Determining a Default
How are defaults determined?
Defaults are determined by a Decision Board, which is responsible for voting on whether a default event has occurred. This determination is based on the following five conditions:
Has there been a significant security breach involving unauthorized access to user accounts, resulting in the loss or compromise of funds or sensitive information?
Has there been a systemic failure of the exchange's infrastructure resulting in an extended period (>24 hours) of inability to execute trades, withdrawals, or deposits?
Has the exchange declared insolvency or bankruptcy, indicating its inability to meet financial obligations, including user withdrawal requests?
Has there been an unauthorized transfer or misappropriation of user funds by exchange employees or associated parties?
Has there been significant regulatory intervention resulting in the suspension, shutdown, or restriction of the exchange's operations, leading to potential loss or freezing of user funds?
If the answer to any of the above questions is "Yes," then the voters are asked to vote in favor of a default.
Decision Board
The Decision Board for each pool will consist of seven individuals selected from both the DeFi and TradFi sectors, known for their reputation as trustworthy and good-faith actors. Their primary role is to assess whether a default has occurred by evaluating the five conditions. In recognition of their participation, they will receive a reward equivalent to 0.1% of the notional balance traded on the protocol, which is held in the voter reserve.
Voting Mechanism
To ensure that voters make rational decisions and prevent collusion or exploitation of the voting system, we have implemented specific incentives for the Decision Board.
In order to initiate a Default vote, a minimum of two voters must cast a "Yes" vote indicating a default event. Once two "Yes" votes have been registered, the protocol will temporarily halt the pool, preventing any further buying or selling of CDSs. This effectively freezes the market until the full voting procedure is completed.
Subsequently, the remaining five voters will be notified and asked to evaluate whether the pool has indeed defaulted, and they can vote "Yes" or "No." Following the conclusion of the vote, the funds from the Voter Reserve will be distributed among the voters in the majority that voted rationally (i.e., in accordance with the majority decision).
It's important to note that during the voting process, votes are kept confidential. This secrecy acts as an incentive for voters to make rational decisions, as they will only be eligible to receive their rewards if they vote in alignment with the majority's rational decision.
If the voters collectively decide on a Default, the contract will permit CDS buyers to claim their covered collateral. Conversely, if the voters opt for "No Default," the contract will be unpaused, allowing further purchases and sales of CDSs to resume until the maturity date, at which point it will roll over to the new period.
Voter Reserve
The Voter Reserve pool serves as a repository for all the accumulated fees reserved for the voters in the event of a default. Apart from its disbursement upon the conclusion of each vote, 25% of the voter pool will be distributed at the end of each maturity period among the Decision Board members. This monthly allocation is designed to encourage ongoing participation and support for the protocol, ensuring the continued engagement of Decision Board members.
Last updated
