JPEG'd has designed a novel insurance module that is the first of its kind of DeFi. Users can voluntarily purchase insurance on any CDPs they open. Insurance is a 5% non-refundable fee assessed when the initial debt is drawn, and any new debt thereafter. If they are liquidated they can repurchase their NFTs from the DAO after repaying their outstanding debt and a 25% liquidation fee. The 25% 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 5% insurance fee along with the 0.5% deposit fee is assessed and he receives 9,450 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 3,750 liquidation fee (25%) back to the DAO. After the DAO receives these funds the NFT will be returned back to the user. If the funds are not sent to the DAO within 48 hours of liquidation the insurance coverage lapses and the NFT is now owned by the DAO.