JPEG'd has designed a novel insurance mechanism that is the first of its kind in DeFi, which is made possible because only the DAO can conduct liquidations. Users can voluntarily purchase insurance on any of their positions, which gives them a 72 hour duration to reclaim their NFT collateral in the event of liquidation.
Insurance is a 2.5% non-refundable fee that occurs any time debt is drawn. If the position is liquidated, users have the option to reclaim their NFTs after repaying their outstanding debt and a 5% liquidation fee. The liquidation fee is based on the user's outstanding debt, which is principal plus any accrued interest.
For example: a user elects to purchase insurance and opens a CDP for 10,000 PUSd. The 2.5% insurance fee is assessed and he receives 9,750 PUSd. Eventually, the debt on this position grows to be 15,000 PUSd and the user is liquidated due to adverse market conditions. The user must repay the 15,000 PUSd outstanding debt plus a 750 PUSd liquidation fee (5%) back to the DAO. The NFT is unlocked when the debt and the liquidation fee are paid. If the owner does not repay within 72 hours of liquidation, the insurance coverage lapses, and the NFT is now owned by the DAO.