RGP-27: Ribbon Lend Insurance Pool

Proposals
1

Summary

We launched Ribbon Lend [1] earlier this month. At the start, the insurance factor for each borrower pool is set to 5%. This means that 5% of the borrow apy (the 5% is already taken as part of spread between borrow and supply apy) in a borrower pool is redirected towards its insurance pool, which is to be used towards repaying lenders in case the borrower defaults. We propose to seed a master insurance pool with 1M USDC from the Ribbon Treasury [2] to cover bad debt across all borrower pools, in addition to a borrower-specific insurance pool.

Proposal

Ribbon Treasury currently has ~$3M across ETH, WETH, WSTETH, rETH-THETA, WBTC, USDC, and yvUSDC as well as ~$150K in non-RBN altcoins.

We propose to seed a master insurance pool with 1M USDC. We will unwrap 805,847 yUSDC + 194,153 USDC and deposit into a contract that will distribute funds in case of default. If a pool defaults, the funds from the master and borrower-specific insurance pool will serve as first-loss capital to help make lenders whole.

If executed this proposal achieves two things:

  1. decreases the risk of providing capital on Ribbon Lend because of the additional 1M USDC in first-loss capital.
  2. using the protocol treasury funds as first-loss capital up to 1M tightly aligns the team with the lenders and avoids moral hazard by increasing protocol exposure to Ribbon Lend’s credit risk. It further incentivizes the team to enforce the most rigorous KYC/AML standards and credit underwriting due diligence with Credora as well as mitigate impact as best as possible if a default does happen.

Conclusion

We believe this will foster the growth of lenders on the platform by minimizing the risk of deploying capital on Ribbon Lend as well as bring more trust to the protocols due diligence process.

Voting

This proposal will be posted on the forum for 1 week prior to voting. Voting will then be open on Snapshot for 5 days. This vote will be a single choice vote. You may vote on the proposal by selecting “Yes, let’s do it” or “No, this is not the way”.

References:

  1. Ribbon Lend
  2. Ribbon Treasury
2

Initial thoughts on this proposal:

  1. $1M is a lot if you consider we only have around 2.1M - 2.8M [1] of non-RBN assets in the treasury. It is +35% of our non-RBN assets and 98% of our stablecoin assets. Putting this into one insurance pool is not sustainable treasury management.
    This is a big problem and enough for an immediate “No, this is not the way” vote.

Other remarks:

decreases the risk of providing capital on Ribbon Lend because of the additional 1M USDC in first-loss capital.

  1. It can be argued that providing free (partial) risk coverage is basically subsidizing lenders. We already have liquidity incentives on Ribbon Lend and have seen a good organic growth of Ribbon Lend deposits at the start. [Dune]
    Further incentivizing Ribbon Lend deposits by providing risk coverage is not necessary.

using the protocol treasury funds as first-loss capital up to 1M tightly aligns the team with the lenders and avoids moral hazard by increasing protocol exposure to Ribbon Lend’s credit risk.

  1. I don’t agree here that the incentives are getting aligned properly.
    a) The team (Ribbon Finance) is the party that currently decides which Lenders are onboarded to Ribbon Lend. RBN holders only had a (quite meaningless) vote on the order at which specific lenders would be onboarded
    b) The team (Ribbon Finance) is the only party that has access to the full due diligence information through Credora.
    c) The team (Ribbon Finance) is the only one that can “mitigate impact as best as possible if a default does happen.”
    d) The DAO (RBN holders) is from my understanding nothing more than an observer here and is only impacted by the market perception of the Ribbon ecosystem (and thus RBN value) on a default.

Conclusion

With the current treasury state this isn’t an acceptable proposal.
I encourage RBN holders to vote NO.

Ask yourself, if a default happened last week and a proposal was launched to use all of the treasury stablecoin assets to cover some of the bad debt (of which the counterparty default risk had been clear upfront). Would you be supporting such a proposal or not?

I hope to hear some other’s opinion on this important vote.

Suggestions

I’ll throw some suggestions out there that we could consider.

  1. Do nothing, Ribbon Lend is doing fine on its own. Improve communications to lenders to clearly state the implied risks.
  2. Improve the health of our treasury by raising the non-RBN and stablecoin allocation.
  3. Put treasury assets in Ribbon Lend to align incentives instead. (should be max 25% of our stablecoin assets imo).
  4. Reduce the amount of the insurance pool (although it becomes ineffective at some point)
  5. Use the 5% insurance rake to buy Credit Default Swaps (CDS) for the borrower instead of building up an insurance pool

Footnotes:

  1. The accurate non-RBN treasury at current prices:
    $1.07M ETH (native, staked, wrapped, ribbon)
    $1.02M USD
    $36k BTC
    We also have: $1.36M RBN/ETH LP (UNI V2), so at current price an extra $680k in ETH
    → BUT this is not risk free and is tied to RBN price.
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