Exploring the DeFi coverages
Since the dawn of DeFi, as its value has grown, we’ve seen an influx and diversity of heists occurring in the space. The risks inherent in DeFi are what most crypto veterans perceive as something they have to tolerate, alongside the massive reward potential. But consider this…
How much value could be added to investing in DeFi if we are able to effectively control the negative risk repercussions, developing a sense of security in the space for users.
A growing awareness of the added value of security solutions is bringing an expanding supply of coverage options suited to tolerate the various risks rising around the sector. At Bright Union, our mission is to make sense of the increasingly abundant coverage options available, giving you the ability to compare and select the options with the terms that are most suited to you. In this article, we will elaborate on the types of covers you can buy to minimize your risk.
Protocol hack and failure
No matter which blockchain technology we are using, every blockchain network has its own protocol. This protocol allows us to share data with each other within a basic set of rules. When operations run smoothly, we are able to send and receive data like cryptocurrencies, NFT or governing transactions without any problem. But sometimes a protocol fails resulting in the protocol code, governance, or associated oracle being compromised. This is best described as an exploited leak within the designed framework.
Protocol failure covers can protect you against events like hacks, rug pulls and 51% attacks when using or investing in protocols, such as Uniswap, Compound, or Ocean protocol. This type of event is the most prevalent, and shielding against this type of risk is most popular by far. This cover type protects users against the risk of incurring financial losses due to the failure of the protocol. No matter how much trust you put into the protocol, developing protocols are always subject to the risk of bugs. When found by ethical white hat hackers? No problem. But what happens when a black hat hacker is quicker to the mark. Without protecting yourself against these unforeseen events, you stand to lose your capital without warning. Let’s look at a practical example where the extreme loss of funds could have been minimized or otherwise avoided.
PolyNetwork fell victim to a hack recently, with the event taking headlines as ‘The single biggest heist to take place in DeFi’, resulting in some $600 million losses for users engaged in swapping tokens across blockchains. Imagine you were among those with funds locked in the Polynetwork- what a rollercoaster! Well, luckily, in this case, the hacker turned out to be a white hat. It didn’t take long before returning all ‘safe kept’ funds and is now regarded as Polynetwork’s Chief security advisor. But other protocols could fail or be compromised where investors are not so fortunate. And they do.
A few weeks ago, the founders of Luna Yield, a yield farm within the immensely popular Solana ecosystem, decided to pull the rug from under investor’s feet. Days after its IDO, the yield farm did an exit scam known as a rug pull and deleted the website and social media profiles.
While initial IDO investors were compensated for their loss by the respective incubator. Other investors, initially attracted by the high yields in the platform’s liquidity pools, were left empty-handed. The cybercriminals were able to steal a hefty sum of $8 million and were able to leave without a trace.
With great risk comes great reward, you might say. Suppose you are one of the degens farming on these protocols; the cost of coverage against the risk associated with the huge promised rewards is small (±2,5% per year) compared to the gains you’re expecting. It’s definitely worth considering.
How to cover your favorite protocol
Let’s say you use the Uniswap DEX to join liquidity pools. Since you lock up a significant amount in the protocol, you decide it’s a good idea to purchase a cover for Uniswap. By selecting Uniswap in the Bright Union app, you can see the covers available on the market. After comparing various covers, you decide to purchase one of them as it covers rug pulls, and you can pay with stablecoins. Now you’re insured for the specified cover period, and in the event of a Protocol Failure, you’ll be paid out your claim.
Decentralization has changed the way we view finance, giving the world access to compounding, loaning, staking, and borrowing/lending with ease. Until now, it is mostly risk-takers flooding the streets of Decentralized Finance. Many users interested in earning yields as a liquidity provider are deterred by the embedded risks. In this sense, there is a need for yield token covers allowing users to easily protect their downside risks.
Yield token covers offer the solution. Against a small fee potentially decreasing the possible upside, users can protect themselves from their yield tokens losing significant value. Nexus Mutual, for instance, protects users against yield token de-pegging in excess of 10% of their face value. A liquidity pool (LP) token represents users’ deposit into the DeFi products. In the event of smart contract or oracle failure, stablecoins de-pegging or governance attacks, ultimately under any risk resulting in loss of value to the protocol, LP holders are covered. This coverage type allows them to swap their LP tokens usually to 90% of its underlying face value if it depegs.
So if you feel apprehensive to explore and exploit yield farming for its benefits because it is just too risky, search for Yield Token coverage on Bright Union that protects your preferred yield token from imminent loss.
How to cover your yield tokens
Say for example you deposit into a liquidity pool of Curve. You choose to buy Yield Token Cover under the terms of a stablecoin, to alleviate the risk of your LP tokens de-pegging substantially. An event occurs that causes your LP tokens to de-peg by more than 40% of its underlying asset value. With the cover you chose, you are eligible to claim up to 90% of the expected face value of the LP. The claims submission process is simple and ensures you’re covered against losses that otherwise would have been incurred.
The invention of stablecoins, either backed by currencies or algorithmically realized, is greeted with a warm welcome by investors looking to take a step back from all the price volatility in the market.
But stablecoins have not always proved to be as steady as the name suggests. Often these coins can deviate from the peg for long periods, exactly what holders don’t want. The Terra stablecoin UST quickly recovered following a flash crash test during the May market plunge. Other stablecoins like SafeDollar and FEI weren’t so quick to recuperate following unexpected events. In addition to this, Tether, perhaps the most popular stablecoin, has long been surrounded by controversy about the legitimacy of its operations. These examples beg the question to what extent stablecoins really guarantee price stability.
Covering your stablecoin exposure against de-pegging might just be the solution you’re looking for. On Bright Union, you can weigh up and select your preferred cover for the best price to mitigate the risks of stablecoins dropping beneath their pegs. The cover type will ensure you receive the value difference between the peg and the current price after deviating for a certain period.
If you’ve been around for long enough, it’s impossible to forget the infamous Mt.Gox exchange hack in 2014, which has been the biggest hack to date, totalling nearly $700 million stolen user funds and causing a lasting negative impact on the market. While exchanges have advanced significantly since then, with sophisticated methods in place protecting against hacks, they are still not entirely secure and wallet and exchange hacks continue to occur.
Coverage for entrusting a large amount of your funds with a third party wallet or exchange
As the famous warning quote goes, “not your keys, not your coins”, ultimately the best way to protect your funds is within a multisignature private wallet, but these wallets may not be the best choice for that uncle you’re tempting into crypto. In the end every crypto user needs to weigh up the balance of safety and convenience. No matter what choice you make, if you are somewhat active, you will always have to rely on a custodian with at least part of your funds.
It is exactly that convenience that makes most people place trust in a custodian, after all they’re all subject to some sort of risk. The unlikely event of a catastrophic hack seems a small price to pay for the ever increasing usability of central exchanges and wallets.
This is where the custodian cover comes in, slicing that chance of an enormous black swan event into small manageable fees. It’s no surprise that the most popular custodian covers are for the most well-known and secure custodians like Ledger, Coinbase, Binance and Nexo. People use these custodians for the long term and the option for coverage allows them to feel their funds are secure without compromising on user convenience. So if you do find your funds under the custody of a 3rd party wallet or exchange there is finally a way to insure yourself against unforeseen events like hacks or bankruptcies.
Custodian covers as a solution when using unknown exchanges
The most prestigious exchanges already offer their clients some type of insurance against hacks, minimizing risk. But especially when looking for that next unicorn project, people often go further down the rabbit hole of exchanges. You can find an enormous range of them, all with their own perks and pitfalls. Just recently, Bilaxy, an exchange known for its wide range of tokens, fell victim to a hot storage wallet hack, suffering the loss of nearly 300 erc-20 tokens. The exchange remains offline while it investigates the issue and rethinks the system’s architecture. In the meantime, users are left worried whether their tokens are stolen and are most probably rethinking their risk appetite.
How to cover your favorite exchange or wallet?
Since you’ve familiar with (Binance) and happy with how it functions, you’d like to keep using it. However, you want to take out coverage to protect your funds against hacks and halted crypto wallet withdrawals. This is where Bright Union can help you safely navigate the crypto space by covering your favorite custodian on the right terms. The ability to cover yourself for popular custodians like Binance, but also the more unknown exchanges. So whenever you are urged to use a custodian you are not familiar or comfortable with, or just don’t completely entrust your funds with, come to the Bright Union platform and find a unique and suitable cover.
Or let’s say you are using Ledger to secure the lionshare of your tokens. While this cold storage wallet is one of the safest ways to store your funds, some sort of compromise when interacting with an exchange or protocol with for instance bluetooth could turn out disastrous. At Bright Union you can find, compare and select the ideal cover to make your funds on Ledger disaster proof.
Get ready for ever increasing crypto coverage
As DeFi continues to progress and disrupt the traditional world of finance, its decentral aspect with its permissionless nature and high accessibility, will keep attracting malicious behavior. Having seen just a few of the examples discussed above, there’s a necessity for protecting our crypto assets.
.. and Bright Union brings you onboard.
We’ve taken this opportunity to inform you about the how and why of unique coverage types you can buy to battle the odds. As the market for decentralized coverage expands and diversifies, the choices will be increasingly abundant and you’ll be able to participate as either an insurreee or an insurer. The growing liquidity pool for coverage payouts will be favorable for all involved. We want to create a safe space for the crypto community, where mutual insurance is there to benefit everyone, bringing back trust to insurance, by making you the insurer.
Let’s secure the DeFi sector together!
About Bright Union
Bright Union is building the world’s leading aggregator and accelerator for DeFi crypto risk markets. Our mission is to make the crypto risk markets work, giving investors the ability to seamlessly enjoy coverage on their exposure. On our Decentralized Crypto Coverage Platform, our community can compare and buy coverage, stake and earn by covering the community, and last but not least, join the Bright Union staking pool.
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