Optimistic adjudication is a decentralized mechanism for determining whether an exploit has occurred and triggering insurance payouts. Unlike parametric insurance that relies on predefined oracle triggers, optimistic adjudication uses crowdsourced verification and economic game theory to handle complex cases that cannot be reduced to simple data thresholds.

The Verification Challenge

Many DeFi exploits do not produce clean signals that oracles can detect. A logic bug that allows an attacker to drain funds might not trigger any abnormal price movements or protocol metrics. The exploit simply executes valid transactions that happen to violate the protocol's intended economic behavior.

Parametric insurance cannot cover these cases because there is no observable parameter to trigger on. Yet the losses are real and policyholders deserve compensation. Optimistic adjudication bridges this gap by introducing human judgment in a decentralized, incentive-aligned manner.

How Optimistic Adjudication Works

The mechanism follows a dispute resolution pattern similar to optimistic rollups. When a potential exploit occurs, a claim is submitted asserting that a covered event happened. This claim enters a challenge period during which anyone can dispute the assertion by posting a bond.

If no dispute is raised during the challenge period, the claim is accepted as valid and payouts proceed automatically. The "optimistic" assumption is that claims are truthful unless proven otherwise—similar to how optimistic rollups assume transactions are valid unless challenged.

When disputes occur, the system escalates to a resolution mechanism. Protocols like Sherlock and UMA's Optimistic Oracle use different approaches: some employ committees of security experts, others use token-holder voting, and some combine multiple mechanisms.

Economic Incentive Alignment

The security of optimistic adjudication depends on proper incentive design. Claimants must stake tokens that are slashed if their claim is rejected, discouraging fraudulent claims. Challengers must also stake tokens, ensuring they have skin in the game when disputing legitimate claims.

The economic parameters—claim bonds, challenge bonds, and resolution rewards—must be calibrated so that rational actors find it profitable to submit truthful claims and challenge false ones. When properly designed, the system reaches correct outcomes through self-interested behavior rather than altruism.

Advantages Over Centralized Claims

Traditional insurance relies on centralized claims adjusters who investigate incidents and determine payouts. This approach introduces delays, subjectivity, and potential bias. Adjusters might deny legitimate claims to protect insurer profits, or approve questionable claims due to pressure.

Optimistic adjudication eliminates these concerns through transparency and economic incentives. All claims, disputes, and resolutions occur on-chain where they can be audited. The economic stakes ensure that participants are financially motivated to reach correct outcomes. No single party controls the adjudication process.

Limitations and Trade-offs

Optimistic adjudication is slower than parametric triggers. The challenge period—typically 24-72 hours—delays payouts while creating an opportunity for disputes. For time-sensitive situations, this delay may be problematic.

The mechanism also requires active participation from informed community members. If potential challengers are not monitoring claims, fraudulent claims might pass unchallenged. Protocols address this through challenger incentives and monitoring infrastructure, but the risk of under-participation remains.

Complex exploits may produce ambiguous facts that reasonable observers interpret differently. Unlike binary oracle triggers, optimistic adjudication must handle gray areas where the "correct" outcome is genuinely uncertain. Clear coverage definitions and precedent from previous disputes help, but some ambiguity is unavoidable.

Role in Defense-in-Depth

Optimistic adjudication serves as a "fuzzy logic" layer that complements the deterministic coverage of parametric insurance. Together, they provide comprehensive protection: parametric triggers handle clear-cut events with immediate payouts, while optimistic adjudication covers complex situations that require human judgment.

This layered approach embodies defense-in-depth principles applied to insurance. Just as multiple security measures protect against different attack vectors, multiple insurance mechanisms protect against different types of losses. The combination provides more robust coverage than either approach alone.