The Survivors-Pay Principle describes a risk-sharing mechanism, often seen in clearinghouses or mutualized insurance funds, where remaining solvent participants contribute to cover losses incurred by defaulting members. In crypto, this can apply to decentralized insurance pools or collateralization schemes designed to absorb systemic shocks.
Mechanism
Under this principle, when a participant defaults and their pledged collateral is insufficient to cover liabilities, the collective fund or remaining solvent participants are called upon to make up the deficit. This typically involves a predefined contribution formula or a pro-rata distribution of losses among the survivors, after primary collateral has been exhausted.
Methodology
The strategic intent is to enhance systemic stability and reduce contagion risk by mutualizing a portion of default losses, preventing a single failure from cascading across the system. Principles include fair burden-sharing, robust risk modeling to determine capital contributions, and clear governance rules for fund administration, aiming to maintain confidence and operational continuity within interconnected financial networks.
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