Insurance Market & Insurance AMM (IAMM)

Collateral Insurance Market

Because providers must post , they are exposed to the risk that collateral is slashed in a dispute. A natural emergent market is collateral insurance, where a third party (or pool) accepts this risk in exchange for a premium.

See: Dispute Resolution & Collateral.

Let denote the probability collateral is slashed for a given transaction under an insurer’s risk model. The insurer’s expected cost per transaction is:

To be profitable, the insurer must charge a premium exceeding expected cost.

Example Insurance Market: Insurance AMM (IAMM)

An insurance automatic market maker (IAMM) can connect:

• Insurance liquidity providers: token holders who stake liquidity into an insurance pool
• Providers: users who pay a premium to externalize slashing risk for the collateral they would otherwise post

Simple single-price model

Let be the set of insurance providers. Provider stakes tokens. Total pool liquidity is:

Time is split into epochs of duration , indexed by . Pricing for epoch is determined from utilization in .

If during epoch , providers purchase insurance over collateral amounts , define total insured collateral demand:

For a provider insuring collateral in epoch , the premium is:

where the epoch pricing constant is:

Intuition: price rises when demand is high relative to available liquidity , and falls when liquidity is abundant.

At settlement of epoch , the pool’s realized PnL depends on whether collected premiums exceed realized slashing losses (payouts / collateral covered).

Self-correcting dynamics

• If the pool loses money, insurance is underpriced; liquidity exits, reducing , increasing until profitability returns.
• If the pool earns excess profit, liquidity enters, increasing , reducing until the market price equilibrates.

Concentrated liquidity and granular pricing (risk “ticks”)

Risk is not uniform across transactions. If slashing risk depends on quantities like and , a single can be unfair. One approach is to price by discrete risk buckets (“ticks”), inspired by concentrated-liquidity AMMs.

See: Graph Value.

For example, take a risk score proportional to . Partition the score range into ticks indexed by . Each tick has pool liquidity and insured collateral demand .

Tick-level premiums are:

Liquidity providers can allocate capital across ticks to express a risk view; prices per tick adjust as demand and liquidity shift, producing a more granular insurance curve.