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Ethereum [ETH] Foundation developer unveils a proposal for a smart contract insurance pool

Alex Van de Sande, a developer who is team lead for the Mist Browser at Ethereum Foundation has unveiled a proposal for an insurance pool that he believes will mitigate the risk of network splits stemming from a desire to recover funds frozen due to code faults in smart contracts.

Van de Sande wrote in a blog post that creating a recovery contract with a dedicated insurance fund would reduce the incentive that a person or group incurs. For example, the owners of more than $320 million in ETH that was rendered unspendable after Parity’s multi-signature wallet contract library self-destructed would have to pursue a contentious hard fork to recoup a share or all of the value lost due to the bug.

In his blog, he quotes:

“It’s a simple calculation really: let’s suppose the overall ethereum community decides not move forward with EIP999, but Parity implements it anyway on their very popular client.”

According to him, the system will work in the following way, developers would insure their smart contracts by locking up Ether for a predetermined period of years in a recovery contract. They would receive an equal number of ‘recover-ether tokens’ in exchange which they could then either hold or sell to speculators.

If the Ether insured by the contracts becomes frozen, i.e. experiences a hack or other exploits in which the fund would not cover the tokens which remain liquid, the recovery process would allow recover-ether holders to redeem their tokens for an equivalent percentage of the pool’s funds at a 90 percent rate, with the remaining 10 percent used to fund the general insurance fund of all tokens.

On the other hand, recover-tokens would be automatically destroyed and the issuer would receive their locked Ether if the lock-up period passes and no recovery process is initiated. He would also keep any profits realized by selling recover-tokens at the outset.

The token holders would govern the recovery contract and enjoy the power to vote on decisions such as, which contracts the fund should insure.

One hurdle to the proposed system would seem to be that the recover-tokens would likely be classified as securities by many regulatory agencies. One more element which is highly controversial in his proposal is launching the fund with more than 513,000 ETH in liabilities by issuing recovery tokens to the victims of code fault in Parity’s multi-signature wallet contract library.

Along with the aim of reducing the risk of a contentious network split, which, to be clear, Parity says it has no intention of pursuing, Van de Sande argues that this would allow the victims, a group that includes many of Ethereum’s top developers to turn into stakeholders in the new fund. This, in turn, would most likely give the pool a greater chance of gaining traction when it launche

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