Introduction
Solace is a decentralized insurance protocol offering FDIC-style protection for DeFi users. Protocols and individuals alike can purchase coverage on a wide range of risk positions, and Solace offers its services on several different chains.
Users can receive an instant quote based on their onchain portfolio and optimize their coverage amount to be as accommodating to their portfolio as possible. Solace presents a novel infrastructure for DeFi insurance unlike any existing solutions today.
The Problem
Simply put, DeFi is like a minefield. Loopholes are often found and exploited in smart contracts that hold user funds, and these hacks have been responsible for $1.9 billion in losses so far with the largest surge occurring this year in 2022. This number doesn’t account for recent exploits either, and it will only continue to grow.
As it stands, there is little to no real protections for onchain users when it comes to the protocols they use getting exploited. While some solutions do exist, they have explicit downfalls like non-guaranteed coverage or do not cover a diverse set of risk positions.
The Goal
Users can completely customize their coverage for their onchain portfolio, even as such to hedge against their position value fluctuating. Similarly, protocols can purchase insurance for their own treasuries or liquidity pools to protect their TVL.
Solace covers many different types of smart contract exploits, and offers protection for any protocol that is listed on Zapper. Users do not have to file a claim to receive their payouts and coverage is guaranteed by smart contracts. All in all, Solace fills a huge gap in the DeFi landscape when it comes to insurance for hacks and exploits.
How Does it Work?
After connecting to the Solace website, all of the different positions a user can buy coverage for will be aggregated and assessed by their risk with a letter-ranking system (A-F). This rating will determine the premium a user is paying for their insurance, with coverage for higher ranking protocols incurring less of a premium. F-rating protocols are not coverable. Users can purchase coverage for any protocol listed on Zapper’s API on either Ethereum, Aurora, Fantom, or Polygon.
Covered users qualify for a payout if they fall victim to a minting vulnerability, flash loan attack, “Trojan fake token”, proxy manipulation, math errors, or re-entrancy attacks. Solace does not insure a user's actual wallet, so buyers aren’t protected if they are phished and have their keys stolen, nor does it protect against the infamous front-end attack vector.
Payouts are issued within one week of an exploit occurring and users are paid out relative to the value of their position at the time of the exploit. This is thanks to Solace’s optimistic processing of loss events in a user’s wallet automatically, rather than requiring users to file a claim to receive their payout.
These payouts are issued by the Underwriting Pool which accumulates capital via bonds, yield strategies, and premiums. Bonds allow users to buy $SOLACE at a discount by depositing accepted asset(s) into the protocol. Some assets will offer higher discounts than others depending on what the protocol has a demand for. This discounted $SOLACE is trickled out to the buyer over the span of a week. Capital in the Underwriting Pool is deployed across different DeFi protocols to earn additional yield.
Right now, Solace only sells insurance given the UP has the capacity to cover all buyers. This may change in the future as Solace scales, but for now the Underwriting Pool will always have more capital than required to fill outstanding coverage.
Currently, protocol governance is controlled by the core team and other top contributors, but will eventually shift to a community-led governance model. The current structure, known as the “Launch DAO”, is part of a bootstrapping period to make sure the protocol sails smoothly in its initial phases and new updates can be pushed effectively.
Partnerships
The protocol already has several notable partnerships and integrations like Stake DAO, Hacken, and Bright Union. Solace uses Celer’s cross-chain messaging feature in order to offer multi-chain insurance with multiple Underwriting Pools.
dApps can natively integrate Solace into their protocol with the Solace SDK to allow users to purchase insurance directly from the application they use, like Stake DAO has done. This opens up huge potential for partnership opportunities in the future on top of the fact that protocols can purchase coverage for themselves.
Tokenomics
$SOLACE Price: $0.01
Market Capitalization: ~$2.3 million
Circulating Supply: 217,413,899
Total Supply: 1,113,319,229
SOURCE: Coingecko
Learn more about token distribution here.
The $SOLACE token can be staked or locked, both of which pass back rewards and eventually governance rights. Lockers can earn up to a 2.5x boost on their rewards (emissions and protocol fees) and 4x the amount of voting power depending on their lock duration, whereas stakers earn unboosted rewards. 10 million $SOLACE is emitted per year to stakers and lockers, and it can also be acquired through $SOLACE bonds.
Conclusion
Ultimately, anyone can come to Solace and take advantage of their flexible coverage options for DeFi insurance. Users are hardly restricted by which protocols they can purchase coverage for, and feel confident knowing their payout is guaranteed and automatic. Solace is rising fast as it accomplishes its goal to bring a new standard of onchain insurance to DeFi users today.
Follow me on Twitter
Come join the Galaxy Box
Follow Solace on Twitter
Join the Solace Protocol Discord
DISCLOSURE: I have no exposure to Solace or $SOLACE. I was asked to write this article and have not been compensated in any way. The information provided in this article is solely for educational purposes and should not be considered as financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. Readers should always conduct their own research before making any financial decisions.