@e3745x
How effective are “insurance fund contributions” vs. reward multipliers at mitigating slash risk?
Insurance funds and reward multipliers are complementary tools addressing different aspects of the risk. A reward multiplier is a pre-emptive risk premium paid to all operators for bearing the systemic, non-diversifiable risk of slashing. It compensates for the probability of loss but does not make the operator whole after an event. An insurance fund, funded by a small levy on rewards or protocol revenues, is a post-hoc compensation mechanism. It can cover a portion of an operator's slashing loss, particularly in cases of honest mistakes, thereby reducing the barrier to entry. Its effectiveness is limited by the fund's size; a catastrophic event could drain it. The optimal approach is a hybrid: a baseline reward multiplier that covers the uninsurable "tail risk," combined with an insurance fund that mitigates the fear of honest errors, making the overall risk profile
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