Examples

In this section, we outline some possible use case examples of the underwriting middleware.

Some high-level example use cases include decentralizing the strategy selection process for yield aggregators, providing underwriting service for DAOs wanting to lend to another DAO, providing risk assessment service for DAOs wanting to deploy their protocol-owned liquidity, etc.

Credit Market Example

Orange DAO wants to lend to Red DAO, but is unsure whether Red DAO will not default. Red DAO is requesting to borrow 1M USD, and is proposing to pay back 1.1M USD in a year. Red DAO will make a proposal(step 0) to RAMM.

If Red DAO is providing collateral, the managers will assess(step 1) whether the collateral is liquid enough. If they are not, the managers will assess the creditworthiness of Red DAO.

1. If the managers decide the collateral/creditworthiness is sound given the 10% rate, they will buy Red DAO bondlongZCB.

2. If hedgers decide the collateral/creditworthiness is not sound given the 10% rate, they will buy Red DAO bondshortZCB.

3. If Orange DAO is leaning bullish on Red DAO's collateral/creditworthiness they can buy longZCB(take more risk for more returns) or buy shortZCB(take less risk for less returns)

Why decentralized underwriting? Maybe one of the many participating managers knows for sure that Red DAO will repay. They can then buy a lot of longZCB to voice their opinion, which effectively includes more information to the decision aggregation.

Let's say the total collateral used to buy longZCB - buy shortZCB is 200K. This is the effective insurance fund for Orange DAO, and Orange DAO needs to supply the additional 800K if they still want to lend to Red DAO. Once approvalCriterion is met, Orange DAO can supply 800K to the Middleware which then sends a total 1M USD to the Red DAO's receiver contract, where Red DAO's collateral is escrowed.(step2).

Now, anyone can trade in the AMM as a tool to long or short Red DAO credit default swaps(step 3).

At maturity(step 4), let's study two possible scenarios :

a) When RedDAO does not default and repays 1.1M USD, the 100K profit is split by OrangeDAO and the managers. Since Orange DAO took less risk, they will make fewer percentage gains than the managers.

b) When RedDAO repays 800K, Orange DAO does not lose any funds. The managers receives only the Red DAO's collateral if it is collateralized, or nothing if it was uncollateralized.

c) When RedDAO repays< 800K, Orange DAO starts to lose funds. The Red DAO's collateral will be split between the managers and Orange DAO in proportion to amount of loss incurred

Yield Strategy Example

Orange DAO wants to invest in Yellow DAO's Banana Vault, but is unsure whether Red DAO will not rug and get hacked, or if the Banana strategy will not incur losses. Orange DAO is thinking of investing 800K USD. Orange DAO will make a proposal(step 0) to RAMM.

The managers will assess(step 1) whether the Red DAO is legitimate, whether the contracts are well audited, and if the strategy's expected APY is positive.

1. If the managers are bullish on Banana, they will buy BananalongZCB.

2. If hedgers are bearish with Banana they will buy BananashortZCB.

3. If Orange DAO is leaning bullish on Banana they can choose to buy longZCB(take more risk for more returns) or buy shortZCB(take less risk for less returns)

Why decentralized underwriting? Maybe one of Orange DAO investors knows for sure Banana is a bad investment. They can then buy a lot of shortZCB to voice their opinion, which effectively includes more information in the decision aggregation.

Let's say the total collateral used to buy longZCB - buy shortZCB is 200K. This is the effective insurance fund for Orange DAO, and Orange DAO needs to supply the additional 800K, if they still want to invest in Banana. Once approvalCriterion is met, Orange DAO can supply 800K to the Middleware which then sends a total of 1M USD to the Banana contract in a single tx. (step2).

Now, anyone can trade in the AMM as a tool to speculate on Banana's returns(step 3).

When OrangeDAO decides to withdraw from Banana(step 4), let's study two possible scenarios :

a) When Banana makes an x % positive return, 1M * x% profit is split by OrangeDAO and the managers. Since Orange DAO took less risk, they will make fewer percentage gains than the managers.

b) When Banana returns 800K, Orange DAO does not lose any funds. The managers receive nothing.

c) When Banana returns< 800K, Orange DAO starts to lose funds.