It took me awhile to understand Cover Protocol, in this article I will try to simplify what I have learned to help facilitate the 3 core user types;
- Coverage Seekers
- Liquidity Providers
- Prediction Market Users
We are also working on some UX changes via yearn to facilitate these distinct separate flows for each use case, but while that is busy, I hope this article helps.
As a Coverage Seeker I want to buy cover for a fixed period for a protocol I use, to protect the capital I have in the protocol.
When you go to app.coverprotocol.com you will land on the following screen;
Coverage Seekers only need to be concerned with Marketplace. If you wish to buy cover for yearn, you select yearn.finance
A few things to note here;
- Expiration Date, this cover is valid till 28 FEB 2021
- The cover pays out in DAI (Collateral)
As a Coverage Seeker, you only need the CLAIM token, so we can ignore NOCLAIM (more on NOCLAIM later). CLAIM token is currently trading at 0.19 DAI, so every 1 DAI of cover you need will cost 0.19. So if you wish to cover 10,000 USDC in yearn.finance it will cost you 1,900 DAI (very expensive, more on why the price is skew later).
To purchase cover, you select BUY which will take you to the Balancer Exchange
Should a claimable incident occur, you will need to file a claim;
This can be accomplished under the Claims by selected + FILE CLAIM
If the claim is approved, you can redeem your CLAIM tokens for 1 DAI each.
As a Liquidity Provider I wish to earn fees on capital I provide as a backstop to protocols that are within my risk tolerance.
When you land on app.coverprotocol.com go to Mint, select the protocol you wish to provide collateral for, select the Expiration Date you wish to use, and input the amount of collateral you wish to provide. In the example below, yearn.finance, 02/28/2021, and 10,000 DAI.
Approve, and Mint.
Under Dashboard you will have a similar screen to below;
Which will show you how much CLAIM & NOCLAIM tokens you have. Let’s quickly look at CLAIM & NOCLAIM;
- CLAIM tokens are worth 1 DAI if an incident occurs
- NOCLAIM tokens are worth 1 DAI if expiry is reached without an incident
- CLAIM+NOCLAIM can be redeemed together before incident or expiry is reached for 1 DAI
As a Liquidity Provider you have the following options;
As a Liquidity Provider I believe this protocol won’t have any claimable incidents
Keep your NOCLAIM tokens until after expiry, sell your CLAIM tokens into the balancer pool for DAI profits.
As a Liquidity Provider I believe this protocol will have a claimable incident
Keep your CLAIM tokens until the incident, and sell your NOCLAIM tokens into the balancer pool for DAI profits.
As a Liquidity Provider I simply want to earn fees from Coverage Seekers
Add your CLAIM + DAI to the balancer pool as a liquidity provider, you will earn trading fees (cover purchases) every time a Coverage Seeker buys CLAIM tokens.
As a Liquidity Provider I simply want to earn fees from Coverage Seekers, & Prediction Market Users
Add both your CLAIM + DAI and NOCLAIM + DAI to the balancer pool as a liquidity provider, you will earn trading/speculation/coverage fees.
Prediction Market Users
As a Prediction Market User I want to earn profits on the perceived risk on a given protocol
At its core, Cover is asking a question, “will protocol <x> have a claimable incident before expiry <y>”.
Therein lies perceived risk. Lets go through a few use cases;
As a Prediction Market User I believe the protocol will have a claimable incident
Buy CLAIM tokens via the Balancer pool and keep till incident
As a Prediction Market User I believe the protocol will have no claimable incidents
Buy NOCLAIM tokens via the Balancer pool and keep till expiry
The above two were both held till expiry, but it can also be risk adjusted, perhaps there is an upgrade event happening within the next month, so the risk now is low, but it increases after the upgrade, so you could purchase CLAIM tokens now, and sell when demand increases.
These are all based on the perceived risk of the underlying protocol.
What I did not discuss (nor wanted to discuss) is Shield Mining, currently liquidity providers are over incentivized to provide liquidity to both CLAIM & NOCLAIM pools, this is accomplished via COVER emission.
The problem with this, miners are buying up CLAIM & NOCLAIM tokens to use for Shield Mining, thus pricing the cost of tokens extremely high versus what their actual perceived market value should be.
As long as Shield Mining is active, I do not believe the market will provide rational coverage numbers.
With the UX reworks with yearn these flows will also become greatly simplified. And then there are three enhancements I am greatly looking forward to;
- Perpetual Cover
- Pay as you go Cover
- Agnostic collateral
I believe the 3 above are significant enough that they warrant their own article, as such I will write more on that later.