Hermetica Insurance Fund
Overview
The Hermetica Insurance Fund is a reserve of assets maintained by Hermetica to protect against negative interest rates on USDh yields due to adverse events.
The fund primarily covers two types of events:
Negative funding rates
Exchange failure
For a detailed analysis of the Hermetica Insurance Fund, please refer to our research paper.
Negative Funding Rates
As detailed in the Yield Mechanism section, the yield for USDh is generated from the funding rate accrued by perpetual swap positions.
Typically, the funding rate is positive, resulting in yield generation. However, there are instances where the funding rate turns negative. During these times, the position backing USDh incurs interest payments, which would otherwise lead to negative interest rates on USDh.
To prevent this, the Hermetica Insurance Fund covers these interest payments, ensuring the principal value remains stable and USDh stakers only receive neutral or positive yield.
Our risk management systems uses current and historical data to conservatively assess the optimal capitalization of the insurance fund, based on the total value locked (TVL) of USDh.
Exchange Failure
Exchanges, whether centralized or decentralized, are prone to hacks and failures.
While the off-exchange settlement systems of the custodians we use safeguards collateral, the potential failure of a hedging venue can lead to unrealized profits not being honored which could lead to a partially un-backing of the liabilities of the protocol.
In such cases, while Hermetica’s risk management systems seeks to re-hedge the position on another venue, any negative PnL accrued between off-exchange settlement periods will be covered by the Hermetica Insurance Fund.
Insurance Fund Capitalization
Hermetica will initially fund the Hermetica Insurance Fund. The optimal size of the Hermetica Insurance Fund is continuously reassessed based on several factors, including:
Total amount of USDh in circulation (TVL)
Bitcoin volatility
General market conditions
Security
The Hermetica Insurance Fund is held in an array of multisig wallets which are controlled by Hermetica.
All addresses associated with the insurance will be publicly available and periodical proof of funds will be conducted.
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