Securing Stablecoins — the Bullish Case for DeFi to go Mainstream in 2021
After witnessing one of the most dramatic markets’ overall crashes in history last spring, the one that has performed better than any other, and which is experiencing the most flourishing period of its still very short history, is the cryptocurrencies market. Generally, the whole Blockchain Industry is rapidly increasing its influence and attracting more and more funds and interest, while Bitcoin has recently surpassed its market cap ATH (all time high) and it’s near to hit another price per unit ‘s historical record too.
2020 marked the eplosion of a very strong trend, which is laying solid fundamentals to establish itself more and more as an alternative to legacy finance products: the Decentralized Finance.
But what should DeFi ecosystem accomplish in order to steal CeFi wider and wider market shares and move towards mass adoption? Let’s break down why Insurance is undoubtedly one of those driver and how Bridge Mutual’s value proposition addresses this field.
Why Insurance — The Dark Side of 2020 in DeFi
2020 will be remembered in the cryptoverse as the year of the rise of DeFi protocols, which have seen an exponential growth in terms of market capitalization (and consequently in popularity), which for some projects has grown tens or hundreds of times.
As of now, DefiPulse states a TVL (Total Value Locked) worth $ 14.12B. The set of these protocols, now called Money Legos, make up the different categories of this new paradigm: Lending, Borrowing, Derivatives, Synthetic Assets, DEXs, Liquidity Pools, Yield Farming, Vaults, Flash Loans and so on. But decentralization, along with various advantages, comes with its risks: a smart contract can be hacked or present backdoors for a rug-pull, an exchange can be attacked.
Maker DAO, bZx, Kucoin, Harvest Finance, dForce Lending Platform, Cheese Bank, Akropolis, Value DeFi: just considering the current year, the attacks on smart contracts and exchanges have led to thefts worth over $200M, and only in the last week we have to add to the list the Origin stablecoin’s protocol hack (worth $7M) and the Pickle Finance protocol hack (for over $20M).
Insurance Markets and the Stablecoins Case
The DeFi insurance market essentially started this year, moving its market cap from $0 to $290M, while the traditional world insurance market currently weighs in at around $5T. Of these, the $3.7T market currently covered by Credit Default Swaps could be digitized and decentralized in the medium term.
There are different types of malicious events to which today DeFi users (but also simple cryptocurrency hodlers) are exposed, and from which they want to be protected: they can concern DeFi protocols, smart contracts, exchange hacks, but not only. The first big step that could give a strong boost to the adoption rate of DeFi and its instruments, in fact, is certainly the use case of stablecoins, a market that is actually worth over $20B and takes an increasingly important slice of the entire crypto market cap (we are now just under 5%).
Stablecoins are, even at a conceptual level, the most important link that unites the world of crypto-assets with fiat currencies. In fact, representing the digitization of fiat currency, as well as translating its value onto the blockchain, with the advantages of transfer speed enjoyed by a token, ease of management and the absence of other whatsoever limits, such as the authorization layers typical of fiat circuits, today stablecoins are recognized in the cryptoverse as a standard. In addition to being used as an asset in exchange pairs against any other crypto, they often also represent a hedging function, used by traders and holders during bear market cycles or simply to transfer a value of a volatile asset into a fiat-pegged one: stablecoins, however, still carry relevant risks: most of them, for example, while using a decentralized infrastructure, are subject to centralization in their management of issuance, supply and custody; $USDT, as well as $USDC, for example, is guaranteed by a central issuer. Other stablecoins, such as $DAI, are decentralized but in any case not immune from the endemic risk of the protocol that issues them being hacked ( Maker DAO in the case of $DAI) or other risks of any kind.
Insurance on stablecoins, in addition to being the only fully automatable claim case (we will see later how Bridge Mutual implements this feature, automatically verifying the failure of the peg between stablecoin and fiat to which it refers), represents a market that is still unexplored and that could really act as a driver of adoption, for DeFi, towards a mass audience, as well as towards institutional funds that still do not trust in the absence of guarantees. Ultimately, offering asset insurance of this type hugely reinforces the most important gateway between legacy and decentralized finances.
Bridge Mutual — Value Proposition
Bridge, which is building its infrastructure on the Ethereum network, but plans to migrate to Polkadot (as soon as its parachains will be up), using a Solidity-compatible parachain like Edgeware, brings innovation into the Decentralized Insurance Market for DeFi products by allowing users to purchase different types of policies, mainly in three categories: (1) Smart contracts getting hacked; (2) Exchange getting hacked; (3) Stablecoins failures.
By paying a premium for the type of policy chosen, coverage is accessed. The premium price is decided by a Dynamic Pricing Model based on multiple risk factors. Users can claim via the app, and the mechanism (explained in detail in the following paragraph) provides for an automatic decision in the case of insurance on stablecoins, while the other two categories of events provide for a 3-step voting system.
The economy of the platform, which is based of two types of users, policy holders who buys insurance and stakers who provide liquidity, is governed by the $BMI token, whose flow will be better described below.
Stakers, who can choose on the basis of an analysis of risk factors which categories of policies to provide liquidity to, receive as a reward a part of the premiums paid by policy holders, as well as the yields generated by the protocol, which automatically invests a part of rewards in DeFi protocols.
Bridge Actors, App, Token Flow
The flow diagram in the image below shows how BMI Staker users and Policy Holder users behave within the protocol.
When users buy insurance for a chosen category, the premium is converted to $BMI and distributed: 70% is burned; 20% is given to stakers; 10% is locked to pay voters in the event of a claim.
BMI holders can lock and stake their BMI in coverage pools for specific assets in exchange for profit sharing and yields.
Both Premium cost and Collateral Pool’s coverages will be derived by a Dynamic Price Model, based on different risk factors. Newer assets are considered high -risk, and require $1 in their pool for every $1 of coverage being purchased.
Claims can be easily placed by Policy Holders using the protocol’s dashboard (stablecoin coverage claims have no voting process, these claims are settled automatically and instantly).
Voters in the majority get rewarded, voters in the minority do not.
Voters that collude and vote dishonestly can have their stake burned.
Claims undergo a thorough 3-phase crowd voting mechanism.
Votes last for 3 days, and there are 10 days between voting phases.
Bridge will provide a list of coverable events along with definitions for key terms. When something happens on an exchange that allegedly results in a loss of funds, those that purchased coverage for that exchange can make a claim for funds up to their policy maximum. It won’t be up to the community to have to determine whether the claimant was personally affected, the community will only be responsible for determining whether a coverable event took place.
An interesting thing to point out is that the exchange itself can purchase insurance, or users of that exchange can purchase insurance. As long as there are users who contribute funds to be used as coverage for a particular asset or exchange, insurance policies can be purchased against those funds. This is why it is important for users to only choose to back exchanges or projects that they feel are secure and unlikely to be attacked.
Though, naturally, the premiums (and therefore the ROI) for those that provide coverage to riskier assets/exchanges will be higher due to increased risk and demand..
Advantages over Nexus
Nexus Mutual, with a market capitalization of around $ 200M, is currently the most significant competitor for Bridge. Briefly listed below are the main competitive advantages that Bridge architecture and tokenomics can retain over its rival:
- Products Coverage: Nexus Mutual only covers attacks on smart contracts, where instead Bridge disrupts the sector by introducing more policy categories, first of all that on stablecoins, but also that on exchanges. Other categories could come with further developments.
- Structure: Bridge does not require the KYC procedure and all processes take place entirely on-chain, where instead Nexus Mutual provides for KYC and the registration of off-chain policies, as well as a membership Fee.
- Premium Price Model: in the case of Bridge it is dynamically determined by the various risk factors of the type of risk from which you want to defend yourself, while Nexus applies a policy entirely based on liquidity, i.e. the capital supply of the protocol.
- Voting on Claims: Bridge introduces an automated result on claims for the use case of stablecoins insurance policies, reducing the processing times and making it clean and smooth.
$BMI — Team, Metrics and Roadmap
Bridge Mutual team is led by Mike Miglio, Managing Partner at Wolfe Miglio, a leading Crypto & Securities Law firm, and counsel to dozens of well-known cryptocurrency projects, including: Akropolis, Certik, Kinesis, NOIA, QTUM, FABRK, Gate.io.
Bridge has successfully closed Angel and Seed investment rounds, where its $50k and $210k targets respectively were both over-subscribed. The currently Private round, with a fund-raising target of $1.35M, is very close to reach the target in only one week. The total amount of tokens destined to the Sales (preceding the IEO) is 13.84M, which make up about 9% of the total supply, amounts to 160M tokens.
The project is officially supported and backed by a list of prominent Crypto sector’s Investors & Partners, including VYSYN, Vendetta Capital, Nabais Capital, ZOKYO, MYNTD , Seikatsu Ventures, Faculty Capital, Etherblock Capital, Consensus Lab, Fairum Ventures, BarnBridge, and New York Stock Exchange Listed InsurTech company SOS Limited (NYSE: SOS).
The project roadmap currently estimates the launch of the main-net, as well as the application for end-users (and a consequent token listing) to happen in Q1'21.
Get in Touch with Bridge Team & Community
If interested, you can follow Bridge Mutual’s developments & announcements, or even be actively involved in the community, by following or joining the channels listed below:
🔹 Website : www.bridgemutual.io
🔹 Medium: https://medium.com/@bridgemutual
🔹 TG Community : https://t.me/bridge_mutual
🔹 TG Announcements Channel : https://t.me/bridgemutual
🔹 Twitter : https://twitter.com/Bridge_Mutual
Originally published at https://ttone.medium.com on November 26, 2020.