Sherlock V2
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Incentives
One of the cruxes of the Sherlock protocol design is the alignment between stakers and Watsons (security and risk experts). This incentive alignment borrows from other "financial" designs such as venture capital firms or hedge funds. In Sherlock's case, stakers are “LPs” who are not experts in a given field but have capital they want to deploy. Security experts are like “hedge fund analysts” who have expertise in a certain field but don’t have the same level of capital as LPs. The way these two parties coordinate in a traditional finance setup is through something like a "carry" structure, where analysts allocate the LP capital and receive a share of the gains (or lack thereof) every year. Sherlock has taken after the spirit of this cooperation.
For each protocol covered by Sherlock, 10-20% of the premium payments are earmarked for the security team responsible for that protocol (as opposed to going to the stakers). These fees will be "vested" for a certain amount of time (i.e. 12 months). If no hacks occur on the relevant protocol during the specified vesting period, then the fees are released to the security team as incentive compensation.
There is some nuance when a hack occurs during a vesting period: the pricing of the protocol’s coverage matters. If a security expert or team prices a specific protocol at 2%, there is an implied “acceptable” hack amount baked in to that 2%. If the value of an actual exploit comes in below that implied “acceptable” amount, then the security team will still have claim to the majority of the tokens in vesting. If the hack comes in above the value implied in the 2% pricing, then the slashing of the vesting compensation can be very severe, to the point where the entire compensation pool can be drained in a scenario where the hack comes in much, much higher than the implied “acceptable” amount.
Last modified 1mo ago
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