I guess it is not a secret at this point that I am a fan of the Terra Ecosystem, especially of Anchor Protocol. I got attracted by the design, simplicity, and ingenious promise of 20% APY on my stablecoins.
As blockchain has become more acceptable in the mainstream, I am coming across more and more people curious about DeFi. So, of course, I am telling them about Anchor Protocol, as I think it is an excellent protocol to onboard people into cryptocurrencies, DeFi and Terra.
I pretty quickly noticed that there are usually two points of anxiety. First, people are skeptical about the fantastic yield possibilities; however, the skepticism ties into a lack of understanding. And well, folks, you know that I am ready to explain how Anchor works (Medium Article on Anchor).
Second, and often way more important, people are concerned about security. I think they are rightfully so. Ultimately, every investment is an assessment of the ratio between risk and reward.
Risk Mitigation has arrived!
Let’s quickly recap how the protocol works to narrow down the security concerns. In a nutshell: Anchor promises a stable yield of 20% APY. To accomplish that, it leverages collateral assets using the PoS mechanism. Participants that provide PoS-assets are entitled to borrow against their collateral in UST for an interest. Thus, the UST arrives from everybody that is lending UST to the protocol to earn 20%.
Even if thoroughly designed, Anchor Protocol is still a young protocol that needs to stand the test of time. Reasonably, there is a concern about the protocol’s security regarding smart-contract failure. Additionally, people ask about the stability of UST. The eyebrows usually rise sky-high when people discover that UST is an algorithmic stablecoin. For non-tech-savvy people, this is not too easy to grasp.
Luckily, hope has arrived! Now, we have a solution to address both concerns. TerraForm Labs recently announced their partnership with Nexus Mutual (to cover protocol risks) and Unslashed (to cover UST de-pegging). Both protocols aim to be insurance alternatives. So, are you interested in getting a new form of coverage? Well, then keep on reading to learn how to cover your assets.
First, we will look into the two protocols to understand how they work and what they cover. Both protocols have a unique approach. Second, we will touch upon the coverage costs and how to participate in the ecosystem. Third, you will find a step-by-step guide on how to get insured. Lastly, I will give my two cents (Quick reminder to cover me; this is no financial advice 😊). Ready? Let’s start with Nexus! Please note that I will try to avoid the word insurance as both protocols are by design not providing traditional insurance contracts.
Anchor Protocol Coverage | Nexus Mutual
You can get a smart contract cover for Anchor Protocol on Nexus Mutual. Nexus is a decentralized insurance protocol on Ethereum. The protocol participants share the risk as a community.
Nexus is unique as you become part of the community if you buy coverage from them. What I think is fascinating is that at the same time that you get protected, you also get rewards from broadening the pools. When joining the mutual, you must become a legal member of a UK company. Thus, legal agreements will back your member rights. Therefore, all members will have legal rights to the pools of funds. That is also why there is a KYC process involved upon participating. The member fee is currently at 0,002 ETH.¹
Two things are essential to understand the protocol. First, the smart contract cover is not a contract of insurance. Instead, community members will decide upon the claims. Thus, rather than placing trust in an insurance company, the community checks the validity of every claim by token-driven economic incentives. Second, the cover protects you against the technical failure of the smart contract. Nexus breaks this down into three areas of coverage. Now the three areas are yield token, protocol, and custody.² Bear in mind; Things like third-party manipulation, governance- or flash-loan attacks are not protected. Please find an overview of the protocol cover here: Protocol Cover Link
Conditions | Nexus Mutual
Of course, as an insurant party, you want to know the costs. So how much of the 20% APY from Anchor do you want to give away? Nexus defines the cover price by the following inputs: Cover amount, cover period, risk costs, and a margin (fixed on 30% to cover rewards). If there is enough capacity, defined by the value staked in the pool, you can choose three cover periods. It starts with 30 days, up to 90 and 365 days. After that, you pay the cover price in either ETH, DAI, or Nexus Mutual Tokens (NXM). Please find the formula below:³
Cover_Price = Risk_Cost x ( 1 + surplus_margin) x cover_period / 365.25 x cover_amount
Please note that the protocol effectively purchases NXM tokens on your behalf before buying cover. The token acts as an economic driver and governance for the protocol. In a nutshell: Nexus Mutual uses a Continuous Token Model.⁴ The price depends on how the mutual is performing financially. For more details, please check out the token model linked above. Anyway, it is a beautifully designed model that incentivizes cover buyers to benefit also as risk assessors.
Walk-through | Nexus Mutual
As outlined above, you have to become a member first to get access to the Anchor coverage. For starters, we are on the Ethereum blockchain. Thus, you can choose to connect a wallet like MetaMask, Ledger, or using WalletConnect. So, yes, time to pay some ETH-gas fee.
Next, go to https://app.nexusmutual.io/home to get a membership. The membership requires a KYC check, so have a verification document like a passport ready to submit. Upon testing, the KYC check takes only a few seconds after submitting.
Once you are a member, the cover becomes available for purchase. Go to https://app.nexusmutual.io/cover. The process follows these steps:
- Search for Anchor and click “Get quote.”
- Decide upon your cover amount, currency (ETH/ DAI), and cover period.
- Decide in which currency to pay the fee and accept the terms and conditions
- Generate a quote and sign the transaction on your wallet.
See all required steps below (Disclaimer: At the time of recording, the Anchor coverage was not available due to the lack liquidity. The example below is based on Crypto.com)
UST Peg Coverage | Unslashed
Unslashed covers the second part of the risk with their UST peg coverage. Like Nexus, Unshlashed is also a decentralized protocol that relies on the liquidity of Capital Suppliers to cover a plethora of crypto-asset risks. The UnslashedDAO runs the protocol on the Ethereum blockchain.⁵
In simple terms: Every cover is described by a so-called Capital Pool. Thus, a pool is equal to a policy for an asset, like UST. Capital Suppliers supply Ethereum to a pool. So-called Premiums balance the risk for the suppliers. Premiums are the price for the coverage that the insurance seeker pays in exchange for being protected. In exchange for the cover, the insurant party receives a token that represents the cover. You can see it like a typical LP token held in the insured wallet.⁶
As a side note: Unslashed recently introduced, in collaboration with Enzyme Finance, the concept of Capital Buckets. A Capital Bucket is a diverse collection of insurance policies that are assessed together for insurers to underwrite. This model allows insurers to diversify their exposure and provide insurance coverage for many pools and thus increase liquidity. For example, UST is part of the Spartan Bucket. Unfortunately, there is currently no possibility to get coverage on multiple policies with one pool. Find more information here: Capital Bucket Announcement
An essential factor of Unslashed is the decision mechanism for claims. Instead of having holders of the protocol governance-token (USF) decide, they outsource the decision to a decentralized dispute resolution protocol called Kleros. Kleros then automatically triggers the payouts to the cover buyer.
Time to talk about the conditions. As the situation is a bit special with the UST peg, you will find the assessment together with the payment conditions below.
Conditions and Deep Dive on the UST Cover | Unslashed
So, what is the cost to sleep well with all my UST on Anchor, mister?
Well, it is pretty simple on Unslashed. The protocol has a premium price for each pool precalculated. This Premium, as mentioned earlier, depends on multiple factors and may vary in the case of UST from 0.5% to 12%. The 12% is called the Security Deposit and must be deposited regardless. The target range, which is called fair pricing, varies between 2.5% and 3%. At the time of writing, it is at 1.6%. You will find the absolute balance as Estimated Premium Cost. Once you close the contract, the protocol deducts the cost from the deposit. There is no minimum duration, and you always have the freedom to cancel. You then receive the insurance token, in this case, PTKN_UST.
The million dollar question hasn’t been answered yet: At which level, does the coverage kick-in, and which assets are affected? I was positively surprised after deep-diving into the docs and the official Unslashed Discord. But first, let’s have a look at the hard facts. The official documentation states: UST Policy (please check this document).
“Your claim may be accepted under this policy if:
- the loss is related to UST-US dollar peg, UST trading below $0.87 on CMC, Coingecko, or other reputable sources; and
- the loss on UST-US dollar peg results in a TWAP [time weighted average price], based on market data extracted from reputable sources, below $0.87 in a two-week span at least; and
- The loss occurred during the policy period.
You are required to provide us with truthful pieces of information. Otherwise, your claim will be rejected. “
So far, so good. So under 87 cents over two weeks on average. Furthermore, they state that this doesn’t cover if TFL or Do Kwon would run away with the keys. I think that is a fair statement. But why am I amazed? Well, while deep-diving into Discord to exchange with the team members of Unslashed, I learned that the coverage applies to assets that have exposure to UST. Thus, aUST on Anchor Protocol, but also mAssets collateralized by aUST on Mirror are covered. Nothing more to add, your honor!
Walk-through | Unslashed
Let´s have a look on how to secure your coverage. Before we start, get some Ethereum on an ETH wallet. Yes, again, time for some gas fee. Note: Unslashed supports only MetaMask at the moment.
Next, go to https://app.unslashed.finance/cover and do the following steps:
- Search for “UST Peg”
- Add the amount of cover in Ethereum.
- Get the coverage providing the “Security Deposit” with “Add cover”.
- Receive the insurance token
Final thoughts
So, what to take from this? I think this is a step in the right direction. As a fan of decentralized applications, I am amazed by the concepts of both protocols.
Of course, there are a few questions that are relevant for everybody to decide for coverage/insurance:
- Do I feel comfortable with my current risk/reward ratio without insurance?
- How easily will I be able to claim in case of an incident?
- How will the liquidity develop on those protocols?
- Do I want to be dependent on a volatile asset, such as ETH?
Time will tell on how those protocols react to real-world use cases. But, I think they are needed as they introduce another layer of trust into the blockchain environment. They are disruptive, fair, and decentralized — great ingredients for a sound investment decision.
Reading upon the whitepapers, I see the concept of Nexus Mutual a little bit ahead. I fell in love with their elegant tokenomics. Nevertheless, I value the depeg coverage of Unslashed on UST more. However, both have their place and purpose.
To get things finished: Let’s not forget about OZONE, the upcoming in-house insurance of the Terra EcoSystem:
“Ozone is an insurance mutual protocol that facilitates levered coverage of technical failure risks in the Terra DeFi ecosystem. Insurers can deposit X UST and provide coverage up to N * X UST to cover various TeFi contracts, N being the leverage constant set by governance. When Ozone is “overleveraged”, the system calibrates itself to its target leverage ratio by increasing the emission of the $OZ governance token to insurers”⁸
Anyway, there is enough to sleep well, ser! So, what do you think? Will you take an insurance alternative for Anchor or UST? I am curious. Let me know in the comments :)
¹ https://nexusmutual.io/assets/docs/nmx_white_paperv2_3.pdf
² https://nexusmutual.gitbook.io/docs/users/types-of-coverOracale
³ https://nexusmutual.gitbook.io/docs/users/docs#pricing
⁴ https://nexusmutual.io/token-model
⁶ https://documentation.unslashed.finance/protocol-design/capital-pools
⁷ https://documentation.unslashed.finance/one-protocol-different-layers/high-level-view
⁸ https://agora.terra.money/t/ozone-insurance-mechanism-v2-1/914