Editing Decentralized underwriting (section)

=== Token scheme ===
The following basic workflow illustrates how an iDAO creates REP tokens and distributes premium cash money from customers. 

==== Workflow ====
(See Figure 1.)

# Underwriter <math>U_1</math> sells a contract to a customer.
# <math>U_1</math> encumbers the canonical amount of REP in the contract.
# Contract Validated by DAO.
# Customer 
#* pays premia, or
#* defaults, or
#* claims
# iDAO
#* mints REP for  <math>U_1</math> proportional to premia & distributes REP salary, or
#* cancels contract, or
#* pays claim by burning encumbered REP and minting sufficient [[BOND tokens|BONDs]] to cover the claim (REP-to-BOND market)

[[File:IDAO workflow.jpg|border|593x593px]]

<small>Figure 1: iDAO workflow follows basic [[DAO Governance Framework#DGF workflow|DGF workflow]] iterated each time a premium is paid</small>

Notes: 

* If a customer makes a claim on the policy, the contract governs how the claim is validated. Typically an [[oracle]] and an [[Arbitration DAO|adjudicator]] are necessary for this step, which are outside the scope of this specification.
* If a claim is validated, the underwriter's encumbered REP is auctioned at market to pay the claim.
** If the auction price of the encumbered REP is sufficient to cover the claim, and excess cash or REP from the auction is returned to the underwriter.
** If the auction price of the encumbered REP is insufficient to cover the claim, further REP is minted and sold at market until the claim is covered. Any excess cash from this process is donated to the iDAO's capital reserve.
* In practice, an iDAO would likely give members the opportunity to keep their REP tokens if the underwriter covers the claim personally. In such cases calling the BOND market would be unnecessary. This would be an attractive choice for most active underwriters, since REP tokens have greater powers than BOND tokens.
* The REP-to-BOND market is designed to prevent a [[51% attack]]. When a claim is made, the REP encumbered in the insurance contract is burned. Then [[BOND tokens]], which have no [[Governance|governmental]] power in the DAO, are minted in sufficient quantity to cover the claim. BOND tokens pay off in the future through the REP salary. Through this mechanism a 51% attack is inhibited and the iDAO is strengthened, because only those underwriters who prove competent at issuing insurance contracts according to the standards of the iDAO are given REP power.