It is becoming clearer and clearer about this. With various hacking incidents on DeFi, there is a growing potential demand in the crypto insurance market.
As a result, the exploration of different DeFi insurance programs is necessary and important for the overall DeFi development. We have introduced many DeFi insurance programs before, and Bridge Mutual is also a DeFi insurance program, so how is its exploration different?
Brigde Mutual is a crypto insurance program
Bridge Mutual is a decentralized, permissionless crypto insurance protocol. Like most current crypto insurance protocols, Bridge Mutual has two main roles: insurance buyer and insurance underwriter, as well as a claims process.
However, Bridge Mutual also has its own different aspects. One of the points is that it plans to provide full-fledged crypto insurance services, and in addition to providing insurance for smart contracts, it also plans to provide insurance for stablecoins, CEX, and other crypto domains. In other words, as long as there is an insurance pool, users can get insurance services for hacking events, rug pulls, vulnerabilities, and other risks arising from various reasons. Even stablecoins are covered, for example, the loss of value caused by a significant decoupling of stablecoins can also be insured.
In short, Bridge Mutual wants to provide a wider range of crypto insurance services that can cover various potential risk events in the crypto space, thus providing more protection or revenue opportunities for the industry’s participants.
In addition to the expansion of insurance coverage, Bridge Mutual is unique in many details. For example, its license-free project pool, multiple flexible incentives for underwriters, support for insurance purchasers, reinsurance pool mechanism to reduce insurance rates, and crediting mechanism design in the claims process.
License-free Program Insurance Pools
Bridge Mutual is a license-free crypto insurance protocol that allows any underwriter to start a project insurance pool by providing a defined network and smart contract address and depositing the corresponding DAI (e.g. 1000 DAI or more) as initial liquidity funds.
In addition, Bridge Mutual supports depositing any number of project tokens into a designated shield mining pool, increasing the underwriter’s revenue and providing an incentive for more users to provide underwriting funds for the project. Project parties or other participants can allocate a certain number of tokens to underwriters in a customized manner based on time and funding ratios. This part of the design Bridge Mutual plans to implement in V2.
In the DeFi program, most projects are currently audited before going live, but audits do not solve all problems. On the flip side, if a project is confident enough in its security, it should use a portion of its tokens as a security fee, which could be offered as underwriting capital or token incentives in an insurance marketplace similar to Bridge Mutual. This could increase the confidence of its project’s backers.
Bridge Mutual’s shield mining pool is designed to facilitate the project’s participation in its insurance marketplace, which will help attract more people to underwrite its projects and increase user confidence in the project and its own expansion.
Incentives for underwriters
An underwriter is a capital provider in the insurance market that bets on the low probability of underwriting a project and provides a secure service to insurance purchasers. As a provider of capital to the insurance market, it takes on a certain amount of risk, and only enough interest can attract more participants to provide capital to the insurance market for a particular project.
Providing insurance market capital for crypto projects on Bridge Mutual provides multiple benefits, which is particularly important in the early years. It has a triple incentive: premium revenue, BMI incentive, and a token incentive for the corresponding project (this part depends on the project owner or other participants).
When an insurance buyer buys insurance for the corresponding project, the underwriter of the project gets a share of the profits from the premiums. 80% of the premiums are allocated to the underwriter, and the premiums are added to the insurance pool on a per-block-time basis, increasing the balance of DAI in the pool. Underwriters receive bmiDAIx (x represents the project) tokens after depositing their capital into the project insurance pool. As the size of the purchased policy increases, the corresponding bmiDAIx value increases, and so does the underwriter’s revenue.
For example, when the underwriter provides underwriting assets of 1000 DAI for the Aave project insurance pool, then the underwriter is assumed to receive 1000 bmiDAIaave of underwriting tokens, assuming its APY of 30% remains constant, which means that after 52 weeks, the user can receive 1300 DAI. When the user wants to withdraw their underwriting assets after 10 weeks, then the user will receive 1,057DAI for destroying their 1,000 bmiDAIaave with a premium gain of 57DAI. Of course, in reality it will change its APY as the number of users buying insurance increases.
Token rewards for the corresponding project
If a project x (e.g. Compound) participates in the shield mining program, then the underwriter also has the opportunity to receive token revenue from project x, which will increase its APY and incentivize more participants to provide underwriting capital for its project. This incentive is especially important for nascent DeFi projects to increase user confidence.
BMI Token Rewards
After underwriters deposit their capital into the project’s insurance pool, they can receive bmiDAIx tokens (x is a particular project) and then pledge their bmiDAIx tokens into the bmiDAO pledge contract, and also receive a BridgeMutual native token, BMI, as a reward. The number of its rewards will be allocated accordingly to the block time based on the underwriting size.
The attractiveness of the BMI token is related to its ecological development. If its insurance scale grows and the value of BMI increases, it will attract more people willing to provide underwriting capital for projects on its platform, which is conducive to the cold start and positive cycle of its ecology.
In addition, underwritten assets are liquid. After underwriters pledge their underwriting capital bmiDAIx to a pledge contract, they can obtain a pledge token, which is represented by an NFT, representing the underwriter’s DAI in the insurance pool and its earnings. This NFT is liquid and can be sold on any NFT’s trading market. This is similar to the LP tokens that provide liquidity on DEX.
In addition, the rate of return (APY) varies from project insurance pool to project insurance pool. In general, protocols with relatively higher risk will have a higher APY because their potential risk is also higher.
Support for insurance purchasers
Setting insurance rates based on market demand
One of the most important motivations for insurance purchasers is undoubtedly to buy security for their potential risks, so they need to pay a fee to the underwriter who provides the underwriting capital. How do premiums make sense? In Bridge Mutual, the premium depends on the amount, the period of coverage (1-52 weeks), the utilization of the program X pool, etc.
In Bridge Mutual, the shortest underwriting period is currently 1 week and the longest is 52 weeks. Currently 1 week is 1 epoch, which means that users can purchase coverage for a minimum of 1 week and a maximum of 52 weeks.
The larger the amount of insurance purchased by the user and the longer the period, the higher the premium. In addition, the utilization rate of a program’s insurance pool is also key to its insurance rates. The utilization rate of an insurance pool, specifically, utilization rate = value of policies in force / value of DAI in a program’s insurance pool. For example, if Aave has 10 million DAI in its insurance pool in Bridge Mutual, and the in-force policy value (the value of insurance purchased by the insurance purchaser for the assets on its Aave agreement) is 5 million DAI, then its pool utilization rate is 5 million DAI/10 million DAI = 50%.
A higher utilization rate indicates higher demand, then its rate is relatively higher, while a lower utilization rate indicates lower demand, then its rate is relatively lower. The rate change is used to balance the demand and supply side of the insurance market.
When a covered event occurs, the insurance purchaser, the policyholder, can submit a claim to receive compensation. Covered events can be hacking, rug pull (e.g. draining liquidity out), vulnerability exploitation, etc. Claims can be filed within 7 days of the policy expiration date. Once the claim is successful, the appropriate compensation can be received from the funds provided by the underwriter. In addition, Bridge Mutual has a claim appeal. When a subscriber’s claim is denied, the claimant has 7 days to file an appeal.
Claim filing is open, and after a claimant (user with a policy) files a claim, users who have pledged stkBMI (BMI’s pledge token) can see the claim filing and can view the evidence uploaded by the claimant. Users with voting rights vote on these claims, and can vote on multiple claims in batches. If a voter submits “0”, it is equivalent to a rejection. If a value greater than “0” is entered, the claim is considered valid and the value represents the amount the voter believes should be paid.
Since the value entered by each voter may be different, the final payout amount will be determined based on the voter’s weight (number of pledged BMI tokens and reputation score) and the outcome of the vote. So, one may ask, what if the voter is evil? First of all, the claim needs to be approved by a 66% majority to pass unless it receives more than 66% of the votes. In addition, to encourage people to vote, there is a reward for voting. The reward is limited to the majority of voters who vote, and this group will receive a reputation score. Conversely, voters who vote in the minority lose credibility points and are penalized by losing a portion of their pledged BMI assets if their vote falls into the “very few votes” range, i.e., no more than 10%.
When voting on a claim appeal, only “trusted voters”, who are more active in the reputation system and have a higher reputation score (e.g. TOP 15%, above 2.0), can participate.
In Bridge Mutual’s claim mechanism, the reputation mechanism is very important to prevent malicious manipulation. First each voting user has an initial reputation score of 1.0, which can then fluctuate between 0.1 and 3.0. When a user has a majority of votes, his or her reputation will increase, and vice versa, it will decrease. In addition, the smaller the percentage of votes going to the minority voters, the more reputation scores this minority loses.
Finally, to prevent malicious attacks by claimants, to make a claim, a claim value of 1% BMI needs to be deposited. if the claimant’s request fails, its 1% BMI is allocated to the voter; if the claim is successful, 1% of the locked-in BMI is returned to the claimant, while 1% of the agreement fee (the agreement fee deposited into the reinsurance pool) is used to allocate it to the voter. Voters’ award allocation will be determined based on their credit score and the number of locked-in BMIs voted.
Withdrawal cooling-off period for underwriters
There is an 8-day cooling-off period for underwriters to submit a request to withdraw covered funds. This helps ensure that there is sufficient liquidity in the pool to cover open policies. The underwriter has a 2-day withdrawal window after the 8-day cooling-off period. If no withdrawals are made, they will re-enter the insurance pool.
Improving asset efficiency through reinsurance pools
Blue Fox Notes has repeatedly mentioned the importance of improving capital efficiency in the future of defi competition. bridge Mutual’s reinsurance pool is one such design. It consists of funds owned by agreement and is designed to improve capital utilization and thus lower premiums. By lowering premiums and thus attracting more users to its protocol system, Bridge Mutual plans to release its reinsurance pool algorithm in V2.
Specifically, the reinsurance pool is funded by the assets in the agreement, primarily from agreement fees and pool revenues that accrue to the reinsurance pool. The agreement fee is understandable to us because 20% of the premium is allocated to the Bridge Mutual agreement and 80% to the underwriters. So, how is the pool understood here?
First of all the purpose of the pool is to increase the size of the reinsurance pool and thus reduce premiums. So where does the money for the pool come from? The pool is funded with DAI that is never needed for claims/withdrawals (of course there is a safety threshold limit here that leaves enough cushion for daily rebalancing) and this is injected into the pool. The pool takes this money and generates relatively robust returns through DeFi protocols, such as through a revenue aggregator like Yean to generate more DAI, and to reduce risk, it does not deposit all the money into one protocol, but into multiple protocols, such as Aave, Compound, MakerDAO, etc., to reduce risk. The proceeds of these newly generated DAIs are injected into the reinsurance pool.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/read-about-the-crypto-insurance-program-bridge-mutual-in-one-article/
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