Self Insurance Fund

Self-Insurance Fund

SES Legal is the name which the Sustainable Ecosystem Core Unit uses for legal and regulatory topics and initiatives. In line with its vision of sustainably growing the Maker Protocol’s moats by removing barriers between decentralized workforce, capital, and work. SES bootstraps a number of projects, some of which are of legal nature. This is the first proposal branded by SES Legal, but expect more content coming from SES, our incubees, and our grantees.

After the dissolution of the Foundation, all DAO active members will be exposed to new layers of legal and regulatory risk. Active participants such as Core Unit contributors or facilitators and developers are exposed to different layers of liability risk, especially when acting outside a legal entity (whose main purpose is to limit liability of its members).

SES Legal has identified the risk of key actors being the target of a legal or regulatory action as likely and potentially severe. Additionally, there is a necessity of including legal feedback in the DAO collective decision process, as the recent discussions with the implementation of DSS Vest showed.

Fundamentally, the need for legal defense and advice for MakerDAO and its members is evident.

SES Legal proposes to the community the establishment of a Legal Self-Insurance Fund.
The purpose of this forum thread is to gauge the general sentiment around this idea and implement feedback from the community.

What is Self-Insurance?

Self-insurance is a well known risk management technique that consists in setting funds for compensating a possible future loss. Although in theory any damage can be self insured, typically self insurance is used when significant and infrequent losses are expected and when risk can not be transferred through traditional instruments such as insurances.

Why does MakerDAO need protection through a self-insurance fund?

Traditional corporate instruments to transfer these risks such as D&O insurances are practically unavailable in crypto, and also not directly applicable in the novel context of DAOs. Crypto proficient legal advice is expensive and scarce in the market. The risk of legal or regulatory action against a DAO member is likely and potentially severe. These risks also represent a bottleneck for attracting new talent to the DAO.

What risks can be covered?

The fund can be structured in three layers:

In a first layer, the Self Insurance Fund can cover legal costs of defense if a DAO member is the target of a lawsuit or regulatory action.

In a second layer, the fund can cover economic damages to third parties ordered by a Court of Justice as well as fines and penalties imposed by an administrative authority.

In a third layer the fund can be used as a legal reserve for obtaining a legal opinion or advice in an urgent or critical matter, such as the implementation of a new technological feature or a MIP.

The first layer is less complex, so we would suggest starting with this one and then build up the other layers.

Who will be covered?

The fund should cover all permanent DAO participants such as:

a) Facilitators, contributors and permanent members of Core Units
b) Delegates
c) Developers

A more formal determination of personal scope of the fund will be necessary.

What are the benefits of a Self Insurance Fund?

Is a risk management tool appropriate for transferring risks of individuals interacting with the DAO. After properly structuring this fund, it is possible to use it as a first layer for other products in the insurance market to transfer the rest of the risk.

Additionally, it is a very flexible instrument that can be tailor made to cover the needs of the DAO, unlike more traditional insurance products.

How large should the fund be and which countries should be covered??

Principally, any jurisdiction where a covered person is domiciled should be covered.

However, a technical and financial study for each layer is required to determine our overall risk exposure, the coverage and the size of the fund.

Arguably the largest risk exposure but also the most complex one is in the US.

Probably it would be a good idea to start with a pilot project in a concrete jurisdiction.

How will the fund be implemented in the MIP framework?

I consider the Special Purpose Fund (MIP 55) as an appropriate framework for implementing the fund. It is high priority and narrow in scope and requests are one-off or irregular. MIP 55 explicitly states as one of the use cases legal reserves for the DAO.

Next steps

  1. Discuss and gather feedback from community
  2. Hire a feasibility study to determine risk exposure, size of fund and other parameters.

I think this is very prudent and is just a matter of good implementation and appropriate scale.


My only request: please use the Treasury for this wise and prudent purpose. The money is just sitting there gathering figurative dust.

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Good initiative. Just a few observations for your consideration:

  1. Layer 1 seems a good place to start. I would perhaps not spend to much time on risk exposure estimation, as I have seen these exercises ending really when you ask ‘so how much can you realistically afford to put up as contingent liability for this sort thing?’ - and that becomes more the determining factor of the fund size than the risk exposure.

  2. Now - unfortunately - having an ability to pay via this type of fund, may actually increase the chance of getting sued and having to pay for both lawyers and settlements. Something to think about how to ensure not happens. Obviously this is mainly in your layer 2 - but I am thinking you may have to have a bit of layer 2 in your first solution (not just cover advice, but potentially help with settlements as a result of the advice etc.).

  3. I guess ideally one would love to see a global defence/advice agreement with a ‘lean, mean global’ law firm designed such that it deterred spurious law-suit/legal pursuits etc.?

  4. I think there are a number of insurance brokers who arrange self-insurance/self-funded insurance schemes - also non-standard ones. You may already have spoken to them - but certainly a possible port of call and get some input from?

  5. Practical admin of the scheme something to consider for sure. Who to decide what is covered/not covered etc? Perhaps that sort of global agreement with a law firms might make this easier and economically contained - not sure.

Good initiative indeed. Looking forward to see where you get to.


Great post @Allan_Pedersen

The above are important points and pretty much cover everything that came to my mind when I first started reading this. Of particular note 1&2 are going to be coupled. My first thought was about (4). Has anyone looked to whether and more just as importantly how much it would cost to lay off some of this risk and reduce the cost significantly by having a large deductible (.5-1M isn’t unreasonable and probably a good number). The question would be what such insurance covers and the maximum coverage. Which leads us to (5) that is strongly coupled to (4).

This is a good initiative and something I support SES pursuing this.


Hey LayerZero, thanks for putting this together. I like the idea of the DAO making a commitment to protect its own against legal/regulatory actions and self-insurance sounds like it could be an effective way to make that happen.

For this reason, it would be helpful to separate concerns that specifically affect the DAO from concerns affecting CUs. No reason to self-insure against liabilities CUs can insure themselves against.

@SES-Core-Unit, do you help the CUs in incubation understand what types of insurance are available and how to obtain them? Might be something helpful to include in the program.


Can you elaborate a bit? I read this as to qualify for these funds an entity would need to have their own liability insurance/umbrella insurance and then above that the DAO steps in? Or did I misinterpret?

Don’t have opinions either way yet, but definitely something that needs to be discussed for implementation

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My read at least on the initial post is that there would be a fund available if certain criterion were met. The point here is if the DAO can lay off any of the insurance risk a reasonably large deductable should be applied. Example is that say one of us gets sued for say 2M. Sure we are going to have to mount our own legal defense, but even at the point we are served we should be able to make a claim for legal expenses based on (a). Now lets say we spend like 250K to defend and we lose and the judgement is for $2M damages. Presumption is the fund kicks in the 250K for defense (a) and the deductible would come from the fund ((b) for.5-1M of the damages) depending and then the DAO insurance would kick in for the 1.5-1M remaining in damages.

Almost all insurance is going to have some deductible and my point was if any quote and terms could even be given the deductible should be reasonably large.

I think a discussion regarding the amount in these funds and the conditions to access would be relevant so people know how much cash they have to have on hand to retain legal after being served before some fund related to (a) would kick in to help cover legal expenses to mount a defense. Conditions where a judgement would quality for (b) probably also required because this is going to affect the insurance policy conditions risk and hence the cost. The point to your question is that Maker itself would put up the funds to cover legal, and judgements and use the insurance policy to cover stuff that goes above what the DAO think it could reasonably fund.

Personally I think the idea of such a fund here is such that it could be quickly drawn upon. We don’t want anyone trying to work for Maker left in the cold under attack and unable to mount a reasonable defense because of available personal cash limitations.


Thank you for your comments.

Yes, I see your point. We have to be thoughtful, what part of this discussion should be held publicly. And I think some of the details of this project should be accessible or “permissioned” for MakerDAO stakeholders.
Regarding your, second point, yes, that is definitely possible, to include part of layer 2 (i.e. settlements) in layer 1.


Very important. We have to discuss as a community the overall strategy for legal defense / advice of MakerDAO. The Self Insurance Fund is only one part of it. We are working in SES in several projects related to public policy, advocacy, compliance, etc that we will soon share . Regarding legal advice, I agree that it should be done by external counsel and not by a potential Legal CU, but struggle with with the idea of one “big law firm” and instead think advice should be more granular and specialized.


Yes @seth. We identify with our incubees some of the risks involved in interacting with MakerDAO, and at the same time advice them that it s their responsibility to comply with local regulations and get proper legal advice in their respective jurisdiction. Sometimes the risks of Core Units are clearly differentiated from those of the DAO, in others there is an overlap. If a critical CU can’t operate normally or goes insolvent because a lawsuit, it can turn into a severe risk for the DAO. At SES, we tackle the risks at the DAO level. In the current setup, there is practically no insurance product for transferring legal and liability risks. With the self insurance fund in place that will change.

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Thank you for your post. Yes, that would be possible, we can structure the self insurance fund to meet our needs. Let’s say we use it for legal defense and settlement / civil claims up to a limit, for the rest we go look for an excess of loss reinsurance.


I think this + helping DAO members to get themselves inside a corporation/LLC should almost become our top priority.

We need everyone to have defensible ground (a limited liability business wrapper) and the arms to defend it with (insurance up to X and then this DAO-supplied fund beyond that).

The reinsurance and other elements can be rolled out over coming months, but I would like to set a goal of everyone who provides work for or receives compensation from the DAO in 90 days to have:

-all individuals interacting through some form of limited liability vehicle
-some record or statement publicly that confirms to any external observers that no contributors are interacting with the DAO as private individuals
-those limited liability vehicles have appropriate insurance to serve as a qualifying deductible to access any Maker self-insurance funds
-a self-insurance fund established, and preferably with the ability to contract in a manner that binds it to honor its obligations to DAO member entities
-a clear definition of what (beyond deductible) qualifies a DAO entity to obligate this fund
-educational materials and advice for those who need help establishing a limited liability entity and acquiring the correct insurance coverage to survive until the fund kicks in (regulatory is usually separate from liability, though I suspect the latter is more urgent if both cannot be acquired)

I welcome refinements and suggestions to the above, but think a “minimum viable product” of this deserves rapid roll-out and reduces tail risk more than anything else we can do at the moment.

A firm commitment to and plan for protecting DAO entities can also serve as a major recruitment tool for anyone who works in traditional businesses and takes for granted a legal shield between them and their business activities. It will also set a good example for other DAOs who lack the expertise to figure out how to do this kind of thing.


Important R&D to be done. Your point around liability protection is spot on. I can’t count on one hand the number of experienced professionals that have been deterred from working with Maker due to the potentially massive liability exposure they would have, without an “umbrella” entity to buffer that risk.

To this date that is still a pending subject. Everyone from devs to risk professionals are very exposed, whether they recognise that risk or not. Our moving focus towards touching real world assets increases that risk so it seems a very appropriate moment to touch on the topic.


We need to come up with a way to facilitate discussions around legal/regulatory topics before we make too many concrete decisions. As others have pointed out, in the context of law, there’s a fine line between explaining why you think something’s a good idea and giving others the information they need to make it look like you’ve done something bad, whether you’ve actually done anything bad or not.

Setting time aside for legal concerns as we experiment with different formats for the mandated actors’ call could be helpful but I’m not sure it would address the problem entirely. @gov-comms-core-unit @GovAlpha-Core-Unit

It’s our duty to be informed of the evolving legal context; both globaly and in key regulatory jurisdictions like the US.

We need to come up with a way to facilitate discussions around legal/regulatory topics before we make too many concrete decisions.

I agree, and I think it should be structured as a “tell us the leading opinions, and then let us ask questions.” With Legal SMEs at MakerDAO leading the calls. I also don’t know that this could be a public call. It would likely have to be invite-only for key stakeholders depending on the topic that the opinions are about.

I like the idea of crowdsourcing them using a vehicle like this fund. Most helpful, in my view, would be a quartlerly/semi-annual “Informational Call” for stakeholders that summaries the top 2-3 opinions on each key matter, hosted by legal SME(s) at Maker who have reviewed the various opinions and metrics behind each.

The key is for MakerDAO stakeholders, both internal and external, to be informed of the evolving landscape of opinion. It’s the practice of being informed that will best help stakeholders understand the risks or problems with certain decisions. This information is what voters and other stakeholders should consider when forming consensus around design or direction.


I also see the Self Insurance Fund as one key component of a comprehensive legal risk management strategy to be implemented at a DAO level. It is one of the first tools we can implement, but not the only one. The next step is to decide on key parameters: risk layers (we can start with one layer or with all three at once), jurisdictions and an exact definition of who is covered.

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Regarding where-to-start and key initial parameters my thoughts would be:

  • Implement Layer 1 (fund legal defense) and potentially Layer 3 (obtaining legal advice). Though it may make more sense to implement Layer 3 as a separate fund.
  • Cover Facilitators, Contributors, Core Unit Members, Delegates and Developers (with a possible exception of developers hosting UI front-ends in the case that they are negligent in informing users of important risks in the use of the protocol.) Both pseudonymous individuals, and individuals known by their ‘real world’ identity.
  • Permit the fund to be used to defend the above in any jurisdiction within which the ‘rule of law’ exists.

The less said about Layer 2, the better.

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Totally agree. If we don’t find a way to protect personal assets of contributors involved in the DAO, we will have a hard time finding the workforce the DAO needs to scale. I believe the law will evolve and provide more tools for mitigating liability risk at DAOs, but until we are there, we need to structure these instruments ourselves. By doing it properly, it will give also give us an important competitive advantage over other projects.

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Thank you for your feedback @LongForWisdom. Yes, I am also inclined to start with layers 1 & 3, which are more urgent and arguably less complex. The personal scope also seems reasonable. Definitely both identifiable and pseudonymous individuals should be covered. We do need to know in which countries we will need protection, we can figure this out.

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