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An article to understand the troika of the DeFi insurance track: Cover, Nsure and NXM

Read this article in 24 Minutes

NSure, Cover, and Nexus Mutual represent three different ways to explore encrypted insurance. Where will they go in the future?

Original title: "Understanding the Troika of DeFi Insurance Track in One Article: Cover, Nsure and NXM"

Original source: Blue Fox Notes

Vulnerable DeFi protocols

The following are the problems that many DeFi protocols have suffered in the past month or so Various attacks include flash loan arbitrage attacks and fund theft by exploiting code loopholes.

· Harvest $25 million

· PickleFinance $20 million

· Origin Protocol $8 million

· Value DeFi $7 million

· CheeseBank $3.3 million

· Akropolis $2 million

DeFi has become a feast for "scientists", further reminding participants not to invest The funds that bear the loss participate in the current DeFi.

How to solve this situation? 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.

Any DeFi protocol needs insurance

DeFi needs infrastructure such as insurance to develop . 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.

In the end, most DeFi protocols regard insurance services as an important component of protocol services. Only in this way can the worries of users be truly solved.

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 place part of their income in the insurance market, which means an increase in insurance demand and an increase in the scale of insurance premium income. 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.

Cover's insurance dual-token operation mode

Cover is a peer-to-peer insurance market. Cover's insurance operation mechanism adopts the insurance dual-token model. Its long-term goal is to build an insurance market for anything, but currently, its focus is on the DeFi market. It uses the bonding curve model 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. Fungible tokens are fungible tokens. This insurance dual-token model is at the core of how the Cover protocol works.

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

COVER_COMPOUND_2020_12_31_DAI_0_CLAIM

COVER_COMPOUND_2020_12_31_DAI_0_NOCLAIM

The homogeneous insurance token and its collateral maintain a 1:1 base. For example, for every 1DAI deposited, the user will receive two insurance tokens, one CLAIM token (claimable token) and one NOCLAM token (non-claimable token). NOCLAIM tokens are equity tokens that represent the right to collect collateral in the event that no claims are made for a specified period of coverage. The CLAIM token is also an equity token, which represents the right to receive the deposited collateral (or part of the collateral) in the event of confirmation of claim payment during the claims management process. Relationship between CLAIM tokens and NOCLAIM tokens and collateral:

1CLAIM token + 1NOCLAIM token ≈ 1 collateral (eg DAI)

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*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 (eg DAI), 1CLAIM token=0.

That is to say, the operation of Cover's insurance market mainly relies on these two homogeneous tokens, and this insurance token Liquidity is achieved 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.

Three roles in the Cover insurance market

In the operation mechanism of Cover insurance, there are three Main roles: market maker, insurance provider, 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

The market maker holds 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 two types of insurance tokens, CLAIM and NOCLAIM, and then deposit CLAIM and NOCLAIM on Balancer Tokens provide liquidity. Becoming a market maker can earn liquidity fee income and Cover token income. However, a market maker can also sell any token in CLAIM or NOCLAIM tokens; if you want to exit, 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 very large, because it is 98%/2% of CLAIM and NOCLAIM Token token pool.

2. Insurance provider

The insurance provider only holds NOCLAIM tokens and is It provides liquidity. 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 receive CLAIM and NOCLAIM tokens; then sell the CLAIM tokens you hold (you can get a premium), providing liquidity only 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 through token subsidies etc.) and keep NOCLAIM tokens by yourself, it is equivalent to providing low-priced underwriting services for your own users, which is also an important sign for the agreement to show its confidence to users.

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

Different from market makers holding two types of insurance tokens, since insurance providers only retain NOCLAIM tokens and become underwriters, if a successful In the event of a claim, the collateral of the insurance provider will suffer losses. In addition, 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.

3. The insurance demander

The insurance demander (Coverage Seeker) holds the CLAIM agent currency, its purpose is to protect the security of assets in its protocol. 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, the insurance purchaser can pass CLAIM on behalf of Token redemption is paid with collateral.

In addition, insurance buyers have other options to earn liquidity income by providing liquidity for CLAIM tokens, while protecting the underlying assets of their corresponding agreements; You can also buy the same amount of NOCLAIM tokens. For example, before the insurance expires or a claim event occurs, you can use the CLAIM in hand and the purchased NOCLAIM tokens to redeem the collateral.

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 Funds are safe in protected projects.

In addition, in the Cover agreement, if a redemption operation occurs, the agreement needs to charge a certain percentage of fees.

Claims Management for Cover

Cover claims are divided into three main steps: Filing a claim , vote, final decision of the committee.

*Filing a Claim

Anyone can file a claim by paying a claim filing fee. The fee for filing a claim per protocol will have a multiplier effect to prevent spam attacks. Additionally, anyone can file a mandatory claim by paying the mandatory claim fee. Compulsory claims can go directly to adjudication by the Commission.

*Voting

After the claim event is submitted, it will be voted by 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 Determination by the Claim Validity Committee

Claim Validity Committee (Claim Validity Committee audit claims, they 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 the reviewers must agree that the claim is valid and determine the percentage of reimbursement if a claim occurs.

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

Nsure Insurance's "Decentralized Lloyd's" model

Nsure Insurance Agreement The core 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.

Nsure Protocol’s Dynamic Pricing Model

Dynamic pricing is based on the capital requirements of each project and supply relations to decide. 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 with 4x leverage. In addition, when considering premium pricing, risk factors are also considered in addition to capital demand and supply.

Ultimately, pricing depends on the supply and demand relationship 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.

(Nsure’s Premium and Return Example, Nsure)

Nsure Protocol’s Capital Pool Model

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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 reimbursement. 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.

The funds of the surplus pool come from the premium, which can capture 50% of the overall premium, and 10% of it will be transferred to the surplus pool after the insurance expires and no compensation occurs . The remaining 50% of the premium is allocated to the insurer.

Nsure Agreement’s Claims Process

Nsure adopts a three-stage claim process, it first The policyholders will be involved, and the victims themselves will vote to submit claims; then professional audit institutions will be introduced, and the ins and outs of the matter will be presented to all parties through professional audit institutions; finally, voting will be conducted. The general process is as follows:

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(Nsure’s claim process, Nsure)

Compared with Cover’s claim process, both of them have introduced professional audit . In Nsure it is the professional auditor, in Cover it is the Claims Validity Committee (CVC).

The integration of Nsure’s token model and protocol growth

Nsure tokens can be used as The 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 has become 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, it still needs the participation of community governance. 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.

Where is the future going?

In the long run, both Nsure and Cover have the opportunity to evolve into Nexus The real rival of Mutual. First of all, neither of them requires KYC, which has advantages in the participation threshold.

In addition, there are certain differences between Nsure and Nsure in terms of premium pricing mechanism, token mechanism, claims process, etc. It has absorbed the history of traditional insurance as a whole Experience, and explore with the blockchain.

And Cover proposed the dual-token operation mode of insurance, combined with liquidity, and has its own unique mode in DeFi insurance, but its tokens The mechanism may need further iterations to capture greater value.

NSure, Cover and Nexus Mutual represent three different ways to explore encryption insurance, where will they go in the future? As DeFi evolves and the need for insurance increases, their respective advantages and disadvantages will be presented one by one. This also tests the iterative upgrade capabilities of the three teams.

Finally, the three insurance agreements of Nsure, Cover and Nexus Mutual also have smart contracts and potential risks. One of the best ways for them to help each other is Each other can provide insurance services to each other's users, and provide stronger resilience for the DeFi industry itself.