A staker deposits USDC into Sherlock's staking pool for a fixed term (6 months, 12 months etc.) and receives a market-leading APY in exchange for the risk of funds being used (up to 50%) to pay out a bug bounty submission or exploit at a covered protocol.
The APY for a staker is made up of 2 streams:
Premiums from protocol customers
Incentive rewards paid in SHER (Sherlock’s governance token)
In return for these streams, a staker’s funds are at risk of being partially liquidated (up to 50%) if a covered bug bounty payout or exploit payout occurs at a protocol covered by Sherlock (or possibly a protocol that the covered protocol depends on). Despite the risk, stakers are incentivized to stake because:
They are paid a substantial APY for the risk
They see the quality and incentive alignment of the audit process