Develop a Context-Aware Risk Ratio Formula for Breadfunds Use Cases

[miawinthertamaki]

Background

The ratio parameter in Breadfunds determines the risk-sharing mechanism for different use cases (such as mutual aid, device insurance, or other forms of pooled risk). Setting this parameter appropriately is crucial for balancing member protection and fund solvency.

Motivation

A fixed or arbitrary ratio may not suit all use cases. For example, the risk profile of an insurance pool for phones is different from a mutual aid fund for healthcare emergencies. Without guidelines or a principled approach for determining the ratio, the protocol is exposed to reserve shortfalls or underutilization, both of which undermine its mission.

Problem Statement

• There is no established process, formula, or guideline for selecting a safe and effective risk ratio for each Breadfund use case.
• This creates a risk that, for some use cases, the contract may either become insolvent (if the ratio is too generous) or fail to serve members' needs (if the ratio is too conservative).
• The lack of a context-aware formula also makes it difficult for new forks or deployments to operate safely.

Example Considerations

• What is the expected frequency and size of claims per use case?
• How much buffer is required to avoid insolvency, based on actuarial or peer mutual aid models?
• Can we parameterize the ratio formula according to real-world data and update it as more claims history is gathered?

Example Code Snippet

// Example formula (pseudo-code)
function calculateRecommendedRatio(uint256 expectedClaimsPerYear, uint256 avgClaimSize, uint256 totalMembers, uint256 reserveBuffer) public pure returns (uint256) {
    // This is an illustrative example, actual implementation may differ
    uint256 riskFactor = (expectedClaimsPerYear * avgClaimSize) / (totalMembers * reserveBuffer);
    return min(1, riskFactor); // ensure ratio does not exceed 1
}

Next Steps

• Research and document risk modeling methods relevant to mutual aid, insurance, and other Breadfunds use cases.
• Develop, test, and propose a formula or decision framework for setting the ratio.
• Collaborate with product, engineering, and community to validate approach.

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Tagging for product, research, and risk modeling input.