One of Sherlock's biggest strengths is the fully trustless, unbiased claims process.
If an exploit is thought to have occurred at a covered protocol, the protocol can submit a claim to Sherlock.
Sherlock's Watsons will first work alongside the core devs to mitigate the exploit if it is still live.
Once the exploit has been mitigated, the Watsons will work to understand the exploit's cause and magnitude. Through this process, a protocol will have a good sense of whether the exploit experienced is covered by Sherlock, and thus a claim should be submitted. The Watsons will help with the general claim submission process as well as choosing the correct timestamp and amount that should be submitted.
The first stage of evaluating a claim is the committee vote of the SPCC (Sherlock Protocol Claims Committee). The SPCC is made up of members of the core team of Sherlock as well as security advisors to Sherlock. These committee members will be well-versed in the nature of exploits covered by Sherlock. All of the members of the SPCC have a stake in Sherlock and an interest in doing what's best for the long-term success of Sherlock and Sherlock's protocol partners. They will also have reputations and public identities outside of Sherlock that they will want to uphold. These factors will make it very likely that the members of the SPCC will see it in their best interest to make the most accurate claims decision possible.
The SPCC's strength is its speed: a decision and payout can be executed in a number of hours. While the SPCC depends on a number of individuals who are associated with Sherlock, the second (optional) stage of the claims process is escalation to the UMA Optimistic Oracle. The UMA Optimistic Oracle is comprised of tens of thousands of UMA tokenholders who are likely unbiased and have an economic incentive to make a consensus decision. More about UMA's Optimistic Oracle can be found here.
The decision made by the SPCC will be binary (either the claim will be paid out or not). Once a decision is made on a claim by the SPCC, there are a few possible paths.
The first path for a covered protocol is to agree and accept the SPCC's decision.
The second path is to revise the claim (i.e. the amount of the claim) and re-submit.
The third and last path is to escalate the claim to the UMA Optimistic Oracle. This would require the covered protocol to “stake” a reasonable claim amount, to escalate the claim above the SPCC, computed as follows:
Staked amount = 2 x (Sherlock's bond of 9600 USDC + UMA's final fee)
E.g. if Sherlock's bond is 9600 USDC and if UMA's final fee is 1500 USDC, the required staked amount for escalation would be 22,200 USDC.
Note: Even though Sherlock's bond is set at 9600 USDC, UMA's final fee can be changed in the future, which may result in lower or higher required staked amounts for escalating a claim. The current fee is fetched using the computeFinalFee function.
The escalation would move the claim decision from Sherlock’s hands into the hands of UMA’s Optimistic Oracle. The claims decision would then be voted on by UMA tokenholders using UMA’s Data Verification Mechanism and the resolution of that vote is the final claim decision. If the covered protocol is proven correct, then the amount specified by the claim will be paid out. They will also receive the staked amount, minus UMA's burned amount (Half of the Sherlock's bond of 9600 USDC + UMA's final fee). If the covered protocol's escalation is not successful, then the amount specified by the claim is not paid out and the stake amount is not returned.
Note: There is also an option for an UMA multisig to reject the claim decision if the core UMA team collectively believes the oracle didn't function properly. Because the UMA Optimistic Oracle is still somewhat new to this use case, and because the dollar amounts at stake could be extremely high, Sherlock has included this intermediate step in the code with the option to enable or disable it at launch. Once disabled, it cannot be re-enabled.