Fragile DeFi protocol
The following are various attacks on many DeFi protocols in the past month or so, including lightning loan arbitrage attacks and theft of funds using code vulnerabilities.
Harvest $25 million
PickleFinance 20 million USD
Origin Protocol 8 million USD
Value DeFi USD 7 million
CheeseBank $3.3 million
Akropolis 2 million USD
DeFi has become a feast for “scientists”, further reminding participants not to invest funds that cannot afford to lose to participate in the current DeFi. How to solve this situation? In addition to iteration and more solid audits, are there other ways? If the participants’ worries cannot be resolved, then the development of DeFi will falter. In the journey of DeFi, insurance is an important puzzle to solve this problem.
Any DeFi agreement requires insurance
DeFi needs infrastructure such as insurance to develop. It is unrealistic to rely on DeFi agreement users to purchase insurance on their own. One of the best solutions is that the DeFi protocol extracts part of the transaction fees or mining revenue of the agreement and deposits it in the project’s fund reserve pool, and part of this fund reserve pool is used to purchase the entire insurance of the agreement, even at the beginning Not insuring all assets, and protecting a certain percentage of them will also give users a lot of peace of mind. If this is not realistic at the beginning, the project party can also use the insurance market to become the insurer and provide relatively low-priced underwriting for its own agreement users, which can enhance users’ confidence and reduce the burden. Ultimately, most DeFi agreements will regard insurance services as an important component of the agreement services. Only in this way can we truly solve the worries of users. This kind of future possibility means a huge opportunity for the insurance track project. In order to attract users and strengthen the moat, more and more DeFi projects will put part of their income into the insurance market, which means that the demand for insurance increases and the scale of premium income increases. In addition, considering the better transparency and better liquidity of the DeFi insurance market, DeFi will have a higher penetration rate than the insurance market in traditional industries. From this perspective, Blue Fox Note is optimistic about the future DeFi insurance market. So, in this track, who will finally stand out from Nexus Mutual, Nsure and Cover? Is it going hand in hand? How strong is it? Or is it thriving? What is the future pattern, maybe only time can tell us, because there are too many uncertainties. But before that, let us briefly look at what they are.
Cover’s insurance dual-token operation mode
Cover is a peer-to-peer insurance market. Cover’s insurance operation mechanism adopts an insurance dual-token model. Its long-term goal is to build an insurance market for everything, but for now, its focus is the DeFi market. It uses the bonding curve mode to set the insurance price. The so-called insurance dual-token operation mechanism mainly refers to the homogeneous tokens CLAIM and NOCLAIM tokens in the Cover insurance market. Homogeneous tokens are fungible tokens. This insurance dual token model is the core of the operation of the Cover agreement. First of all, the two homogenized tokens, CLAIM and NOCLAIM, are generated by users depositing mortgage assets into the Cover smart contract. Each insurance contract contains the agreement to specify the insurance, the deposited collateral (such as DAI or ETH), the amount of storage, and the expiry date of the insurance. Its insurance token code format: COVER_{Agreement}_{Maturity Date}_{Collateral}_{Nonce}_{Direction} For example: Compound insurance token COVER_COMPOUND_2020_12_31_DAI_0_CLAIMCOVER_COMPOUND_2020_12_31_DAI_0_NOCLAIM The homogenized insurance token is maintained with its collateral1 :1 base. For example, for every 1DAI deposited, the user will receive two insurance tokens, one is CLAIM token (claimable token) and one NOCLAM token (non-claimable token). NOCLAIM tokens are equity tokens, which represent the right to receive collateral without any claims during the specified underwriting period. The CLAIM token is also an equity token, which represents the right to receive the deposited collateral (or part of the collateral) when the claim payment is confirmed in the claim management process. The relationship between CLAIM tokens and NOCLAIM tokens and collateral: 1CLAIM token+1NOCLAIM token≈1 collateral (such as DAI) *If a claim occurs, 1CLAIM token ≈1 collateral (such as DAI), and 1NOCLAIM token = 0; *If no claim occurs due to maturity, 1NOCLAIM≈1 collateral (such as DAI), and 1CLAIM token=0.
In other words, the operation of Cover’s insurance market mainly relies on these two homogenized tokens, and this insurance token is made liquid by providing a liquidity pool on DEX (mainly Balancer). Therefore, after CLAIM and NOCLAIM tokens are generated, they can be used to provide liquidity, can be sold, and even used as collateral for lending platforms.
There are currently two Cover insurance token pools on Balancer: 98% CLAIM tokens and 2% DAI, and another 98% NOCLAIM token and 2% DAI pool. Three roles in the Cover insurance market
In the operating mechanism of Cover insurance, there are three main roles: market maker, insurance provider, and insurance demander. Among them, both market makers and insurance providers need to deposit collateral, and insurance demanders are mainly users of various DeFi agreements, who can purchase insurance tokens in markets such as Balancer.
1. Market maker Market maker holds CLAIM and NOCLAIM tokens and provides liquidity for these two tokens. The main purpose of market makers is to earn market-making income that provides liquidity and subsidy income from mining. Market makers first need to deposit collateral, such as DAI, and then receive two insurance tokens, CLAIM and NOCLAIM, and then provide liquidity for CLAIM and NOCLAIM tokens in Balancer. Becoming a market maker can earn liquidity fee income and Cover token income. However, a market maker can also sell any of CLAIM or NOCLAIM tokens; if you want to withdraw, you can also use CLAIM and NOCLAIM tokens Currency redemption of collateral. Of course, becoming a market maker also has the risk of impermanent loss of liquidity, but this loss will not be very large because it is a 98%/2% CLAIM and NOCLAIM token pool.
2. Insurance provider The insurance provider only holds NOCLAIM tokens and provides liquidity for them. In other words, insurance providers are mainly underwriting, rather than becoming insurance demanders. The project party can become an insurance provider and provide underwriting for its contract users. To become an insurance provider, you first need to deposit collateral and collect CLAIM and NOCLAIM tokens; then sell the CLAIM tokens it holds (you can get a premium) to provide liquidity only for NOCLAIM tokens. If the agreement sells CLAIM tokens to its own users (there can even be a discount to allow its agreement users to accept a lower price, or sell it through token subsidies, etc.), and keep NOCLAIM tokens for yourself. Of users provide low-cost underwriting services, which is also an important sign of the agreement to show users their confidence. At the same time, you can also get fees when you provide liquidity for the NOCLAIM token pool. At the same time, you can also get COVER rewards by staking liquid LP tokens to participate in Shield mining. Of course, you can also choose to sell NOCLAIM tokens to reduce risk. If there is no claim event at the expiration of the insurance, the insurance provider (such as the project party or any other subject) can also use NOCLAIM tokens to redeem the collateral. Unlike market makers holding two insurance tokens, since the insurance provider only retains NOCLAIM tokens and becomes the insurer, if a successful claim occurs, the insurance provider’s collateral will suffer losses. In addition, regarding The impermanence loss of liquidity is similar to that of a market maker, and it may cause losses, but generally it will not be too big.
3. Insurance demander Insurance demander (Coverage Seeker) holds CLAIM tokens, the purpose of which is to protect the security of assets in its agreement. The insurance demander is the user who purchases the insurance. It is very simple to purchase the insurance, no KYC is required, only the CLAIM tokens of the specific agreement need to be purchased on the DEX (Balancer). Of course, there is another way to deposit collateral to receive CLAIM and NOCLAIM tokens, then sell NOCLAIM tokens, hold only CLAIM tokens or provide liquidity for CLAIM tokens (earning liquidity income and COVER tokens) Currency reward). Insurance requires users to buy a certain agreement of CLAIM tokens means that once a successful claim event occurs during the underwriting period of the agreement, the insurance purchase user can redeem the compensation paid with collateral through CLAIM tokens. In addition, insurance purchase users have other options to earn liquidity income by providing liquidity for CLAIM tokens, while protecting the underlying assets of the corresponding agreement; they can also buy the same amount of NOCLAIM tokens, such as when the insurance expires or occurs Before the claim event, CLAIM and purchased NOCLAIM tokens can be used to redeem the collateral. For the insurance demander, the main risk is that if there is no claim, the premium paid will be paid to the insurer. Of course, this also means that the funds in the protected project are safe. In addition, in the Cover agreement, if a redemption operation occurs, the agreement needs to charge a certain percentage of fees. Cover’s claims management Cover’s claims are mainly divided into three steps: filing a claim, voting, and a final decision by the committee. *Anyone can initiate a claim by paying a claim filing fee. The cost of filing a claim for each agreement will have a multiplier effect to prevent spam attacks. In addition, anyone can file a mandatory claim by paying the mandatory claim fee. To file a compulsory claim can directly enter the committee’s ruling. *After the voting claim event is submitted, a snapshot will be used to vote. COVER token holders can participate in voting to determine whether a claim is valid or invalid. If you vote to reject the claim, the claim will be rejected. If anyone disagrees with the community’s voting results, they can file a mandatory claim. *The final ruling of the “Claim Validity Committee” The Claim Validity Committe audits the claims. They are professional auditors who can provide professional assessment reports and decide whether they meet the claim standards and what% should be paid. Each claim will be assigned 5 or more auditors. To determine the claim event, more than 50% of the reviewers must agree on the validity of the claim and determine the proportion of reimbursement (if a claim occurs). Finally, if the claim is successfully passed, the holder of CLAIM tokens can redeem the payment amount after a certain period of time.
Nsure Insurance’s “Decentralized Lloyd’s” model
The core of the Nsure insurance agreement is the same as other insurance projects. In order to form the insurance market, it also needs to focus on the three aspects of insurer incentives, demander incentives and the claim process. It has three core mechanisms to promote the operation of its model: dynamic pricing model, capital pool model, three-stage group voting and claim decision-making mechanism. The dynamic pricing model of the Nsure Agreement Dynamic pricing is determined according to the capital demand and supply relationship of each project. The capital demand (total insured amount) is related to the total locked assets of the project, the demand ratio, etc. The demand ratio will be affected by the insurance penetration rate and Nsure’s market share. Capital supply is mainly about the underwriting assets behind each project. One of the interesting designs is that users can maximize their pledge by 4 times the leverage. In addition, when considering premium pricing, in addition to capital demand and supply, risk factors are also considered. Ultimately, pricing depends on the relationship between supply and demand and the risk level of the project. The premium price is related to α, β, and risk factors. Where α and β are the parameters in the Beta distribution. The demand and supply factors convert the total insured amount and total pledged underwriting assets into α and β. Different DeFi agreements have different risks. In the early stage, Nsure will conduct risk ratings on DeFi projects by itself, and will allow the community to participate in risk ratings in the future.
The capital pool model of the Nsure agreement. The capital pool can be used for mining to encourage users to underwrite. At the same time, once a claim event occurs, it will also support compensation. If the surplus pool cannot meet the MCR (minimum capital requirement), all claims cannot be repaid, the capital pool Will be used to pay the remaining repayment. The capital pool model is an important support for Nsure’s operations. It must solve the problem of capital supply to ensure that systemic risks will not occur, and it can also attract more people to provide underwriting funds. The funds for the surplus pool come from insurance premiums, which can capture 50% of the overall premiums, 10% of which will be transferred to the surplus pool after the insurance expires and no claims have been made. The remaining 50% of the premium is allocated to the insurer. The claim process of the Nsure agreement Nsure adopts a three-stage claim process. It first involves the policyholders and the victims themselves vote to make claims; then it will introduce professional auditing institutions to show the ins and outs of the matter to all parties through professional auditing institutions; Finally vote. The approximate process is as follows:
DeFi (Nsure’s claim process, Nsure), compared with Cover’s claim process, both introduce professional auditing. In Nsure, it is a professional audit agency, and in Cover it is the “Claim Validity Committee (CVC)”.
The integration of Nsure’s token model and protocol growth
Nsure tokens can be used as pledge assets in the capital pool, and the pledge assets in the capital pool are equivalent to underwriting assets and can capture 50% of the premium. In addition, Nsure can also participate in mining through pledged assets to earn more Nsure. It itself becomes a productive asset. On the one hand, it can reduce circulation and capture the value of system growth. In the Cover token model, currently COVER is mainly a governance token. As for how to capture value in the future, community governance is also needed. From this perspective, the current Nsure token model can capture more value. Of course, how much value can be captured in the end, in addition to the token economic mechanism, is more important than the fundamentals of the business, which depends on the scale of the entire insurance business. This is the key to determining the value of future agreements.
Where is the future
In the long run, Nsure and Cover have the opportunity to evolve into Nexus Mutual’s actual opponents. First of all, neither of them need KYC, and they have an advantage on the threshold of participation. In addition, Nsure also has certain differences from Nsure in terms of premium pricing mechanism, token mechanism, and claim settlement process. It has absorbed the historical experience of traditional insurance as a whole and explored it in conjunction with the blockchain. Cover proposed an insurance dual-token operation model, and combined with liquidity, it has its own unique model in DeFi insurance, but its token mechanism may need further iterations to capture greater value. NSure, Cover, and Nexus Mutual represent three different encryption insurance paths to explore. Where will they go in the future? With the evolution of DeFi and the increasing demand for insurance, their respective advantages and disadvantages will be presented one by one. This also tests the iterative upgrade capabilities of these three teams. Finally, the three insurance agreements, Nsure, Cover, and Nexus Mutual, also have smart contracts and potential risks. One of the best ways for them to help each other is to provide insurance services to each other’s users, which is for the DeFi industry itself Provides stronger toughness.
