Bifurcating the Insurance Fund: Return Staker Capital, Consider Protocol-Owned Accumulation for Recovery

[activevision1800]

Bifurcating the Insurance Fund: Return Staker Capital, Consider Protocol-Owned Accumulation for Recovery

The Insurance Fund should not be treated as one undifferentiated pool.

It contains two structurally different buckets with different ownership characteristics:

1. IF staker principal and accrued yield
User-owned capital deposited by Insurance Fund stakers.

2. Protocol-owned IF accumulation
Protocol or foundation-owned capital accumulated inside the IF structure.

Any DIP on Insurance Fund treatment should separate these two buckets from the start. The user-owned staker portion should be returned to IF depositors at relaunch. The protocol-owned portion should be transparently accounted for and opened to governance discussion as a potential recovery source.

Why the distinction matters

Across multiple official communications, including the initial post-exploit X update, the April 16 recovery update, and the May 5 recovery plan, Drift has repeatedly described the Insurance Fund as unaffected, safeguarded, or separate from the impacted user funds.

The April 16 update was especially clear that IF depositor assets remained intact and would be available to depositors upon protocol relaunch.

Drift’s own docs also describe IF staking as taking on a specific category of risk: trading-related bankruptcies, AMM deficits, liquidation losses, and bad debt.

IF stakers did not deposit capital to insure against an unrelated security or admin-key exploit.

Redirecting user-owned IF would create a bad precedent

Redirecting user-owned IF principal into the recovery pool would set a very dangerous precedent.

This is not only an IF-staker issue. It would damage trust in the whole protocol.

If user-owned funds that were repeatedly described as unaffected can later be redirected by governance, then lenders, traders, vault users, LPs, and future IF stakers all have to ask the same question:

Can my funds also be reclassified after the fact?

That precedent would be far more damaging to Drift long term than the amount recovered from user-owned IF capital.

Protocol-owned IF is different

At the same time, the protocol-owned portion of the IF is a different matter.

Based on my own on-chain checks, at least $8M out of roughly $20M of the Insurance Fund appears to be protocol-owned.

That number should be verified publicly. I think the team or foundation should publish the exact accounting by market and vault, including:

1. User or staker-attributable principal
2. Accrued yield owed to stakers
3. Protocol-owned IF shares
4. Any ambiguous or residual balances

Once that breakdown is public, the DAO should seriously discuss whether some or all of the protocol-owned portion should be directed toward recovery, used to seed the relaunched IF, or split between the two.

Proposed path

My preferred path is simple:

1. Return user-owned IF principal and accrued yield to stakers at relaunch.

2. Publish a full ownership breakdown of the IF.

3. Treat protocol-owned IF accumulation as a separate governance item.

4. Consider directing protocol-owned IF funds into the recovery pool or relaunched IF.

5. Avoid treating the entire IF as one undifferentiated pot.

Bottom line

Return the user-owned IF portion. Put the protocol-owned IF portion up for serious governance discussion.

That is the cleanest and most trust-preserving outcome.

It honors Drift’s repeated communication that the IF was unaffected, avoids redirecting user-owned capital, protects Drift’s credibility with all future users, and still allows meaningful protocol-owned funds to support recovery.

[driftgovinsurance]

Good plan, totally agree.

[brothfulbro]

Insurance fund was not affected. Almost no one would come back to drift on relaunch if the team decides to sweep the unaffected users’ portion of insurance fund into the recovery. Who in the right mind, would deposit or stake into a protocol that can unilaterally do w.e they want with any funds under the guise of DAO

[Clevelandcavs58]

I think you hit the nail on the head here.

It was made very clear when depositing to the IF, that assets were separated, and only at-risk in the event of trading-related bankruptcies.

Me personally, i looked at how each of the major DeFi protocols treated their users before/after/during 10/10, and i determined that Drift was the place I wanted to trade and I thought the yield for insuring traded-related bankruptcies was a fair yield (10% or so).

I have/had listened to my fair share of CFA style analytics, and general consensus is saying that to insure a crypto protocol-related bankruptcy, rather than a trading-related one, it would feature a required return in excess of 30% (this may sound crazy, but I would urge readers to look at the amount of recent hacks and other risks that may not be evident).

When I pledged assets to the IF, it was made abundantly clear what the risks were.

[craigbeck]

100% agree - it is the only legal way forward.

Insurance Fund participants accepted a very specific, defined risk profile in exchange for a modestly enhanced yield. They did not agree to underwrite an open-ended, all-risks comprehensive policy covering every conceivable failure of the protocol. In the real world, your home insurer will not pay out if you leave the keys hanging in the front door.

1. The Insurance Fund represents less than 10% of total value locked. Inviting 100% of the community to vote on how that fund should be distributed is so transparently inequitable that it underlines, rather than disguises, the absence of proper legal due diligence.
2. If a DAO vote is going to take place, the only defensible mechanism is to ask Insurance Fund holders themselves whether they wish to donate a portion of their position to a recovery fund. Anything else is a vote by the many to seize the property of the few.
3. Drift earlier public statements confirming that the Insurance Fund was not affected by the exploit materially restrict the options now available to you. Those statements are on the record, they are timestamped, and they would be produced as evidence in any subsequent civil action.
4. Nobody wants to see this resolved through class action litigation. That outcome leaves every party worse off, including the community Drift are trying to protect. However, the reputational damage caused by what would reasonably be characterised as expropriation of the Insurance Fund would, in my professional view, lead to the permanent closure of Drift Protocol.

Craig Beck

[fathe]

I support separating the Insurance Fund into user-owned staker capital and protocol-owned accumulation.

My position is simple: return staker principal.

The core issue is the principal that IF depositors intentionally supplied under a specific mandate. Insurance Fund stakers did not provide general bailout capital. They deposited into a defined-purpose vault designed to backstop trading-related bankruptcies, liquidation shortfalls, borrower defaults, and AMM deficits.

The April 1 exploit was not one of those events. It was a security and operational failure. Expanding IF staker obligations after the fact would rewrite the risk users agreed to when they deposited.

Drift repeatedly stated that the Insurance Fund was unaffected and that depositor assets remained intact. If those assets are intact, user-owned principal should not be reclassified into recovery capital by governance.

A DAO vote can decide future protocol structure. It should not be used to redirect unaffected user principal deposited under a specific disclosed purpose.

A clean resolution:

1. publish a wallet/vault-level IF breakdown;

2. identify user-owned staker principal;

3. return that principal pro-rata to IF depositors;

4. treat protocol-owned IF balances separately;

5. discuss only protocol-owned balances as a recovery source.

This is not opposition to user recovery. It is opposition to funding recovery by retroactively changing the terms of a purpose-built user vault.

Returning staker principal preserves Drift’s credibility. Redirecting it tells every future lender, LP, vault user, and IF staker that “unaffected” user funds can still be reclassified after the fact.

[activevision1800]

Looks like someone did better on-chain accounting than I did. On-chain view of Drift Insurance Fund protocol-owned shares: ~$6.56M notional It seems like there are about 6 million that is protocol owned.

[Hydeee]

This sounds the most fair vs the binary options team suggested in the latest update. I am in both the affected borrowers/lend and unaffected insurance fund. I can’t imagine getting affected twice simply because the team wanted to…

As much as I want to see my affected portion getting max recovery, “rugging” the unaffected users just isn’t it. I won’t be using drift if that’s the case, and I assume most won’t either.

[driftwgmi]

wow, thanks for this. I had no idea there is a big chunk of the insurance fund that is protocol-owned! I thought most of it was user funds and I get it, as much as I want that to help our recovery, it is hard to argue this was a normal bad debt the insurance fund should cover. But I definitely think it makes sense to discuss how we should use the protocol-owned portion for recovery.

Also shouldn’t the team be disclosing this along with their current state of treasury? Now I am asking even more questions? e.g how much of the borrow/lend is protocol owned as well? Should they even get recovery tokens??