This mechanism seems overly complex, introduces MEV risk, and is designed to further delay the already under-sized compensation being offered to affected LPs. [EDIT: @mjc716 corrected my understanding of the mechanism and I no longer believe it introduces MEV risk]
That last point should be emphasized further: I believe the overall compensation proposal to LPs is far too low. The increased proposal is only 20% of losses, paid out over a year, which is significantly below the standards set by other teams who have experienced hacks, such as Alpha Homora, Harvest, Yearn, and Rari Capital. In the latter case, their core team is contributing 100% (an overly-generous amount, IMO) of their allocated tokens back to the DAO, and the community held a vote to overwhelmingly support 100% reimbursement of losses.
All of the protocols mentioned above should be considered much higher-risk for users than xToken, whose core value proposition is “we help you capture the native yield of a token as simply and safely as possible.” While I think the xToken concept has incredible potential, this reimbursement plan sends a message from the team and community that users should not view xTokens as a safe place to allocate their capital, because even with massive team and community allocations held in treasury due to a quite sizable fully diluted network valuation, there is no willingness to fully backstop the users. This message will be heard loud and clear and will ultimately be far more destructive to long-term token value than the risk of market impact from making a much more generous reimbursement proposal now.
If we really want to make sure we only reimburse users who will hold XTK over the long term (which I think is misguided, but alright), we should consider working with UMA to do KPI options that are redeemable for XTK only once certain targets of TVL or liquidity are met. Current tokenholders should not be worried about this dilution, given it will only actually happen if the protocol is doing well and therefore the price should be up significantly from today.
Full disclosure: my fund (Nascent) was among those affected by the hack, but our loss was significantly less than the 7-figure (USD) exposure to XTK we have between what we currently hold and are vesting. We benefit far more from XTK increasing in value than getting reimbursed for our losses from the hack. We want to see xToken succeed over the long term, and hope XTK holders and the team reconsider this reimbursement proposal and move towards something more generous, which we believe will ultimately lead to better outcomes for all.