UST de-peg: Impact on the Bright Risk Index

As with all innovative products, nothing is better than stress-testing a product through a real crisis. Little did we know that during the Early Access phase of the Bright Risk Index, one of the most catastrophic events in the history of crypto would take place: the de-pegging of the UST stablecoin, and the meltdown of the Luna ecosystem.

Well-known DeFi insurance protocol and partner of Bright Union, InsurAce, had to use 25% of their investors’ capital, which was used to underwrite insurance policies, to pay out the claims covering the UST de-peg event.

The UST de-peg confirmed a lesson we already knew: to truly make crypto risk manageable, further diversification is essential.

UST de-peg claim

On May 9th the crypto world was shaken by UST losing its peg against the dollar (Read our previous article on the details). A total value of $40B was lost on the day itself and the TVL of DeFi halved. Among the more prudent DeFi investors were those who bought insurance against this event, with the total claims paid worth $14M (95% of capital covered).

On the flipside were those who provided insurance capital to InsurAce. On June 24th, 25% of their staked assets were used to fund the $14M claim payout.

Impact on the Bright Risk Index

The Bright Risk Index (BRI) is a tool which allows users to provide capital to multiple risk platforms (Nexus Mutual, Bridge Mutual and InsurAce). It is simple and safer for users than underwriting risks directly through platforms.

Since the BRI provides liquidity to InsurAce, it was exposed to the UST de-peg event (other risk platforms Nexus Mutual and Bridge Mutual do not provide coverage for a de-pegging event). Due to the diversification strategy, the impact of the claim was ~12% of the TVL — significantly lower than the 25% of InsurAce. Its diversified nature greatly benefited users in this catastrophe, and will do so again. It is a case in point for extensive diversification across risk pools.

While InsurAce’s stakers were aware of the risk of providing capital to underwrite insurance products, the scale of their losses was higher than expected. To reduce this impact and encourage users to continue staking, they have announced a plan to allocate higher APYs to those stakers affected, thus, reducing the impact from 25% to 10% over the next 12 months. Consequently, BRI investors will also benefit from this initiative.

Alongside the UST de-peg, the BRI was also exposed to exchange rate risks of funds allocated in Nexus Mutual. From May 9th to June 12th, the price of wNXM dropped 52%, and consequently the capital staked decreased accordingly. Overall impact was 3% on the TVL of the BRI.

The Future of the Bright Risk Index

The BRI is currently still in its Early Access Phase and the team has big plans for how it can be further developed to bring more value to its investors and to the risk ecosystem.

Firstly, the Bright Risk Index will be further diversified by integrating more risk protocols. Initial talks with other platforms are currently underway. This will decrease users risk exposure from an already low estimate of 12%. The effects of diversifying across different product categories (travel, flight, life insurance) are being explored as well as the current selection of protocol failures.

The second plan for the Bright Risk Index, is to split it into two tranches with different risk/reward ratios. The junior tranche has higher APYs but this capital will be the first to be used to pay out a claim. The senior tranche isn’t so lucrative for investors, but will be lower risk in the event of a claim payout. This will empower users to make informed decisions about their portfolio and its risk exposure. More details on this development will follow in the coming weeks.

What can we, the industry, learn from this?

It often seems that the crypto world is learning the same lessons as Wall Street but decades later. Traditional insurance companies are highly profitable due to their solid risk management frameworks, and reducing their exposure and upside.

We believe that the insurance industry, and the crypto investors are following this same trajectory. Insurance Protocols will start managing their cover exposure more strictly, at the expense of short-term growth. Similarly, crypto investors will manage their risks more carefully — reducing their upside slightly– by buying more insurance covers and diversifying their own portfolio.

The positive outcome from this is that InsurAce has demonstrated their ability to pay outstanding claims and to effectively manage stakers’ confidence. In the traditional insurance industry trust is the most important asset any insurer can have. We believe that in the long term this trust is way more valuable than the financial impact of paying out the claims for the UST de-peg.

About Bright Union

Bright Union is the world-leading multi-chain decentralized finance cover marketplace. Our mission is to safeguard your digital assets from hacks and smart contract failures by empowering the crypto community to cover one another in a decentralized and permissionless manner.

Bright Union provides the most comprehensive range of crypto insurance on the market at competitive prices. Furthermore, Bright Union will soon release its unique suite of cutting-edge risk solutions, providing investors with outstanding investment and coverage opportunities. Be bright and take advantage of DeFi’s exponential growth.

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