decides to ensure the loan.
- Lender applies to insurance pool to insure their loan
- Upon examining loan amount, duration, collateral and Borrower’s credit rating, Insurer sets the monthly fee for insuring the loan, for example 5% of the loan amount
- Lender accepts, and pays the Insurer 5% of loan amount every month
- If Borrower successfully pays back the loan amount + interest, loan transaction is finished and Insurer keeps previously paid monthly fees as profit.
- If Borrower defaults on the loan (can’t pay back), then Insurer pays the Lender the full original loan amount, but keeps previously paid monthly fees.
We really hope you like this new feature concept and as always we look forward to hearing your feedback on it!
