Origin Dollar Prix

Helping the above average John guy understand the Defi space : Decentralized insurance, Nexus Mutual, Armor Protocol, Cover Protocol, Capital Efficiency, Claim payout ratio and risks + notable mentions

<!-- SC_OFF --><div class="md"><p><strong>"Insurance? Are we going to talk more in depth about it?"</strong> Yes John. Here is a short recap :</p> <p>In the world of decentralized finance (DeFi), where digital money projects are growing fast, there are more and more cases of cyberattacks and theft causing people to lose their money.</p> <p>If we want more people to use DeFi and not just those who are willing to take big risks, we need a strong insurance system. This insurance will help protect users from losses when they use DeFi apps, making it safer and more attractive for everyone.</p> <p>​</p> <p>​</p> <p>​</p> <p>Do you know exactly what I mean by Insurance?</p> <p><strong>"I think so. I want to hear the version of the teacher too."</strong> Ok John : </p> <p>Insurance is a massive industry that deals with unexpected events and accidents. In a simple way to manage these different risks, we should transfer out the ones that don't happen often but can cause significant damage, like natural disasters and severe illnesses. That's where insurance comes in – it helps us handle these kinds of risks. </p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"How does Insurance work actually?"</strong> Don't feel embarrassed John : </p> <ol> <li><strong>Law of Large Numbers</strong> : Insurance works best when events it covers are random and not connected. If these events happen often enough, the overall results will match what's expected.</li> <li><strong>Risk Pooling</strong> : Insurance deals with rare events that can have a big impact, like accidents. Many people pay insurance premiums, and these funds help cover the costs of the few who make significant claims.</li> </ol> <p>​</p> <p>​</p> <p>​</p> <p><strong>"Does Crypto need Insurance in your opinion?"</strong> Yes, it needs it if it wants adoption : </p> <p>Insurance helps regular folks take chances and spreads the cost of big problems. It's like a safety net. For the crypto industry to grow and attract big investors, it needs insurance to show it's safe and reliable. </p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"Nexus Mutual? Let's see what the fuss was about it." Sure thing friend :</strong> </p> <p>Nexus Mutual is the largest. It's like a big pool where members share insurance. They cover things like DeFi protocols and custody risks for your funds. To join, you need to become a member by doing a KYC process and pay a one-time fee. You use ETH or DAI to buy insurance, and they convert it into NXM tokens. When you make a claim, members vote on whether it's valid. If they agree, you get paid.</p> <p>Armor Protocol is another option. It helps with some issues wNXM has and converts it into arNXM.</p> <p>Nexus Mutual makes money from premiums, selling NXM, and investing the capital pool.</p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"Now, remind me of Armor Protocol."</strong> Anytime : </p> <p>Armor Protocol is like a bodyguard for your investments in DeFi, making them super safe. They have four main things:</p> <ol> <li><strong>arNXM:</strong> This lets you be part of Nexus Mutual's insurance without sharing personal info. You trade wNXM for arNXM, which is used to show that certain smart contracts are secure.</li> <li><strong>arNFT:</strong> This turns your insurance into digital tokens, so you can buy, sell, or transfer them easily without KYC.</li> <li><strong>arCORE:</strong> It's like pay-as-you-go insurance for your DeFi moves. You pay based on how much you use, and it's more flexible. Some of the extra money goes to those who stake arNFTs.</li> <li><strong>arSHIELD:</strong> This is for Liquidity Providers (LP) tokens. It covers the risks of the protocols, not the assets themselves.</li> </ol> <p>If you ever need to make a claim, Nexus Mutual reviews it, and Armor token holders help decide if it's valid. Then, they pay out from their treasury.</p> <p>Armor makes money partly from the 10% premium on Nexus Mutual covers, and if there are no claims, they give some of it back to arNFT holders.</p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"Help me understand the next protocol that you are suggesting."</strong> Here is an explanation friend : </p> <p><strong>Cover Protocol</strong> started as an insurance project within Yearn Finance but split into its own thing. It offers protection for DeFi protocols, and here's how it works:</p> <ol> <li><strong>Type of Covers:</strong> They provide Smart Contract Covers, like insurance against hacks on DeFi projects.</li> <li><strong>Cover Purchase:</strong> You can buy cover easily with one Ethereum transaction, no registration needed.</li> <li><strong>Claim Assessment:</strong> If something goes wrong, you can file a regular claim for 10 DAI or a force claim for 500 DAI. A committee decides if your claim is valid.</li> <li><strong>Risk Assessment:</strong> They use flash loans to make the process cheaper for users. The price of cover depends on the balance of tokens in their pool.</li> <li><strong>Protocol Revenue:</strong> They make money from fees when people redeem tokens. COVER token holders get to vote on how they use this money.</li> </ol> <p>Cover Protocol is trying to compete with Nexus Mutual in the DeFi insurance space. It's a newer player, but they're trying hard to innovate and catch up.</p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"What's the Capital Efficiency?"</strong> Here is your answer John :</p> <p>Nexus Mutual lets people who provide capital use it more effectively, like getting more bang for their buck. This helps them earn more money from premiums. It's riskier but follows the way traditional insurance spreads risk across various products.</p> <p>On the other hand, Cover Protocol doesn't allow capital providers to use their money as efficiently because each pool is separate. So, Cover Protocol's insurance ends up costing more than Nexus Mutual's. For instance, covering Origin Dollar costs 12.91% yearly on Cover Protocol but only 2.6% on Nexus Mutual. They're working on a new version to bundle different risks together, but we don't have all the details yet.</p> <p>We can measure how efficient this is by comparing the amount of insurance provided to the available capital. Nexus Mutual can be very efficient, up to 200%, while Cover Protocol, due to its design, can't go over 100%.</p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"How many covers are available?"</strong> That's a really good question : </p> <p>Cover Protocol offers insurance for 22 protocols, while Nexus Mutual covers 72. Nexus Mutual gives users more flexibility to start and end their coverage whenever they want, up to a year. In contrast, Cover Protocol only has fixed-term insurance that ends on a set date, like the end of May. So, over time, CLAIM tokens lose value, and NOCLAIM tokens gain value.</p> <p>Nexus Mutual has more comprehensive coverage for major DeFi protocols, but it's often sold out due to a lack of stakers. Armor Protocol helped by attracting more wNXM into arNXM, making more coverage available.</p> <p>Cover Protocol is more focused on offering insurance to smaller or newer projects without the need for extensive risk assessments. Each risk is separate, so it doesn't affect the whole pool like Nexus Mutual. However, getting coverage for lesser-known projects is tough. There's limited space, and it can be expensive.</p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"What's the claim payout ratio?"</strong> Here is the answer John : </p> <p>In February 2021, Yearn Finance experienced an $11 million hack. Even though Yearn Finance planned to cover the loss themselves, insurance protocols wanted to demonstrate that their product works as intended.</p> <p>Nexus Mutual approved 14 claims, totaling $2,410,499 (1,351 ETH and 129,660 DAI). This resulted in a 9.57% loss for NXM stakers who supported Yearn Finance. The losses were fully paid if the claimants could prove they lost at least 20% of their funds.</p> <p>On the other hand, Cover Protocol decided to pay out only 36% of the loss, which matched the percentage of the affected vault. So, if someone had 1,000 CLAIM tokens, they received only $360. Since there were only $409,000 worth of CLAIM tokens for Yearn Finance, market makers lost just $147,240.</p> <p>People who buy insurance from Cover Protocol should understand that it doesn't guarantee a full payout in case of a loss. The way payouts are determined is more like a prediction market.</p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"Again, what are the risks that come with using those platforms?"</strong> As usual John : </p> <p>The amount you receive from an insurance claim depends on the agreements made between the insurance provider and you. In situations with big claims, there can be different interpretations of these agreements, and what you get may not seem fair. Each insurance protocol has its own way of deciding payouts, which might not benefit everyone equally. So, buyers of insurance should be aware of the limitations of the insurance products they choose.</p> <p>Becoming a capital provider for insurance protocols is a complex task, and users should fully understand the risks before getting involved. If the likelihood of claims is higher than anticipated, stakers can end up losing money.</p> <p>​</p> <p>​</p> <p>​</p> <p><strong>"If I want to use another platform? Maybe I don't like those."</strong> Ok, your wish :</p> <ol> <li><strong>Unslashed Finance</strong>: They offer risk pooling for capital providers, and their Spartan Bucket product covers various risks related to custodians, wallets, exchanges, smart contracts, validators, and oracles. Lido Finance has purchased $200 million worth of cover from Unslashed Finance to protect against slashing penalties in Ethereum 2.0 staking.</li> <li><strong>Nsure Network</strong>: They've raised $1.4 million in seed funding and operate a marketplace for trading risk. NSURE tokens are staked to indicate the riskiness of a protocol, which influences the pricing of insurance coverage. They're running tests on Ethereum's Kovan testnet to fine-tune their pricing model.</li> <li><strong>InsurAce</strong>: Backed by $3 million in funding, InsurAce aims to become the first portfolio-based insurance protocol. It offers investment and insurance products, allowing users to get coverage for multiple protocols involved in their investment strategies. InsurAce relies on an actuarial-based pricing model, which is different from traditional staking or market-based pricing.</li> <li><strong>Derivative Protocols</strong>: Some derivative protocols, like Hakka Finance's 3F Mutual and Opium Finance, provide unique insurance products, such as covering the de-pegging risk of stablecoins like DAI and USDT. However, adoption of these products has been limited so far.</li> </ol> <p>​</p> <p>​</p> <p>​</p> <p><strong><em>TL;DR :</em></strong> </p> <p>Crypto needs insurance for DeFi safety. Nexus Mutual and Cover Protocol offer coverage, but Nexus is more efficient and flexible. Beware of varying claim payouts and risks. Consider other options like Unslashed Finance, Nsure Network, or InsurAce. </p> <p>​</p> <p>​</p> <p>​</p> <p>All of the info above was written by me with the help of the How to Defi book, advanced edition, from Coingecko. Hope it helped others like it did for our boy John here! </p> </div><!-- SC_ON -->   submitted by   <a href="https://www.reddit.com/user/Natural_NoChemical"> /u/Natural_NoChemical </a> <br/> <span><a href="https://www.reddit.com/r/CryptoCurrency/comments/16xo0ps/helping_the_above_average_john_guy_understand_the/">[link]</a></span>   <span><a href="https://www.reddit.com/r/CryptoCurrency/comments/16xo0ps/helping_the_above_average_john_guy_understand_the/">[comments]</a></span>