Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.

Editor's Note: This article comes from

Blue Fox Notes (ID: lanhubiji)

• Blue Fox Notes (ID: lanhubiji)

• , reprinted by Odaily with authorization.

• secondary title

• Vulnerable DeFi protocols

• The following is the various attacks that many DeFi protocols have suffered in the past month or so, including flash loan arbitrage attacks and fund theft by exploiting code loopholes.

• Harvest $25 million

PickleFinance $20 million

Origin Protocol $8 million

CheeseBank $3.3 million

Akropolis $2 million

DeFi has become a feast for "scientists", further reminding participants not to invest funds that cannot afford losses to participate in the current DeFi.

Faced with this situation, how to solve it? Is there any other way besides iteration and more solid auditing? If the worries of participants cannot be resolved, then the development of DeFi will falter.

In the journey of DeFi, insurance is an important puzzle to solve this problem.

secondary title

For DeFi to develop, it needs infrastructure like insurance. It is unrealistic to rely on DeFi protocol users to purchase insurance by themselves. One of the best solutions is that the DeFi protocol draws a part of the protocol’s transaction fees or mining proceeds and deposits it in the project’s fund reserve pool, and part of this fund reserve pool is used to purchase the overall insurance of the protocol, even if it starts It is not possible to insure all assets, and being able to protect a certain percentage of assets 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 an insurer to provide relatively low-cost insurance for its contract users, which can enhance the confidence of users and reduce the burden.

Ultimately, the vast majority of DeFi protocols will regard insurance services as an important component of protocol services. Only in this way can the worries of users be truly solved.

This 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 will increase and the scale of insurance premium income will increase. 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 Notes is optimistic about the future DeFi insurance market. So, in this track, who will stand out among Nexus Mutual, Nsure and Cover? Is it neck and neck? Or how strong is it? Or stand out? What the future pattern will be, maybe only time will tell us, because there are too many uncertainties here.

But before that, let's take a brief look at what they are.

secondary title

Cover's insurance dual-token operation mode

COVER_COMPOUND_2020_12_31_DAI_0_CLAIM

COVER_COMPOUND_2020_12_31_DAI_0_NOCLAIM

Cover is a peer-to-peer insurance marketplace. Cover's insurance operation mechanism adopts the insurance dual-token model. Its long-term goal is to build an insurance market for everything, but currently, its focus is on the DeFi market. It sets the insurance price through the bonding curve mode.

The so-called insurance dual-token operating mechanism mainly refers to the homogeneous tokens CLAIM and NOCLAIM in the Cover insurance market. Fungible tokens are fungible tokens. This insurance dual-token model is at the core of the operation of the Cover protocol.

The first two homogenized tokens, CLAIM and NOCLAIM tokens, are generated by users depositing mortgage assets into the Cover smart contract. Each insurance contract contains the agreement specifying the insured, the collateral deposited (such as DAI or ETH), the amount stored, and the expiration date of the insurance.

Its insurance token code format: COVER_{Agreement}_{Expiration Date}_{Collateral}_{Nonce}_{Direction}

Example: Compound Insurance Token

1CLAIM token + 1NOCLAIM token ≈ 1 collateral (e.g. DAI)

* In case of a claim, 1CLAIM token ≈ 1 collateral (e.g. DAI), while 1NOCLAIM token = 0;

* If no claim occurs at maturity, 1NOCLAIM ≈ 1 collateral (such as DAI), 1CLAIM token = 0.

That is to say, the operation of Cover’s insurance market mainly relies on these two homogeneous tokens, and this kind of insurance tokens realize liquidity by providing liquidity pools on DEX (currently mainly Balancer). Therefore, after CLAIM and NOCLAIM tokens are generated, they can be used to provide liquidity, can be sold, and can even be 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 tokens and 2% DAI pool.

secondary title

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 protocols, who can purchase insurance tokens on markets such as Balancer.

1. Market Maker

Market makers hold CLAIM and NOCLAIM tokens and provide liquidity for both tokens. The main purpose of market makers is to earn liquidity-providing market-making income and mining subsidy income.

Market makers first need to deposit collateral, such as DAI, and then receive CLAIM and NOCLAIM, two insurance tokens, and then provide liquidity for CLAIM and NOCLAIM tokens on Balancer. Becoming a market maker can earn liquidity fee income and Cover token income. However, a market maker can also sell any of the CLAIM or NOCLAIM tokens; if you want to quit, you can also use CLAIM and NOCLAIM tokens Coin redemption collateral.

Of course, becoming a market maker also has the risk of impermanent loss of liquidity, but this loss will not be large, because it is 98%/2% of the CLAIM and NOCLAIM token pools.

2. Insurance provider

Insurance providers only hold NOCLAIM tokens and provide liquidity for them. In other words, insurance providers are mainly underwriting rather than being demanders of insurance. The project party can become an insurance provider to provide coverage for its agreement users.

To become an insurance provider, you first need to deposit collateral and collect CLAIM and NOCLAIM tokens; then sell the CLAIM tokens you hold (you can get a premium), and only provide liquidity for NOCLAIM tokens.

If the agreement sells CLAIM tokens to its own users (there can even be a discount, a lower price that its agreement users can accept, or sell through token subsidies, etc.), and keep NOCLAIM tokens for itself, then it is equivalent to of users provide low-priced underwriting services, which is also an important sign for the agreement to show its confidence to users.

At the same time, you can also get fees for providing liquidity for the NOCLAIM token pool. At the same time, you can also get COVER rewards for staking liquidity LP tokens to participate in Shield mining. Of course, you can also choose to sell NOCLAIM tokens to reduce risk. If the insurance expires and there is no claim event, then the insurance provider (such as the project party or any other subject) can also use NOCLAIM tokens to redeem the collateral.

Unlike market makers who hold two types of insurance tokens, since insurance providers only retain NOCLAIM tokens and become underwriters, if a successful claim event occurs, the collateral of the insurance provider will suffer losses. In addition, regarding The impermanent loss of liquidity is similar to that of a market maker and may cause losses, but generally it will not be too large.

The insurance demander (Coverage Seeker) holds CLAIM tokens for the purpose of protecting the assets in its agreement. The insurance demand side is the user who purchases insurance. Purchasing insurance is very simple and does not require KYC. You only need to buy the CLAIM token of a specific agreement on the DEX (Balancer). Of course, there is another way to deposit collateral to receive CLAIM and NOCLAIM tokens, then sell NOCLAIM tokens, only hold CLAIM tokens or provide liquidity for CLAIM tokens (earn liquidity income and COVER tokens currency rewards).

Insurance requires users to buy CLAIM tokens of a certain agreement, which means that once the agreement has a successful claim during the underwriting period, insurance purchasers 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 their corresponding agreements; they can also buy the same amount of NOCLAIM tokens, such as when the insurance expires or occurs Before the claim event, the collateral can be redeemed by using the CLAIM in hand and the purchased NOCLAIM tokens.

For the insurance demand side, the main risk is that if there is no claim event, 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.

secondary title

Cover's claims management

Cover's claim is mainly divided into three steps: making a claim, voting, and the committee's final decision.

*Make a claim

*vote

After the claim event is submitted, it will be voted through the snapshot. COVER token holders can participate in voting to determine whether a claim is valid or invalid. If a claim is voted down, the claim is rejected. Mandatory claims can be made if anyone disagrees with the community's vote.

* Final decision of the "Claim Validity Committee"

Claims are audited by the Claim Validity Committee, who are professional auditors who can provide a professional assessment report and decide whether the claim criteria are met and what percentage should be paid. Each claim is assigned 5 or more auditors. To determine a claim event, more than 50% of reviewers must agree on the validity of the claim and determine the percentage of reimbursement if a claim occurs.

Finally, CLAIM token holders can redeem the initial payout amount after a certain period if the claim is successful.

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 an insurance market, it also needs to revolve around the three aspects of insurer incentives, demander incentives, and claim procedures. It is driven by three core mechanisms: dynamic pricing model, capital pool model, and three-stage group voting claim decision-making mechanism.

Dynamic Pricing Model of Nsure Protocol

Dynamic pricing is determined based on each project's capital requirements and supply relationships. Capital demand (total insurance amount) is related to the total locked assets of the project, demand ratio, etc. The demand ratio will be affected by insurance penetration rate and Nsure market share. Capital provisioning is primarily about the underwriting assets behind each project. One of the interesting designs is that users can maximize their pledge by 4 times leverage. In addition, when considering premium pricing, risk factors are also considered in addition to capital demand and supply.

Ultimately, pricing depends on supply and demand relationships and the risk level of the project. The premium price is related to α, β, risk factors, etc. where α and β are parameters in the Beta distribution. The demand and supply factors transform the total insured amount and the total pledged insured assets into α and β. Different DeFi protocols have different risks. In the early stage, Nsure will rate the risks of DeFi projects by itself, and then let the community participate in the risk rating.

image description

Capital pool model of Nsure protocol

The capital pool can be used for mining to motivate 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) and cannot pay all claims, the capital pool will be used to pay the remaining pay. The capital pool model is an important support for the operation of Nsure. It needs to 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.

Claims Process for Nsure Protocol

Nsure adopts a three-stage claim process. It will first involve the policyholders, and the victims themselves will vote to file a claim; then they will introduce professional audit institutions to present the ins and outs of the matter to all parties through professional audit institutions; and finally vote. The approximate process is as follows:

image description

Compared with Cover's claims process, both have introduced professional audits. In Nsure it is the professional auditor and in Cover it is the "Claim Validity Committee (CVC)".

secondary title

The integration of Nsure's token model and protocol growth

Nsure tokens can be used as pledged assets of the capital pool, and the pledged assets of the capital pool, which are equivalent to underwriting assets, can capture 50% of the premium. In addition, Nsure can also participate in mining by staking assets to earn more Nsure, which itself becomes a productive asset, which can reduce circulation on the one hand and capture the value of system growth at the same time.

In the Cover token model, currently COVER is mainly a governance token. As for how to capture value in the future, community governance participation is also required. From this perspective, the current token model of Nsure 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 to the fundamentals of the business, which depends on the transaction scale of the entire insurance business itself. This is key to determining the value of future agreements.

secondary title

Where is the future going?