Introduction:
Coverage Pools are pools of collateral assets provided by passive investors (a.k.a underwriters), to ensure the safety of the peg in exchange for fees and rewards. Coverage Pools’ function is to be a backstop for tBTC, acting as the buyer of last resort in tBTC v1 and to insure against fraud in tBTC v2.
This article is a continuation of previous articles shared on coverage pools — Introducing Coverage Pools and Coverage Pools, with the focus on sharing additional details on process and economics.
Note: ‘KEEP’ refers to KEEP work token and ‘keep’ refers to keep deposit contract.
How does the process work ?
Step 1: Coverage pools act as backstop for tBTC, buyer of last resort in tBTC v1. Coverage pool funds will only come in to play when there is an auction which is at/under 100% and nobody wants to buy at the end of TBTC liquidation auction process. Coverage pool will kick in to buy that auction i.e. acting as backstop.
Step 2: Coverage pool notifies of its intent to buy TBTC through an auction (different auction than the actual keep liquidation auction) and amount of TBTC it needs to buy, slowing increasing the amount of KEEP it offers to buy the TBTC lot.
Step 3: Coverage pool uses its assets (KEEP to start with) and buys TBTC from auction. Anybody can sell TBTC and get KEEP.
Step 4: Coverage pool uses the TBTC it acquired from auction to buy the keep deposit liquidation.
Note: This will be a keep that will be at/under 100% peg i.e. coverage pool will buy the liquidation at a loss.
Step 5: Coverage pool now has ETH from step 4 keep liquidation.
Step 6: Coverage pool will buy back the KEEP in open market using ETH from above step.
Which assets can be deposited ?
Initially it will start with KEEP. But expected to expand to many other assets (WETH, WBTC, TBTC KEEP/ETH etc) few weeks after.
What are the primary risks ?
- Buying TBTC above the peg. Depending on the size of TBTC lot required, coverage pool will buy TBTC at premium using its assets.
- Taking keep liquidation. As mentioned above, Coverage pools will come in to play only when the peg is at/under 100% and depending on how much its under 100%, there can some losses for coverage pool.
- Slippage for market buying KEEP using ETH. Depending on the size of liquidation, there could be slippage if KEEP liquidity in AMM doesn’t go up.
How much rewards can be expected ?
It depends on many factors –
- How much KEEP gets deposited in coverage pool.
- Weekly rewards allocation (this is governable and can be adjusted weekly).
- How many liquidations coverage pool takes.
- Start c-ratio. This is expected to drop from current 200% to lower 100’s after coverage pools launch. To be decided by governance.
- Courtesy call ratio. This is expected to drop from current 115% to close to 100% after coverage pools launch. To be decided by governance.
- Liquidation ratio. This is expected to drop from current 110% to close to 100% after coverage pool launch. To be decided by governance.
- KEEP liquidity in open market and so on.
With many assumptions, expect the APR to be Net 20% — 32% (after liquidations if any). The APR could potentially be higher in the beginning when there are less stakers and lower if lot of stakers stake their KEEP in the pool eventually. This would be atleast 3X of KEEP-Only (currently ~6%) staking pool rewards. Rewards are auto compounded unlike Keep-Only staking pool. There will be no impermanent loss in coverage pools.
Keep team has open-sourced the work on coverage pools in github, and you can read more technical documentation there.
If you have any further questions in regards to coverage pools, feel free to join the KEEP discord server and ask !
Additional Resources :
- Keep’s Discord: https://discord.com/invite/wYezN7v
- Keep’s website: https://keep.network/
- Keep’s GitHub: https://github.com/keep-network
- Keep’s Twitter: https://twitter.com/keep_project
