Since June of this year, we are experiencing a bull run in the crypto markets led by DeFi and we have seen more and more projects arriving on the scene. Token prices have pumped and dumped, sometimes manipulated by whales. Some made money, some lost and suffered. We may be tired of looking at projects because we can’t easily earn money by researching fundamentals. But here is my warm reminder, projects can be forked or copied but the essence can’t.
Okay, now Let’s go to the point.
An article recently written by Multicoin Capital introduces the landscape of DeFi today. It’s fairly convenient for newbies to understand DeFi systematically. Based on this article, I divide DeFi projects generally into two categories — ‘OLD’ and ‘NEW’.
The ‘OLD’ DeFi projects were mostly first movers that came to the scene in 2019 or even earlier, they occupied the most of market share when DeFi was still in it’s infancy. The ‘NEW’ DeFi projects, (though not identified by time of launch), are those that are more aggressive and innovative in this year’s competition.
This sheet below is a brief summary of my thoughts.
Compound’s liquidity mining was the spark that lit the fuse of DeFi’s bull run this year, but the real opportunities favoring the retail investors are in Uniswap and Yearn. Uniswap, as some calls the ‘Shitcoin’ value discoverer, helped many retail investors make their first big win in crypto; never mind the big bonus of their free airdrop of $UNI at token launch. Yearn is the real dark horse, it makes protocols interact seamlessly and releases the liquidity intelligently, functioning like an adhesive in DeFi Legos.
These two winners led me to ponder, what do we need in today’s DeFi market? I think I can conclude in three words.
1. Limitless — imagination of protocol
2. Light — effectiveness of design
3. Liquidity — will of participation
I will take Cover Protocol as an example to demonstrate my point of view.
Cover Protocol, formerly named as yinsure.finance. Funded by Andre Cronje, Yinsure was born to be the focus of liquidity mining. The high APY did not last too long because of a dispute that happened between two project members. (more details of these can be found on google). In short, after this issue, the young founder of Cover Protocol chose to take a break from university and become a full-time contributor to his project. In Septermber, Yinsure rebrands to Cover Protocol.
Limitless — imagination of protocol
When you firstly build a new product, you can have a clear idea of what it should do but you need to have no idea of what it will be. That it limitless — let your customers unlock their imagination when playing with your product.
Cover Protocol is actually doing this. Insurance is always a very serious business in many people’s minds because it should protect people away from accidents by calculating claim payments and avoiding frauds. Nexus Mutual, a first mover in DeFi insurance, hires actuaries to achieve this goal, while Cover Protocol takes another path.
In September, Yinsure (then Cover) initiated a new experiment — using NFT to tokenize policies based on the business of Nexus Mutual. The market was extremely excited with this play and the sales of policies on Nexus Mutual boomed — Yinsure almost exhausted the whole Nexus Mutual capital pool.
Yinsure named it as ‘Insurance Mining’, and in Cover protocol, it evolves to ‘Shield Mining(Farming)’. I believe in the first day of building Yinsure, the founder has already decided an another path — free the market to decide the demand and supply.
There are three players in Cover Protocol:
Market Maker(MM); Coverage Provider (CP); Coverage Seeker(CS)
Four tokens:
DAI symbols collateral deposits by Market Maker(MM); CLAIM token symbols the right of Coverage Seeker(CS); NOCLAIM token symbols the right of Coverage Seeker(CS); COVER symbols reward and governance token
Three pools:
CLAIM-DAI pool; NOCLAIM-DAI pool; Cover-ETH pool
Here is a graph originated by me to show the system.
Leaving alone the traditional complicated premium or claim calculations, the whole system is circulating under the market demand. Every process of insurance is fragmented by tokenization, in order to let users assemble flexibly, which unlocks people’s imagination. Cover Protocols firstly launched 10 protocols in the marketplace, and you can freely choose the role to play in the system by analyzing the APY and APR statistics. I think we could customize our own pool in the future.
Light — effectiveness of design
Why do we need a long and boring BP to express the idea of a project? Codes and economics will tell everything.
Excellent projects are all very light at core designs. As Cover Protocol, the whole system is operated at one formula:
1 CLAIM token + 1 NOCLAIM token ≈ 1 Collateral (e.g. DAI)
CLAIM token and NOCLAIM token are all available in Balancer pools. The light design makes the platform launch quickly and run smoothly.
After 3 days of launch, Cover Protocol has already encountered with a claimant. Pickle.finance was hacked for almost $20M due to bugs of its new strategy. Pickle pool is one of the 10 Protocols firstly deployed by Cover Protocol. The community of Cover Protocol also responded very fast, it took just 3 days from voting to claiming. Now, almost all of the Pickle.finance CLAIM (nonce 0) covTokens have been redeemed for DAI. The total claim payment comes to $282K，performance of which is really effective and outstanding compared with other insurance protocols.
Here is a meme made by the community
Liquidity — will of participation
What’s the most important element in trading? In my view, it is absolutely liquidity. Liquidity decides people’s will of participation in order to create a virtuous circle in the system. In the recent past popular liquidity mining era, many protocols choose to pump token prices and get an unbelievable APY to attract more TVL, but it is usually trapped in a death spiral when token price dumped.
As I analyzed above, Liquidity is firstly given by the top design of Cover Protocol — make every process of insurance tradable. You can easily buy and sell your policies by holding or not holding CLAIM token and convert your identities between MM, CS and CP by holding different tokens.
Also find a beautiful description in the Whitepaper : ‘Once CLAIM and NOCLAIM tokens are minted, they can be placed into a Balancer pool, offered for sale on Bounce, or even used as collateral in various lending platforms (very risky but technically feasible!)’.
Secondly, liquidity comes from tokenomics. Cover is defined as a valueless governance token by the team but it actually plays a very important role in adding liquidity. In my opinion, Cover is a balancer in the system.
Look at the formula in the white paper：
real coverage cost = price to purchase CLAIM — mining rewards from staking
When you buy CLAIM token in the marketplace, you must probably have the true demands for protecting your assets in those protocols. And if the mining rewards from staking is very high (decided by the $Cover price), your real coverage cost maybe zero or lower.(Here is a live example caculated by the team). It will reversely encourage people to buy coverage in Cover Protocol. That’s really different from meaningless high APY of many DeFi protocols.
Also, this valueless governance token Cover is just used to vote for the claim for Pickle.finance. Unlike Nexus Mutual, it is strict that people need to do KYC for voting, which I think is a bit unfair for not allowing common NXM token holders to execute their rights. I think Cover will have more governance functions in the future.
Above is my humble opinion of what I learned from Cover Protocol. Recently, Cover Protocol cooperated with Yearn.Finance. As a $Cover Hodler, I’m happy to see the young school-boy finally take the first step to a new unicorn in DeFi space. But I think it’s not the final destination as he said in Medium ‘deliver a product that changes the world’.
