Slashing and Missed Rewards Coverage Program Guidelines

Last revised: 11/09/22

The Liquid Foundation, a Cayman Islands foundation (“Liquid Collective”), has partnered with Collective Risk Services CIC (“Nexus Mutual”) and the participating Liquid Collective protocol (“Protocol”) validator node operators (each, a “Validator”) to develop a comprehensive slashing and missed rewards coverage program (the “Program”). These SLASHING AND MISSED REWARDS COVERAGE PROGRAM GUIDELINES (“Guidelines”) codify the requirements applicable Validators in connection with the Program.

1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings assigned below:

   1. "Applicable Law" means, with respect to any Person, any transnational, domestic or foreign federal, state or local law (statutory, common or otherwise), constitution, treaty, convention, ordinance, code, rule, regulation, order, injunction, judgment, decree, ruling or other similar requirement enacted, adopted, promulgated or applied by a Governmental Authority that is binding upon or applicable to that Person, as amended unless expressly specified otherwise.
   2. “Missed Rewards Incident” means the occurrence of a calendar month in which the Protocol fails to collect a percentage of the Network Rewards that are available to be collected by the Protocol's Validator set by staking Protocol users' cryptoassets that is equivalent to the Period Minimum (as defined in the Validator Agreement) in accordance with the Network Rewards Methodology (as defined in the Validator Agreement).
   3. “Missed Reward” means a Network Reward that would have accrued to a cryptoasset staked through the Protocol on behalf of Protocol users but for a Validator's failure to propose, attest or sign a block on a Supported Network. Missed Reward specifically excludes Network Rewards that would have accrued to a cryptoasset staked through the Protocol but for Validator's failure to propose, attest or sign a block on a Supported Network if such failure to propose, attest or sign a block was due to Validator's concerns regarding cybersecurity issues, sanctions compliance and/or other concerns that would reasonably result in Validator's good faith belief that proposing, attesting or signing such block would have resulted in a breach of Validator's cybersecurity controls or a violation of Applicable Law.
   4. “Network Reward” means any cryptoasset reward that is distributed by a proof-of-stake cryptonetwork as a reward to validator nodes that stake cryptoassets and validate transactions on the proof-of-stake cryptonetwork, including, without limitation, block rewards, transaction fees and endorser rewards.
   5. “Network-Wide Event” means any Slashing Incident or Missed Rewards Incident that impacts two or more Validators within a fifteen (15) day period operating validator node infrastructure in accordance with commercially reasonable industry operating procedures.
   6. “Slashing Incident” means the occurrence of a Slashing Penalty.
   7. “Slashing Penalty” means any slashing penalty assessed against Protocol users’ staked cryptoassets by the blockchain on which the cryptoassets are staked through the Protocol.
   8. “Supported Network” means any proof-of-stake cryptonetwork supported by the Protocol.
   9. “Validator-Specific Event” means any Slashing Incident or Missed Rewards Incident that is directly attributable to a single Validator.

2. Program Overview. The Program incorporates three layers of coverage against certain Slashing Incidents and Missed Rewards Incidents that result in the course of staking Protocol users’ cryptoassets:

   1. Nexus Mutual Policy. Liquid Collective maintains an umbrella slashing and missed rewards coverage policy (the “Nexus Mutual Policy”) with Nexus Mutual. A copy of the Nexus Mutual Policy is available at: https://nexusmutual.io/pages/Liquid-Collective-v1.0.pdf
   2. Collective Coverage Treasury. 0.30% of the Network Rewards that accrue to cryptoassets staked through the Protocol are allocated to a coverage treasury (the “Coverage Treasury”). The Coverage Treasury may be utilized to: (i) pay deductibles under the Nexus Mutual Policy pursuant to Section 3(b) below; (ii) cover Slashing Incidents and Missed Rewards Incidents in connection with any Network-Wide Event that is not covered by the Nexus Mutual Policy; and (iii) cover any excess amounts not covered by one or more Validators in connection with any Validator-Specific Event.
   3. Validator Coverage Commitment. Pursuant to Section 3 of these Guidelines, Validators are required to pay deductibles under the Nexus Mutual Policy pursuant to Section 3(b) below and provide coverage against Validator-Specific Events that are not covered by the Nexus Mutual Policy and are attributable to the Validator pursuant to Section 3(c) below.
3. Validator Obligations.
   1. Coverage Cap. Each Validator is required to provide coverage in connection with any Slashing Incident or Missed Rewards Incident pursuant to this Section 2 up to a maximum U.S. dollar amount equivalent to the lesser of: (i) the product of (x) the pro rata portion of cryptoassets staked by the Validator on behalf of Protocol users relative to the total amount of cryptoassets allocated to the Protocol by users staked to all Validators and (y) 0.30% of the total U.S. dollar-denominated amount of cryptoassets allocated to the Protocol by users to be staked by Validators or (ii) five million U.S. dollars ($5,000,000) (the “Coverage Cap”).
   2. Payment of Nexus Mutual Policy Deductible.
      1. In the event of a Network-Wide Event, the Coverage Treasury will pay any deductible that is required to be paid to Nexus Mutual pursuant to the terms of the Nexus Mutual Policy in connection with a coverage claim that results from the Network-Wide Event; provided that the Coverage Treasury has sufficient funds to cover such deductible.
      2. In the event of a Validator-Specific Event that is attributable to a Validator, such Validator is required to pay any deductible that is required to be paid to Nexus Mutual pursuant to the terms of the Nexus Mutual Policy in connection with a coverage claim that results from the Validator-Specific Event; provided that the Validator will not be required to pay any amount in excess of the Coverage Cap.
   3. Validator Coverage Commitment. In the event of any Validator-Specific Event that is not covered by the Nexus Mutual Policy, the Validator(s) to which the Slashing Incident or Missed Rewards Incident is attributable is required to cover losses associated with the Slashing Penalties or Missed Rewards up to the Coverage Cap.