[BSP:04] Explore Protocol Coverage

TL;DR - a non-binding steering proposal to determine if the DAO supports reallocating Beefy protocol revenue to a new “Protocol Coverage Fund” to routinely finance Nexus Mutual coverage for the benefit of Beefy users.

Background

Across Beefy’s 5 year history, we’ve deployed automated strategies on top of hundreds of DeFi protocols and thousands of digital assets. As the industry has evolved, we’ve also suffered the knock-on effects of a wide variety of exploits and security breaches.

The recent Balancer V2 exploit reminded the industry that even long-established and battle-tested protocols can be vulnerable. No amount of history or due diligence can truly guarantee protection.

At the same time, we were thrilled to see users successfully claim against coverage purchased from Nexus Mutual and Open Cover to mitigate the harmful impacts of the exploit. It served as a reminder of that — in an industry where it’s impossible to reach complete certainty over the security of our infrastructure — ex-ante coverage for smart contract exploits and failures is extremely important.

It’s on that basis that Beefy’s core contributors have approached Nexus Mutual to sound out the possibility of introducing protocol coverage for Beefy users, funded by the protocol.

Nexus Mutual

By way of introduction, Nexus Mutual is the largest provider of coverage for crypto assets. Founded in 2019 by Hugh Karp, Nexus launched its protocol on Ethereum later that year as the first onchain discretionary mutual designed to protect users against smart-contract risk.

Since then, Nexus has grown to become the dominant coverage provider in DeFi, expanding from its original Smart Contract Cover product into a broader suite of protection offerings, including protocol, custodian, and depeg coverage across multiple ecosystems.

Nexus integrated Beefy coverage in March 2022. This included extending to multi-protocol coverage, where users are protected both from exploits in Beefy’s smart contracts and exploits in the underlying protocols that Beefy builds on top of. Through OpenCover, coverage with Nexus was also extended to a variety of chains beyond Ethereum, allowing for direct integration into the Beefy web app.

Having maintained a good working relationship over the last 4 years, we feel confident that Nexus is the perfect partner to help Beefy realise the core team’s vision of comprehensive protocol coverage.

Protocol Coverage

Our vision is for leading Beefy products — wherever reasonably possible — to come with a level of user insurance baked in by default. That is not to say that every deposit should be fully backed by coverage in all circumstances, but rather that users should be able to invest knowing that an additional safety net exists to cushion the blow, should the worst happen.

That fund would routinely acquire coverage from Nexus to cover both the Beefy protocol contracts and certain of the underlying protocols that Beefy builds upon. Covering some rather than all is necessary given the broad range of Beefy’s integrations and the lack of available counterparties to offer coverage on novel integrations. Instead, we aim to achieve general coverage over the majority of Beefy’s TVL and revenue across major DeFi protocols.

Our idea is modeled on the global deposit-protection and investment-protection schemes, including the US Federal Deposit Insurance Corporation (FDIC) and the UK Financial Services Compensation Scheme (FSCS). Similar to those schemes, our Protocol Coverage Fund would offer protection of up to an agreed maximum level of coverage (e.g. $50,000 of protection) for every Beefy user. Where total claims exceed total coverage, each user would receive a pro rata share of the total pot. The scheme would be subject to strict terms to prevent multiple claims by the same party.

Setting expectations straight, this would be a fractional form of coverage only, meaning much smaller than the total amount of assets deposited in Beefy. To cover all of Beefy’s TVL would be extremely expensive, necessitating a large increase in fees. And, due to the diversification of Beefy’s TVL across so many chains and protocols, history would suggest that insured events tend to arise on only small fractions of protocol TVL, one protocol at a time. Had the relevant coverage been available, the Balancer exploit value could have been covered with just $10 million of coverage (~4.5% of current protocol TVL).

Where an exploit leads to loss of user funds, Beefy DAO would be able to claim against all relevant policies and then receive compensation (less a deductible) up to the amount of the loss or coverage (whichever is less) before paying this out to users. This provides some cushioning that a level of recovery should always be possible on Beefy.

Costs, Coverage Levels & Funding

The downside of this scheme is that coverage is not cheap, taking account of the likelihood that this Fund will be used at some stage in the future. It therefore requires a detailed conversation on the appropriate level of coverage, the appropriate structure of these costs and the appropriate means of funding this addition.

In terms of costs, Nexus differentiates between the cost of Beefy’s own coverage and coverage for the protocols Beefy builds upon. In initial discussions, Nexus provided some initial indicative figures based on a basket of underlying protocols reflecting our current TVL:

• 1% to 2% for Beefy Native Protocol Cover, depending on the size of coverage and the agreed deductible; and
• 4% to 6% for Supplemental Beefy Protocol Cover of other underlying protocols, again depending on the size of coverage and deductible, as well as the specific composition of protocols.

Note that Nexus reserves the right to alter pricing over time. These figures are indicative only.

The actual rate offered is a function of the amount of coverage requested and the size of deductible that we are willing to pay. For example:

• $10 million of coverage with a 5% deductible ($500,000 to deduct for first claim) gives an estimated cost of $750,000
• $5 million of coverage with a 10% deductible (also $500,000) gives an estimated cost of $300,000.

A deductible is an important component of any coverage policy. It effectively sets a minimum threshold on claims, ensures that the policyholder has skin in the game, and therefore serves to promote a cautious approach (rather than proceeding recklessly on the basis of the coverage). This would be deducted from the total amount claimed, and the DAO would not be liable to make any payment with respect to any deductibles.

In terms of funding, the core contributor team is proposing to incorporate this cost into Beefy’s protocol fees. That could be through a reallocation of existing fees from strategists, treasury and/or stakers. It could also be through a small fee increase.

In 2024, Beefy generated ~$4.5 million in Protocol Strategy Revenue from our current 9.5% fee; in 2025, current estimates indicate ~$3.2 million. Allocating a 1% fee (from whichever source) to protocol insurance would give an annual budget of $320-450,000. Depending on the level of deductible, this budget could obtain $4.5 - $7.8 million in coverage.

Ultimately, the precise details remain to be worked out. The purpose of this steering proposal is to give an accurate indication of the likely scale and cost of this endeavour, and to solicit feedback from the community. If attractive, a full proposal will be shared later for voting with specific details of the precise parameters of the Fund.

BIFI Holder Benefits

A further consideration for the Protocol Coverage Fund is the potential for introducing some kind of BIFI holder benefit, whereby holding BIFI increases your proportional participation in the fund.

A form of holder benefits would add complexity to the delivery of the Fund, but also increase BIFI utility and ensure that BIFI holders receive something in exchange for any decrease in the proportion of fees allocated to governance pool incentives (if that formed part of the funding for coverage).

Potential options for holder benefits could include:

• Extended Base Coverage - holders get higher coverage levels than general participants, calculated as a function of their counted BIFI holdings. For example, it could be $500 extra per BIFI up to an agreed limit. So, a $50,000 base maximum could extend by $500 per BIFI up to a 100 BIFI limit, to a maximum of $100,000 coverage.

• Boosted Partial Recovery - if an approved claim exceeds the fund size, meaning all affected users would receive less than full recovery, holders could receive a slightly higher proportion given the amount of their BIFI holdings. For example, holders could receive a multiplier of 0.25% extra per BIFI up to 100 BIFI (maximum of 25%). For example, imagine a 100 BIFI holder with $4,000 loss and a non-holder with $5,000 loss, the holder receives an additional 25%, taking it up to $5,000, meaning both receive an equal share of the compensation, even though the non-holder had greater loss.

We share these points at this stage to open up discussion. We expect that holders will undoubtedly be in favour of some additional perks, but wish to hear from other users as to whether these adjustments would be undesirable or dampen their willingness to participate.

Ultimately, we feel that the scale of the benefits would have to be carefully configured, to ensure they are desirable but do not materially detract from the position for non-holder users. Where no clearly-favourable options for holder benefits are identified, we propose to push ahead without.

Proposal

Beefy should work together with Nexus Mutual to develop and propose a form of protocol coverage for the benefit of users of the Beefy protocol in line with the details of this proposal.