Insurance Bonds for LPs:

Creation of Insurance Bonds:

Osmosis can create a new financial instrument called "insurance bonds" specifically designed to protect LPs against IL, and widen the use case for osmosis native token.

Insurance Coverage and Premiums:

LPs have the option to purchase these insurance bonds, which provide coverage against potential IL. To obtain coverage, LPs pay a premium, which can be a one-time fee or periodic payments. Lp providers can choose to cash the bond to cover cost on IL, or if bond is unused can redeem bond as a value defined in smart contract.

Insurance Bond Pools

User may deposit osmosis token inside the pool to cover claims on the IL from users. A user must be staked inside the pool for a minimum of 14 days before rewards are paid to the user. Tokens may be locked for tier number of days. Like inside the Lps. Each pool will have an epoch of seven days (168 hours) where as the amount of premiums collected minus Insurance bond paid equals the reward distribution.

Reward distribution

Once an epoch has expired the total insurance bond paid is subtracted from the amount of premiums paid and is divided between users. An .02 fee is collected on every epoch to be staked inside the pool itself to be used in emergency situations of extreme volatility. (Controlled by governance)

Risk Assessment:

The platform assesses the risk associated with the liquidity pool in which the LP participates. The premium amount is determined based on the perceived risk of IL.

Coverage Period:

The insurance bond comes with a specific coverage period, which may vary based on the premium paid, amount in LP, or other factors. This period typically aligns with the LP's liquidity provision timeframe.

Compensation Mechanism:

If an LP experiences IL during the coverage period, they can make a claim on their insurance bond. The insurance pool, funded by premiums from multiple LPs and/or bonds created to fund is used to compensate the claimant. Coverage doesn't have to be 100 percent. A LP can chose an amount based on USD. Bond covers amount can vary.

Claim Verification:

Claims are subject to verification to ensure that IL has indeed occurred according to the predefined criteria. Once IL is greater than 50 percent of total LP staked a user can choose to claim the insurance bond.

Compensation Distribution:

Once a claim is approved, the LP receives compensation in the form of additional assets or tokens, helping them recover some or all of their IL losses can send to osmosis address that sign the contract or deposited inside the LP and an new insurance bond can be created. If desired.

Benefits and Considerations:

Risk Mitigation: LPs can protect themselves from potential IL, reducing the fear of providing liquidity during volatile market conditions.

Incentivizing Liquidity Provision: The availability of insurance bonds may encourage more LPs to participate in liquidity provision, enhancing liquidity and depth in pools.

More use case for the native token osmosis. By creating an new pool for user to fund drives the desire to purchase more osmosis token to stake inside the insurance bond pools. Creating more use case.

Risk Pooling: The insurance pool, funded by LP premiums, spreads the risk across the LP community, making it more manageable for individual LPs.

Premium Costs: LPs should consider the cost of insurance premiums when evaluating their overall returns from liquidity provision.

This is a rough draft. Please feel free to comment and let me know if this is possible. Blue Collar Crypto is dedicated bringing use cases to crypto and want to help bring ideas to builder.