Introducing the Kava SAFU Fund — Security of Assets Fund for Users.
By: Brian Kerr
Tags: Financial Services, Hacks, Safu, Kava, Defi

What is it?

Kava SAFU Fund is an on-chain community pool that will increase the overall safety of the Kava platform by protecting against unforeseeable black swan events while giving users assurity that their funds are safe. The Kava SAFU community pool’s main function is to make users whole after events like unforeseen bugs, exploits, hacks, liquidation failures or other technical issues that result in lost user funds.

These types of events haven’t happened on the Kava platform because of Kava’s architecture, robust testing, audits, and market monitor infrastructure. Now Kava is introducing the latest component in its security and reliability infrastructure; the Kava SAFU Fund. Designed to counter the unique threat of black swan events.

The Kava SAFU Fund will be created through a one-off inflationary event where 10% of Kava’s current token supply will be minted and held within the Kava SAFU Fund.

“Over the long run, the creation of the Kava SAFU fund is a net positive for the overall DeFi ecosystem. By giving assurance on compensation in the case of a black swan event helps instill further confidence for Kava’s DeFi platform.” — Michael Ng, Co-founder of StakeWith.Us

Motivations

Now that the Kava platform has grown to hundreds of thousands of users and has hundreds of millions of dollars in collateral deposits, Kava Labs as a centralized entity cannot and should not take responsibility for unforeseen events for following reasons:

As a US company, we must collect KYC/AML and run OFAC checks before transferring funds to any users. Even if we wanted to, due to regulations we cannot send funds to many users around the world. In the spirit of creating an open and decentralized platform for anyone, anywhere in the world to use, the Kava platform needs to have an on-chain way to make users whole in the event of loss that is free of censorship and regulation. Collecting KYC/AML of all the users on the Kava platform is the opposite of what DeFi is all about. Kava Labs would have to do exactly this if a global black swan event occurs that impacted funds across all users on the Kava platform. Now that the collateral deposits are hundreds of millions of dollars in size, it’s simply not possible for Kava Labs to play a role in making users whole in black swan events. The Kava platform network needs a better solution that can scale with its increasing size.

Historical Context and Comparables

Inspiration for the Kava SAFU Fund comes from traditional finance where margin trading platforms have a rainy day fund to cover losses. In crypto, we have several notable examples with Bitmex’s Insurance Fund that ensures liquidations of margin positions go smoothly and Binance’s all purpose SAFU Fund which has been used to make users whole after serious hacks and exploits have occurred.

More recently, the Cosmos Hub has adopted a community pool which has several purposes, including that of being a SAFU fund for users. Similarly other Cosmos-SDK based blockchains like Akash and Terra have adopted different forms of community pools.

Qualification for Covered Incidents

Many events can impact user funds. Events like upgrade errors, defaults, and critical bugs that result in lost funds will qualify to be reimbursed by the Kava SAFU Fund subject to governance approval. Below is a example non-exhaustive list for illustrative purposes of the type of events which may impact users funds and may be covered by the Kava SAFU fund, however it is critical to note that any and all actions taken on behalf of the Kava SAFU fund is made by the Kava governance community alone.

Network downtime resulting in loss of users funds (e.g. via inability to re-supply)

Critical network bugs which result in loss of users funds (e.g. inaccurate accumulation of interest)

Critical network exploits which result in loss of users funds (e.g. exploited vulnerabilities in business logic)

Critical cross-chain software bugs or exploits which result in loss of user funds (e.g. cross-chain double spends or multi-sig wallet compromise)

Critical bugs or exploits in auxiliary network services (e.g. oracle software exploits)

Market manipulation which results in loss of user funds (e.g. driving massive liquidations by manipulating price feed or associated reference market price)

Application service defaults in the event of massive liquidation events (e.g. under-collateralization of Kava of Hard application services resulting from system debt not being met at auction)

Network upgrade critical bugs which may result in loss of users funds

Network upgrade rollback procedures which may result in loss of users funds

The Funding the Pool

There are many ways to fund the pool, including a one-off inflationary event or a continuous inflation schedule which adds to the pool overtime.

For the purposes of providing an adequate SAFU Fund for the current levels of collateral and debt managed by the Kava platform, 10% of total Kava supply should be created in a one-off inflationary event and put towards the Kava SAFU Fund initially. This will be more than adequate for the foreseeable future.

Should the platform grow orders of magnitude larger or if Kava SAFU Funds are disbursed after an event, it will be up to the Kava governance community to decide how to ensure the Kava SAFU Fund is appropriately re-capitalized from that point forward. This can occur from a redirecting of various platform fees, another one-time inflationary event, or a continuous inflation contribution to the Kava SAFU Fund going forward.

It’s great that we’re implementing an insurance pool. Binance SAFU fund has helped Binance users immensely in the past and also served as a safeguard for PR damages. The initial one-off inflationary event seems reasonable given that we’d need significant time for the SAFU fund to be filled should we allocate a proportion of the network inflation to the pool instead. — David Park, CMO of Cosmostation

Usage and Disbursement of Pool

It will ultimately be up to the Kava token holder group to vote on each SAFU-spend proposal/request and determine if the case qualifies for distribution.

If a SAFU-spend proposal passes successfully, the number of KAVA encoded in the proposal will be transferred from the Kava SAFU Fund to the address encoded in the proposal, and this will happen immediately after the voting period ends.