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Risk of Staking
Understand the risk before making the investment
When staking your assets, you are trading liquidity risk with insured returns via the staking pool. Rewards are not guaranteed as these are always subject to changes in the protocol and can also be affected by external factors.
The following factors may affect Staking & Rewards:
- Stake Impairment Loss
- Locking period
- Solvency Capital Requirement
- Liquidity and Volatility
Stake Impairment Loss
The tokens staked in mining pools are used to build up capital pools. Capital pools are the cornerstones that are used to lay the foundation of insurance capabilities. Events such as insurance claim payouts and hacking incidents will cause permanent drains in the value of your staked assets.
- Claim Payout
In the event of claims approval, part of the tokens in the underwriting mining pool may be used for the claim payout. As elaborated in Staking Mechanism, as the principal token amount is deducted, it results in the depreciation of your LPTokens, which affects the amount upon withdrawal.
The rules for claim payout from the capital pools are illustrated below:
1. Claim payout will first be drawn from the premium pool. The maximum deductible is 20% of the premium pool balance in a single claim.
2. If 20% of the premium pool is not enough to cover the whole payout amount, principal tokens in underwriting mining pools will be used to settle the payout amount balance.
3. Based on the exchange rate and pool size, capital from underwriting mining pool will be taken from all underwriters in proportion to their staking value.
- Cyberattacks
There is an inherent risk that cyberattacks may occur. In the event of a cyberattack that causes a loss to the staking pools, staked tokens may be drained unexpectedly as well.
Please note, the token staked in the capital pool are not entitled to any insurance coverage from InsurAce.io.
Lockup Period
When you stake your tokens, they will automatically be set to a locked state. During this time, the tokens cannot be moved or traded. You cannot withdraw staked assets right after you unstake, as they will be subject to a lockup period of 15 days (this is configurable).
The unstaked amount will be available or withdrawable as soon as the lockup period ends. However, if you initialize another unstaking action before the 1st lockup period ends, the lockup period will be recalculated and the unstaked amount will only be available for withdrawal after the final lockup period ends.
Solvency Capital Requirement
As elaborated in Capital Management, the SCR is the amount of funds that are required to hold to ensure that the insurance company can meet its obligations to policyholders over the next 12 months with a 99.5% probability, which limits the possibility of falling into financial ruin to less than once in 200 cases.
In InsurAce.io, we use SCR as our capital management standard to calculate the minimum required amount of funds set aside to pay all the potential claims considering all quantifiable risks.
InsurAce.io derives its coverage capabilities based on total capital pools from both underwriting mining pool and investment pool. In the event that the SCR% = Capital Pool Size / SCR falls below certain threshold, stake withdrawal will be constrained as deficient or limited free capital available.
Liquidity and Volatility
The price of the staked tokens might be volatile, meaning it could go up or down in a matter of seconds. When tokens are staked, all the staker can do is watch the market. There are always risks that the tokens will lose their liquidity and thus result in a financial loss.
Last modified 1mo ago