# Peg insurance

An insurance product that protects users from de-pegging of stablecoins

Bob is holding USDT and would like to protect himself from the event of it losing its peg to the US dollar. Alice is holding USDT as well and is quite confident that it will hold its peg. Alice would like to earn some additional yield on her stablecoin holdings by selling insurance to Bob.

Alice uses the DIVA App to create a peg insurance product with the following configuration:

Example configuration for a peg insurance product in the DIVA App.

After creating the pool, Alice sells all 100 short position tokens minted for a total of USDT 3 to Bob and keeps the long position tokens. The payoff profiles for Alice and Bob are depicted below:

1) USDT >= 1.0:

- Alice can redeem her initially deposited collateral of USDT 100 and keep the premium for selling the short position tokens to Bob for USDT 3 ->
**net gain for Alice: USDT 3**(3% yield on her initial investment) ->**net loss for Bob: USDT 3**

2) USDT/USD = 0.95:

- Alice received a premium of USDT 3 for selling the short position tokens to Bob but loses 50% / USDT 50 of her initially deposited collateral ->
**net loss for Alice: USDT 47**->**net gain for Bob: USDT 47**

3) USDT/USD <= 0.925:

- Alice received a premium of USDT 3 for selling the short position tokens to Bob but loses the collateral of USDT 100 that she initially deposited ->
**net loss for Alice: USDT 97**->**net gain for Bob: USDT 97**

Instead of using the value of UST/USD at some specific point in the future as the underlying metric, Alice could have chosen the following metrics alternatively:

- Average UST/USD value over the lifetime of the derivative
- Minimum UST/USD value during the lifetime of the derivative

Also, instead of using a linear payoff curve, she could have used a binary pattern or a combination of both (rug/cliff shape).

Last modified 1yr ago