TIDAL is a decentralized discretionary mutual cover protocol that offers the DeFi community the ability to hedge against the failure of any DeFi protocol or asset. By directly leveraging up the reserve to cover multiple protocols at the same time, the enhanced capital efficiency attracts liquidity providers (LPs) while a competitive insurance premium attracts buyers.
Tidal primarily consists of insurance purchasers and sellers. Since pure peer-to-peer matching platforms on an individual bases have failed to gain traction in areas related to both lending and insurance, Tidal pools capital from sellers to offer covers to purchasers. This allows for higher capital efficiency as the same reserve backs more covers than can be individually paid out and also eliminates a peer matching process resulting from double coincidence of wants.
Capital pooling is known to be very efficient as well as effective as the probability of every protocol that an insurance provider covers is very low. However, this also requires proper risk management to reduce the chances of bankruptcy and consequent default on the insurer's front while also charging insurance purchasers an appropriate premium to account for the risk they transfer to the insurer.
Tidal achieves this balance by maintaining several Insurance Pools where each pool is a collection of protocols that its reserves back. When an insurance seller (also called a liquidity provider or LP) adds capital to an Insurance Pool, he chooses one or more protocols his capital should cover. The more protocols he chooses to cover, the higher is his income as he receives premiums from each of them. Similarly, his risk increases proportionately as an incident with any of the protocol covered leads to the LP losing his share in the reserve to a payout (following a successful claims process). An insurance purchaser can rest assured that the capital backing his cover is only over-leveraged to the extent of the protocols in the same Insurance Pool.
All Insurance Pools are initially designed by the development team. However, as the protocol matures we expect the DAO to be able to make such decisions.
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