Makina Launches a Security Module
The Security Module is an add-on to a Machine that serves as a reserve, designed to mitigate losses in the event of a shortfall, for instance in the event that an underlying position in the strategy suffers a loss due to a hack or credit loss. It enables Machine Token holders willing to lock their MTs to earn higher yield by securing the Machines.
Here is how it works and how to get started.
The Role of the Security Module
The Security Module introduces a dedicated pool of capital that can be used to cover losses at the Machine level.
The Security Module receives and holds staked Machine Tokens and in return depositors receive Security Tokens representing their position.
The capital provided through the Security Module is used to cover losses, with Security Token holders absorbing losses first during a slashing event.
With the addition of the Security Module, users opting to participate, earn additional rewards as compensation for this greater risk, and provide protection for the remaining Machine Token holders.
Who is the Security Module For
The Security Module is for users who:
Have higher risk tolerance
Seek higher yield than standard deposits
Believe in the Operator’s ability to run successful strategies
Understand and accept that Security Token holders are the first to absorb losses during slashing events
Depositors in the Security Module should understand the risks involved before participating.
Depositing into the Security Module
1) Deposit Machine Tokens into the Security Module
2) Receive Security Tokens
3) Earn higher yield from the moment of deposit
When a user deposits Machine Tokens into the Security Module, they receive Security Tokens representing their position. In return, the depositor receives increased yield from Machine’s fees, in the form of Machine Tokens. The increased yield reflects the additional risk taken by Security Token holders. For example, an underlying position in the strategy suffers a loss due to a hack or credit loss.
Users can preview the exact amount of Security Tokens received, the Security Module APY, and estimated yield, before confirming the transaction.
The Security Module is funded through a fee applied at the Machine level. This fee is routed to the Security Module and distributed to Security Token holders, providing the additional yield incentive. This fee accrues continually and nothing needs to be claimed by users who participate in the Security Module.
Withdrawing from Security Module
A mandatory cooldown applies when converting Security Tokens back into Machine Tokens. This mechanism prevents short-term participation around potential loss events. When a cooldown is initiated, Security Tokens are burned and replaced with a receipt NFT representing the position. The NFT can be redeemed for Machine Tokens once the cooldown expires. The cooldown duration is determined by the Security Council (currently a 7-day minimum).
The withdrawal can be canceled at any time during the cooldown. Cancelling returns the Security Tokens to the NFT holder. During the cooldown period, users are still subject to slashing and do not earn the Security Module rewards.
Because the position is represented by a receipt NFT, it can be transferred or sold during the cooldown period.
Security Module Parameters
Several parameters of the Security Module can be adjusted by the Machine’s Risk Manager.
Adjustable parameters include:
Cooldown duration: how long users must wait before withdrawal
Maximum slashable percentage: the cap on how much can be slashed during a loss event
Minimum balance floor: the amount that must remain after slashing
These changes pass through a timelock, introducing a delay between approval and implementation. This allows users time to react to parameter changes.
What Happens During a Loss Event
If a Machine experiences a loss, the Security Council can trigger a slashing event. The Security Council has emergency intervention capabilities that provide a last line of defense to a Machine, and is able to trigger a Security Module slashing event.
A slashing event reduces the total value locked in the Security Module to cover the shortfall. Up to 99% of a user’s position can be slashed however this depends on the limits that are set.
Slashing has built-in limits and the more conservative limit applies.
- A maximum percentage of the total balance can be slashed
- A minimum balance must remain after any slashing
During a slashing event, new deposits in the Security Module are disabled. The module remains paused until the Security Council completes the slashing and restores normal operation.
The First Security Module Activation: DUSD
The first Security Module is going live on the DUSD Machine with the following parameters set.
DUSD Security Module:
- Fee: 0.10% (10 bps)
- Cooldown Duration: 7 Days
- Max Slashable: 99%
- Min Balance Floor: 1 DUSD
Here is an example of how much total APY users can expect by participating in the Security Module.
For this example assume:
- The DUSD Machine has $15,000,000 TVL
- The DUSD Machine Base Yield is 6%
- $300,000 of DUSD has been staked in the Security Module (2% of the total TVL of the DUSD Machine)
To calculate the total APY for users participating in the Security Module:
i) Fees Generated by the Security Module: (15,000,000 x 0.001 = 15,000)
ii) Security Module APY: (15,000 / 300,000 = 5%)
iii) Adjusted Base Yield: (Base Yield 6% - Security Module Fee 0.1% = Adjusted Base Yield 5.9%)
iv) Total APY for Security Module Participants: (Adjusted Base Yield 5.9% + Security Module APY 5% = Total APY 10.9%)
Here is a table of potential scenarios:
DUSD Net Return = 5.0%
Utilization 0.10% SM Fee
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2% staked 11.00%
3% staked 9.33%
4% staked 8.50%
5% staked 8.00%
6% staked 7.67%
7% staked 7.43%
8% staked 7.25%With the introduction of the Security Module, how users interact with Machines begins to change. It reduces loss exposure for Machine Token holders, while opening up a new path for those who want to take on additional risk in search of higher yield. It also makes Machines more interesting from an investment perspective, particularly for curators who professionally think about risk, allocation, and how capital is positioned across opportunities. The Security Module will roll out Machine by Machine and we look forward to helping our users understand how to get involved.
To get started, navigate to the points page, and under the DUSD Machine Security Module click deposit: https://app.makina.finance/points