Liquid Collective's Slashing Coverage Program
Three layers of slashing coverage are available for every participant staking through the Liquid Collective protocol including network-wide events, such as network outages, and node operator failures.
With the rise of institutional participation in staking, slashing coverage is a risk mitigation consideration for enterprises and institutions. Liquid Collective's Slashing Coverage Program provides web3-native slashing coverage to every participant staking through the Liquid Collective protocol. The program covers both network-wide events — such as network outages — and node operator failures.
Overview: 3 layers of slashing coverage
- Nexus Mutual Coverage
Nexus Mutual is the leading provider of decentralized crypto-native protection, securing billions of dollars in value held in smart contracts. Nexus Mutual’s bespoke Slashing Coverage for Liquid Collective is fully scalable coverage that dynamically adjusts with the protocol's assets on platform (“AoP”) and provides access to Nexus Mutual's slashing coverage directly from an end-user's custody account at platforms such as Coinbase and Kraken.
- Slashing Coverage Treasury
Liquid Collective’s Slashing Coverage Treasury allocates a percentage of all network rewards to pay slashing coverage deductibles on network-wide slashing incidents. The Treasury continues to accrue network rewards unless deployed.
- Node Operator Commitment
Node operators supporting Liquid Collective's active set provide coverage for deductibles, up to a cap, against slashing incidents and missed rewards incurred due to the fault of their infrastructure.
Node operator & network-wide events
Slashing incidents may result from a node operator's specific fault/inaction as well as from network-wide events broadly (e.g., client bug, natural disaster). Liquid Collective's Slashing Coverage Program is designed to mitigate the risks of both types of incidents. Nexus Mutual provides dynamic umbrella coverage up to 2.0 ETH per validator, and the deductible is assigned between the Node Operator Commitment and the Slashing Coverage Treasury, depending on the cause of the incident. Deductibles will be paid by either the responsible node operator or the Slashing Coverage Treasury.
|Network-wide events are covered
||Node operator events are covered
|1. Nexus Mutual Coverage
(Deductibles paid by Slashing Coverage Treasury)
|1. Nexus Mutual Coverage
(Deductibles paid by Node Operator Commitment)
|2. Slashing Coverage Treasury
||2. Node Operator Commitment
||3. Slashing Coverage Treasury
1. In the case of a network-wide slashable event, e.g., a client bug that leads to a 5 ETH loss across 5 active validators:
- Because this was a network-wide event, and did not result due to the fault/inaction of any specific node operator, deductibles towards the Nexus Mutual coverage are paid from the Slashing Coverage Treasury.
- Deductibles are calculated as a maximum of 0.25 ETH per affected validator. In this example, the Slashing Coverage Treasury would reimburse the protocol 1.25 ETH (5 validators x 0.25 ETH). The Nexus Mutual coverage reimburses the remaining loss, up to the coverage limit. In this case, 3.75 ETH (5 validators x 0.75 ETH).
2. In the case of a node operator slashable event, e.g., a misconfiguration in validator infrastructure that leads to a 1 ETH loss for a single node operator:
- The node operator fulfills their Node Operator Commitment and posts a 0.25 ETH deductible, which is redeposited to the Liquid Collective protocol.
- The Nexus Mutual coverage reimburses the remaining loss, up to the coverage limit. In this case, 0.75 ETH (1 validator x 0.75 ETH).
In either case, when a deductible or claim is reimbursed, the reimbursed ETH is deposited to the protocol without minting LsETH. Another benefit of the cToken model is that users' LsETH is not slashed. Instead, the LsETH conversion rate programmatically adjusts to reflect the underlying ETH deposits (e.g., the LsETH conversion rate may weaken if a slashing incident occurs, but conversely strengthen when the protocol accepts a reimbursement deposit).
In-depth: Liquid Collective's Slashing Coverage
1. What is Nexus Mutual's decentralized slashing coverage for Liquid Collective?
Nexus Mutual collaborated closely with representatives from the Liquid Collective to provide third-party, decentralized slashing coverage for the Liquid Collective protocol.
- Dynamic coverage that is designed to scale to support the potential growth of Liquid Collective, the Nexus Mutual coverage for Liquid Collective provides up to a 2.0 ETH maximum level of coverage per validator in slashing losses in excess of coverage deductibles.
The policy's minimum level of coverage is computed as the lesser of 2.0 ETH or 200 / √number of covered validators ETH per validator.
For example, under a scenario in which Liquid Collective's AoP and number of validators matched Lido's, the Nexus Mutual Slashing Coverage would provide a minimum of 0.525 ETH of coverage per validator in excess of policy deductibles. At current ETH market prices (as of 11/16/22), Nexus Mutual's coverage would provide LsETH holders with cumulative slashing coverage up to approximately $96 million (145,000 validators x 0.525 ETH ETH x $1,263)
- The Nexus Mutual Slashing Coverage aims to be live with the protocol's general access launch — every holder of LsETH will receive coverage through Liquid Collective.
- Nexus Mutual coverage details as well as definitions around covered events can be found in Nexus Mutual's Slashing Coverage.
“Nexus Mutual's coverage dynamically adjusts the cover amount as more ETH is staked to reflect the change in risk. More validators means more diversified risk, so we lower the cover per validator as Liquid Collective grows to provide the perfect balance between cost and coverage.”
—Hugh Karp, Founder, Nexus Mutual
Secure by design. Transparent by nature.
- Nexus Mutual is fully transparent. Everything is on-chain, which means all information can be accessed and audited at any time. Anyone can review the active coverage, capitalization levels, and other data and analytics in Nexus Tracker.
- Experts from the Liquid Collective and Nexus Mutual worked together to create this comprehensive coverage. Liquid Collective worked with leadership at Nexus Mutual to design a bespoke slashing coverage. By collaborating together, we were able to produce dynamic coverage that scales with the Liquid Collective's needs and provides the flexibility needed for the protocol's active set to continue to expand over time.
2. What is Liquid Collective's Slashing Coverage Treasury?
A percentage of total network rewards generated is allocated to Liquid Collective's Slashing Coverage Treasury
- Liquid Collective's Slashing Coverage Treasury collects a fixed 30bps of network rewards and continues to accrue network rewards unless deployed. This model ensures that coverage dynamically scales with the growth of Liquid Collective's AoP.
- The Slashing Coverage Treasury will begin accruing network rewards when the protocol launches. It is utilized to cover Nexus Mutual coverage deductibles on network-wide slashing events and may provide additional coverage on slashing incidents in excess of Nexus Mutual coverage maximums or non-covered events.
3. What is the Node Operator Commitment?
Liquid Collective requires that node operators supporting the protocol's active set collectively provide up to 0.30% of the protocol's AoP in coverage, up to a maximum of $5.0 million per node operator.
- Node Operator commitments are utilized to cover Nexus Mutual coverage deductibles on slashing incidents caused by a Node Operator's infrastructure or setup.
- Node Operator commitments are computed as (Liquid Collective AoP x 0.30% x Node Operator's pro-rata share of funded validators) with a maximum of $5.0 million per Node Operator.
- Node Operator commitments will begin when the protocol launches. The commitments will continue to be recalculated as Liquid Collective increases AoP.
LsETH users may still be subject to slashing losses. If slashing losses were to occur, they would be socialized pro rata for all LsETH user's starting with earned but unredeemed network rewards.
Liquid staking via the Liquid Collective protocol and using LsETH involves significant risks. You should not enter into any transactions or otherwise engage with the protocol or LsETH unless you fully understand such risks and have independently determined that such transactions are is appropriate for you.
Any discussion of the risks contained herein should not be considered to be a disclosure of all risks or a complete discussion of the risks that are mentioned. The material contained herein is not and should not be construed as financial, legal, regulatory, tax, or accounting advice.
By Liquid Collective
Nov 17 2022