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title: FIAT Deposit Insurance Collective (FDIC)

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# FIAT Deposit Insurance Collective (FDIC)
Over the past two weeks, Fully and myself have written on possible directions for the future of the Smart Yield product. In the same span, market events have highlighted the pressing need for onchain insurance against, or hedging of, collateral risk in the future FIAT II system. I want to synthesize these conversations and concerns into a proposed spiritual successor to Smart Yield, (jokingly?) referred to in this document as FDIC. 

## 1. Short Pitch
FDIC is a permissioned protocol in which approved external projects compete to direct realized yield from FIAT II across FIAT-denominated liquidity pool positions, with the twist being that this TVL is reserved as an insurance module for FIAT II. It is analogous to the Federal Deposit Insurance Corporation from US TardFi, in which participating banks pay an annual assessment against their deposits in order to have access to the insurance fund should they go into receivership. 

**FDIC offers partners locked liquidity in exchange for underwriting long tail FIAT II risk.**

## 2. Rudimentary Specification

### 2.1 Yield Redirection
FIAT II will generate interest across its open positions. The majority of this interest will be reserved for pledgers of credit, but some portion of this is expected to be returned to the DAO to be used as its discretion. 

This document assumes that every interest-generating position in FIAT II will pay a percentage tax to the FDIC commensurate with their risk tiering. 

### 2.2 FIAT Liquidity Pool Positions
FDIC will support integrations with leading onchain DEXes in order to support the staking of their respective liquidity pool tokens. If FDIC can accept the LP token of a given DEX, Barnbridge governance would then have the ability to allowlist specific ones.

FDIC will only accept FIAT-denominated LP tokens. 


### 2.3 Partner Gauges
As alluded to above, the FDIC protocol would not be permissionless. Partner projects would need to be onboarded by Barnbridge governance in order to participate. Once onboarded, the partner project would need to address two main considerations:
- **What LP tokens does it want to assign gauges?**
- **What FIAT II vaults does it want to have underwritten?**

These decisions impact the list of acceptable FDIC collateral, as well as the payout terms of the overall insurance pool.

### 2.4 Time-Weighted Deposits
Any user would be able to stake accepted LP tokens with FDIC. When doing so, they would indicate their willingness to escrow the LP token for a prolonged period of time. In doing so, they receive a decaying boost which gives them access to a disproportionate amount of the yield generated.

It is expected that FDIC would distribute funds from the following sources:
- **FIAT II Protocol Revenue**
- **BOND Protocol Emissions**
- **Partner Project Subsidies**

Yield would be earned per block, and we should consider giving users the ability to sell a position prior to maturity. 

### 2.5 Insurance Payouts
FDIC liquidity is tapped in the event of a collateral failure for a FIAT II vault meeting three requirements:

- **Debt ceiling set to greater than 100% of liquidation buffer liquidity**
- **Target asset associated with FDIC partner project**
- **Failure not caused by an underlying reason associated with another project**

The amount of FDIC liquidity that can be used to make up for the shortfall is capped by the risk tiering of the FIAT II vault. Riskier vaults would be able to draw upon less of FDIC liquidity, and vice versa. 

The actual settlement of a payout would look to swap out the failed collateral with unimpacted collateral. That is to say, it is not to pay back bad debt, but to ensure that any credit lines extended from the collateral can remain open. In exchange, FDIC would receive the failed collateral and benefit from any recovery of its value.

## 3 Emergent Behaviors


### 3.1 Governance Power Accumulation
FDIC would be pitched to prospective partners as a subsidized pathway for acquiring liquidity. Partners would look to acquire Barnbridge governance power in order to direct realized yield and token emissions at their respective gauges, and could further influence flows by themselves subsidizing specific LPs of theirs over others. 

Unlike existing solutions, FDIC natively supports boosted emissions for locked assets. Locked liquidity should be viewed as more valuable than freely-removable liquidity, and so Barnbridge governance may be viewed more valuable as a result. Furthermore, it's worth noting that with auto-compounding solutions for platforms like Aura or Convex, this functionality can be complementary to existing yield originators.

Over the longer term, should the FDIC protocol prove popular, we would expect to see more indirect valuation of Barnbridge governance power, as partner projects would look to gain more favorable terms for their FIAT II vaults (i.e. lower taxes, higher payout cap).

### 3.2 Ambient FIAT II Deposits
The FDIC insures only against protocol failures that impact FIAT II. This means that if, for example, it had been in production during the time of the Euler Finance hack, only "e-tokens" that were deposit as collateral in FIAT II would be eligible for a payout. For projects making use of the FDIC, this gives them an incentive to direct their users toward FIAT II rather than other possible integrations.

Implementation of the FDIC would need to consider how to deal with freeriders, possibly with the following mechanisms for determining eligiblity:
- **Minimum deposit length**
- **Minimum amount of credit pledged**
- **Maximum loan-to-value utilization**

Furthermore, because payouts do not necessarily involve the subsequent sale of the staked LP tokens that are transferred to recipients, such an event does not have to represent selling pressure for participating protocols. 

### 3.3 Leveraged TVL
FDIC liquidity could be rapidly scaled through a combination of FIAT II debt and weighted liquidity pools. For example, a partner with a 1.5M FIAT line of credit extended to it by underwriters could easily bring $5M in TVL to FDIC via a Balancer 80/20 weighted pool. As the cost of their debt is unrelated to the emissions received by their FDIC gauges, this could even be a positive basis strategy.

To a lesser extent, this phenomenon could play out with gauges not associated with specific partners. There may be an interest to provide ETH-FIAT or USDC-FIAT LPs as collateral in FDIC, purely to receive the uncorrelated yield being distributed. If a given user has the ability to mint undersecured FIAT, perhaps because they are a market maker, it may make sense for them to pursue such a strategy.

### 3.4 Derivatives
The inclusion of FDIC into the FIAT ecosystem introduces a new segment of users that will look to hedge the risk of a payout. This would be in addition to **a)** credit pledgers hedging collateral risk, **b)** undersecured vault underwriters hedging default risk, and **c)** FIAT holders hedging depeg risk.

The popularity of platforms like Y2K shows that there is a growing degree of sophistication in DeFi markets and that it would be possible to offer such hedging solutions in the future.