Signal Proposal: DXdao Self-Insurance Fund

DXdao is a fully on-chain DAO with no legal entity, which exposes active DAO participants to layers of legal and regulatory risk, especially when respective participants are also acting outside a legal entity (the main purpose for which is to limit liability of its members).

The risk that DXdao actors may be the target of a legal or regulatory action is always a possibility, as is the case with any organization or business, and the need for legal defense and advice for DXdao members is evident in such a situation.

This signal proposal requests that the DXdao community establish a Legal Self-Insurance Fund.

The purpose of this forum thread is to gauge the general sentiment around this idea and implement feedback from the community into any proposed Fund.

What is Self-Insurance?

Self-insurance is a well-known risk management technique that consists in setting funds for compensating a possible future loss. Although in theory any damage can be self-insured, typically self-insurance is used when significant and infrequent losses are expected and when risk can not be transferred through traditional instruments such as insurances.

Why does DXdao need protection through a self-insurance fund?

Traditional corporate instruments to transfer these risks, such as Directors & Officers insurances (“D&Os Insurances”), are practically unavailable in crypto, and also not directly applicable in the novel context of DAOs. For context, it is a common practice for a corporation to obtain insurance to cover personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organization. D&Os Insurances can also cover the legal fees and other costs the organization may incur as a result of such a suit.

Crypto proficient legal advice is expensive and scarce in the market. The risk of legal or regulatory action against a DAO member is possible and potentially severe. These risks also represent a bottleneck for attracting new talent to the DAO.

What risks can be covered?

The Fund can be structured in three layers:

  1. In the first layer, the Self-Insurance Fund can cover legal costs of defense if a DAO member is the target of a lawsuit or regulatory action.
  2. In the second layer, the fund can cover economic damages to third parties ordered by a Court of Justice as well as fines and penalties imposed by an administrative authority. This can be referred to as the indemnity layer.
  3. There is also the possibility of creating a third layer for the fund to be used as a legal reserve for obtaining a legal opinion or advice in an urgent or critical matter, such as the implementation of a new technological feature or intiiative. However, DXdao is currently using a quarterly budgetary process for this to track expenses, but it may be good to siphon this in larger quarterly chunks with some level of discretion on expenses built into the Fund.

The first layer is less complex, and possibly the most urgent. So DXdao could start with scoping this first layer out and go from there.

Who will be covered?

The fund should cover all DXdao participants, such as:

a) Full and part-time contributors with active work proposals

b) others acting on behalf of DXdao?

  • Need feedback here to see who could fall into this category. The standard that I’m honing in on is anyone who has on-chain approval for their actions and inactions in relation to DXdao.
  • This will include anyone approved as a paid contributor during a particular payment period, anyone rewarded REP for a particular positive contribution to DXdao, and anyone appointed as a community moderator or delegate, if DXdao creates such a process.

What will the scope of coverage be?

A more formal determination of personal scope of the fund will be necessary. However, here are some initial thoughts.

The scope of coverage for such individuals / entities / organizations could be:

(1) a temporal limitation, meaning the time period in which an active worker proposal is submitted and approved on-chain proposal; and

(2) actions or inactions that fall within a scope or work and/or contribution to the DAO that have been approved with an on-chain proposal.

What are the benefits of a Self Insurance Fund?

Is a risk management tool appropriate for transferring risks of individuals interacting with the DAO. After properly structuring this fund, it is possible to use it as a first layer for other products in the insurance market to transfer the rest of the risk.

Additionally, it is a very flexible instrument that can be tailor-made to cover the needs of DXdao, unlike more traditional insurance products.

How large should the fund be and which countries should be covered?

Principally, any jurisdiction where a covered person is domiciled should be covered. Arguably the largest risk exposure but also the most complex one is in the US. Probably it would be a good idea to start with a pilot project in a concrete jurisdiction.

However, a technical and financial study for each layer is required to determine our overall risk exposure, the coverage and the size of the fund. MakerDAO is currently undergoing a similar analysis.

Since DXdao has a smaller scope of products, DXdao could start with an initial $500,000 - $1,000,000 fund.

How will the fund be implemented?

This is a big question because these funds should be allocated and transferred, likely through a separate process other than those that are on-chain. I would like to discuss this topic in more detail to get feedback on possible structuring solutions.

Next steps

  1. Discuss and gather feedback from community.
  2. Explore partnering with existing players in the crypto insurance space to scope out the Fund size and what it should cover.

This Signal Proposal was largely inspired by and adopted from MakerDAO’s September 29, 2021 proposal for a Self-Insurance Fund. See Self Insurance Fund - Governance - The Maker Forum.

8 Likes

It’s great to finally see this initiative coming together. Thank you, Tammy.

Point a should be refined. Many of the core contributors are either late to renewing their proposal or submit them retroactively. What’s an active work proposal in this context?

Should the fund also insure core contributors up to a certain period. i.e. two months?

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Thanks for reviewing @adamazad ! Need more comments like this, in particular regarding the execution of the Fund.

So the following section after the one you quoted begins to outline some basic elements for a coverage test, but I think it can be updated a bit based on your comments. Updates in [bold]. As mentioned below, a full coverage test would need to be drafted, like any insurance policy, for this process to be a success.

Here is the section:

Let’s apply this test to a contributor that is hypothetically sued by a trademark troll in an infringement lawsuit:

The suit would likely be filed much later than the alleged activity that gives rise to the suit. So the main issue for coverage would be (1) whether there was an on-chain proposal for work from that individual during the alleged time period in the suit. If there is an approved on-chain proposal for work during the alleged time period, then the next inquiry would be to review (2) that if the on-chain proposal describes the activity (action or inaction) that generally relates to the law suit.

If the alleged conduct falls both within an on-chain worker proposal and the alleged conduct relates to the contributor’s scope of work during that time period, then the Self-Insurance Fund would likely cover any attorneys’ fees to defend the suit and damages to a third-party arising out of those activities related to the suit.

If there is no on-chain worker proposal from a contributor and / or the alleged conduct does not relate to the contributor’s on-chain proposal, then there would likely be no coverage for that contributor.

5 Likes

Thanks for putting this together. It’s important for DXdao and its members. It also sets an example for the rest of the industry.

In terms of who qualifies, could we just say “REP holders”? Or is it more defined by the off-chain actions you’re doing on behalf of DXdao?

And then, the other group is developers, or really anyone, deploying a smart contract or submitting a proposal that makes a certain change to a front-end, I guess that falls into those that are active contributors to DXdao, but maybe it should also include community members that also do it on behalf of DXdao?

Or, alternatively, is the fund specifically structured so that the legal protection only accrues to those that contribute to DXdao in a public, active way?

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Thanks for your thoughts. This is definitely one of those topics that benefits from discussion to fully think through what the Fund could cover.

All REP Holders vs. 'off-chain actions sanctioned as done on behalf of DXdao

I think it’s the ladder. The idea that all REP holders would receive coverage feels clean at first, but when the different factual scenarios are played out, it could get complicated to determine what actions are on behalf of DXdao or in furtherance of something in relation to DXdao vs. someone who just does something in DeFi that doesn’t really relate to DXdao and happens to be a REP holder, or worse an action in the name of DXdao that DXdao would not necessarily support.

It’s important that DAO members think about how great the exposure could be by not making the Fund too broad and balance against being too restrictive in a manner in which those that are active community members, though not being paid by the DAO, could also be covered. Inclusivity in relation to on-chain actions is where I’ve landed on so far.

Yes, agree. Submitted proposals for on-chain actions approved by DXdao or executed / deployed for DXdao would fit as well. There could be a qualifier about excluding clearly immoral / bad faith activity, or on-chain activity that is essentially an attack on DXdao governance.

This group would hypothetically have the most exposure. So they should be covered, but still leaning towards inclusivity, with the qualifier of DAO-approved on-chain actions / inactions may cover the active (though less active) DAO members. If the Fund only covers contributors, does it feel to corporate and not DAO-ish enough?

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