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The PAYASO insurance agreement is based on Ethereum and is mainly used to protect against asset price fluctuation risks.
Author: Lou Yue
The emergence of the automatic market maker (AMM) mechanism allows individual investors not only to trade on the platform, but also to play the role of a liquidity provider, and the mechanism for obtaining rewards as an on-chain transaction medium has fundamentally changed Central exchanges obtain profits by monopolizing liquidity.
With the development of the DeFi market, the emergence of more and more SWAP flash swap products has also promoted the development of a variety of related derivative products. The attractive APY (Annualized Yield) of liquid mining has become a hot spot in the recent market, but behind the boom of the liquid mining market, its related risks cannot be ignored.
AMM causes risks such as multi-token exposure and unpaid losses
Under the AMM mechanism, traders often have information advantages over liquidity providers . When the market is stable, liquidity providers can get considerable benefits from APY subsidies. But when there are unilateral fluctuations in the market, traders can often make decisions and take actions faster. In contrast, liquidity providers may suffer impermanent losses , including multi-token exposure, short-term losses, and the possibility of liquidity exhaustion caused by systemic risks.
Under the AMM mechanism, continuous price fluctuations not only lead to the inability of liquidity providers (LP) to fully realize the appreciation of their pledged tokens against prices, but also aggravate the depreciation of their overall assets . When the prices of two assets in the designated liquidity pool move rapidly in opposite directions, the impermanence loss will reach the highest point.
Compared with token holders or unilateral traders, investors may passively bear the risks and impermanent losses of multiple tokens , and if the price of the designated token drops sharply, traders may face emptying of their liquidity pool risk.
Although the AMM mechanism is open and transparent, there are still many issues that need to be considered. For example, how to continue to retain liquidity providers when gains cannot offset losses? In the event of extreme market volatility, how can liquidity providers make decisions and actions faster? Does an open market need an insurance product to hedge risks outside of speculation?
In the past experience in traditional financial markets, hedging methods through options and other derivatives transactions have been proven to effectively reduce the risks caused by market volatility. In the field of cryptocurrency, the Ethereum- based currency insurance agreement PAYASO draws on this experience , Adding a layer of insurance to on-chain activities by establishing options on Ethereum.
What is PAYASO?
PAYASO is an insurance agreement built on Ethereum, which can reduce the risk of interaction with digital assets on Ethereum. Anyone can use the PAYASO platform to purchase insurance for on- chain activities such as gaming, mining, and trading.
PAYASO users can act as the clearing party to underwrite and earn insurance premiums. Insurance payment is automatically completed through the agreement, without the need for centralized agency review, verification or confirmation. By using PAYASO, users do not need to worry about potential risks caused by impermanent losses or multi-token exposure, and avoid the possibility of financial losses.
The PAYASO platform clearer sells insurance policies to solve the problem of multi-token exposure and free losses on the insured chain, and reduces the risk of currency price fluctuations when the asset giant whale provides liquidity for AMM.
PAYASO implements decentralized real-time clearing, no delay, no approval, and market-based premium prices. The price is determined by the supply and demand relationship between many policyholders and insurers, and there are no unreasonable terms and monopoly prices.
Unlike other insurance products , PAYASO does not solve the “smart contract risk of code attack” problem, but can reduce the risk of asset price fluctuations, and is more like a platform insurance agreement that links insurers and clearers.
PAYASO is derived from Spanish and means “joker”. According to the official website information, the team was initiated by six anonymous team members , representing the characters in the six cards. They advocate decentralization, democracy and autonomy, “Everyone is for me, I am for everyone”.
How does the PAYASO protocol work?
On the PAYASO platform, policyholders and liquidators can sign contracts with the “price” (stable currency exchange ratio) of the protected assets at a certain moment, and policyholders can customize the target insurance period and insured amount at any time, and hedge the stable currency standard at any time Price fluctuations . The liquidator issues an insurance policy by collateralizing stable currency assets, and the insurer pays premiums to the liquidator to complete the issuance of the insurance policy.
During the validity period of the policy, the insured can choose to ” exit at any time” at any time, and at the same time can purchase the corresponding stable currency assets at the insurance price to hedge the value of the assets held to reduce the potential loss risk, liquidity risk or other chain Losses caused by the above activities.
The operation flow chart of PAYASO agreement is as follows:
PAYASO payment and governance token PAYA
PAYA is the payment and governance token of the PAYASO platform, which is mainly generated by rewards for liquidity providers and policy traders (insured and liquidators). PAYA is the only token used by policyholders to purchase insurance and can be used to earn rewards for platform fees (0.2%).
In the PAYASO roadmap, the PAYASO team has determined the type of insurance supported by the first generation of products, but when PAYA tokens are created, PAYA holders will vote in the future to determine the type of insurance .
- First choose the coverage date and the premium you want to charge
- Sufficient funds to ensure that it is sufficient to cover the cost of funds of the insured (stable currency)
- After the buyer pays the insurance premium, the insured must apply for the insurance on the expiry date, and the contract will automatically freeze the reserve (insurance guarantee amount)
If the insured has already insured:
- The liquidator will obtain the insurance subject matter and trade with reserve funds
- If the buyer chooses to abandon the policy, the liquidator’s obligations will become invalid and the reserve fund will be automatically released (insurance guarantee amount)
As a liquidator, you can get rewards of premiums, market premiums, and platform tokens, but there are also risks such as waiting time for on-chain transactions that are common in transaction scenarios.
Of course, the liquidator can reasonably avoid such risks. A qualified trader should calculate the “time” in the cost, for example, by adjusting the premium to avoid pricing problems caused by the overtime of some transactions when the block is crowded. If the liquidator believes that the current guarantee is a product that may fall rapidly at any time, then some positions can be processed first through platforms such as Compound or Aave.
In addition, PAYASO discourages liquidators from holding unsecured long positions as “bullish” speculators or purchasing underlying assets at discounts, but hopes that liquidators adopt a risk-free arbitrage mentality to establish a comprehensive position hedging mechanism .
Liquidators can manage potential net long positions through different hedging strategies, while keeping potential hedging transaction costs within the premium range.
Progress of PAYASO Agreement
PAYASO is expected to officially release the first generation of products soon . The agreement will not only support mainstream assets such as ETH and LINK, but will also increase underwriting support for emerging assets such as UNI. PAYASO has launched a liquidity provider on September 21 Recruitment plan , and announced the PAYA token distribution plan.
PAYA token distribution plan
PAYA is a token based on the ERC-20 protocol. The total number of tokens is 10,000 . 5% of the tokens are allocated to the LP Onboarding plan, and 95% of the tokens are generated through transactions or liquidity.
LP Onboarding plan
As a native token, PAYA is mainly generated through insurance transactions. Before the product is launched, there will be insufficient liquidity in the early stage, which may cause huge slippage and cause harm to traders. Therefore, PAYASO abandoned the plan of simply selling PAYA and started the LP Onboarding plan. PAYASO will launch two rounds of financing.
In the first stage of conditional financing, up to 50 Ethereum addresses will be collected, and the investment limit for each address is 100 ETH. The invested ETH will be converted to LP tokens based on Ethereum AMM, and half of it will be automatically converted to PAYA.
Conversion ratio: 1 ETH = 0.2 PAYA
After the end of the first phase, the second phase will start. Anyone can purchase LP tokens without restrictions on PAYASO
Scale: Real-time pricing based on AMM
In order to express gratitude to the early supporters, the whitelisted address (the Ethereum address confirmed in the first round) will permanently and only enjoy “paya” (the single indicator is the currency price of paya) while maintaining initial liquidity Insurance) the right to share the insurance transaction fee (0.2% of the subject matter).