Mapping Out DeFi’s Asset Protection Competitive Landscape

In our previous 2-part series on the unique risks facing DeFi, we considered the multitude of threats facing DeFi — many of which are a direct consequence of composability. These threats have continued to manifest in the sector, as illustrated by the recent Value DeFi and Akropolis flash-loan reentrancy exploits and the $20 million Pickle Finance hack.

With high-profile exploits occurring on almost a weekly basis, it’s increasingly evident that sophisticated asset protection and risk management tooling are unquestionably important for participants in DeFi markets. Market participants are quickly realizing that rapid innovation, novel financial engineering, and hastily compiled code are likely prone to future exploits.

The hand-waiving of exploits of less reputable DeFi protocols needs to be dismissed immediately. The recent Pickle dilemma, a reputable protocol itself, intimates it’s only a matter of time before other major DeFi protocols face problems of their own. Assumptions that established, audited smart contract platforms are safe from potential future threats have proven inadequate.

Additionally, the current focus on preventative measures against exploits (e.g., audits, bug bounties, etc.) misses the forest for the trees. Preventive measures against technical code mishaps or economic vulnerabilities are no match for progressively sharper human ingenuity on global, permissionless networks with billions of value moving around freely.

The market needs to be prepared for more sophisticated entrants and an ever-growing attack surface. Rather than exclusively honing in on preventative measures, fail-safes like insurance pools, automated risk analysis, and complex derivatives for hedging against a spectrum of unknown vulnerabilities are urgently needed.

After all, the excitement around liquidity mining, composability, and DeFi’s future potential is moot if DeFi participants aren’t sufficiently allayed by the safety of their deployed capital over extended periods. With too much over-hanging risk, DeFi’s true potential will never be realized.

Unfortunately, the asset protection landscape on Ethereum is still maturing into the market’s needs. Insurance platforms and other risk management tools are often too convoluted for the average DeFi user or, otherwise, are in their very early stages — making their potential benefits more challenging to grasp. In DeFi, just like other industries, insurance is typically the last thing on people’s minds until, of course, an event occurs that highlights the need to pool and offset systemic and specific risks of economic activity.

However, well-crafted asset protection modelling will usher in the next major wave of innovation and capital inflows into DeFi. Specifically, more mature risk-hedging products and insurance pools will meet the deluge of recent exploits with a persistent counter — financial restitution. Below, we classify some of the leading asset protection and derivatives platforms into 3 primary buckets based on their risk model and the explicit advantages they convey to users.

The 3 primary categories are:

  1. Derivatives-Based Price-Risk Hedging
  2. Insurance Platforms
  3. Structured Risk Platforms

The ensuing list is not exhaustive, nor does it cover the protocol mechanics of each platform listed below at a granular level. Instead, it represents an overview of the spectrum of coverage and protection options available to DeFi market participants today. Using the options at hand can help you sleep peacefully, knowing that even if human ingenuity triumphs over smart contract code once again, there is some safety and security that may prevail.

Derivatives-Based Price Risk Hedging

Examples — Binance, CME, Deribit, dydx, Hegic, Opyn

The use of derivatives to manage price risk is among the first and most widely used methods for hedging risk in DeFi. Primarily seen in the form of quarterly futures, options, and perpetual swaps, derivatives act as a form of price-risk hedging used by professional traders, miners, trading desks, retail investors, and institutions alike.

Derivatives like perpetual swaps, options, and futures are primarily used to hedge price-risk. Their functionality (concerning risk management) is limited to protecting portfolios from major drawdowns, regardless of the initiating event. For example, if institution A is looking to reduce short-term exposure to the price of BTC, they can buy protective puts on the CME to cover any potential price downside during market uncertainty in the run-up to the Presidential Election.

Price-risk hedging can also extend into DeFi-specific events. For example, buying protective puts on the price of ETH in case of a major exploit on a platform like Compound or Aave sends the price of ETH spiraling downward.

Whether their use includes hedging positions against market volatility, minimizing impermanent loss from AMM’s, or speculating on price drawdowns, these products are familiar to most DeFi users. They are among the most liquid instruments in the market. Many DeFi users simply use derivatives for speculating. But when properly managed, they can protect users from downside volatility risk significantly.

However, straightforward derivatives like perpetual swaps and options are handcuffed in events they can cover. They can’t insure stolen funds from a liquidity pool because they’re not claims-based insurance platforms. Such derivatives focus on contractual agreements between counterparties rather than socializing risk among a set of willing participants. They also require complicated manoeuvring via multiple exchange venues to rival an instrument like a structured risk derivative for yield sensitivity.

Derivatives-based price risk hedging instruments are currently available to DeFi users on both CEXs and decentralized platforms — including on-chain options, futures, and perps markets. Benefits and disadvantages exist for both ends of the decentralization spectrum. We can break down the market into two broad classifications:

  1. Centralized Derivatives
  2. Decentralized Derivatives

Let’s provide a brief overview of each and examine their advantages/disadvantages via a few prominent examples.

Centralized Derivatives

Platforms — Binance, Deribit, CME, FTX, Huobi, OKEx, BitMEX

Advantages — Liquidity, familiarity, superior counterparty reduction risk. Centralized derivatives are the most popular derivatives instruments in crypto markets. They are accessible on CEXs with intuitive user-interfaces, an array of features, and fast order book execution that make them ideal for speculative traders. Importantly, the CEXs on which they trade serve as fiat gateways to the world of crypto, and subsequently, are due significant credit in broader crypto adoption.

Disadvantages — KYC/AML, custody of assets, high position size minimums, don’t provide broad coverage for vulnerabilities in DeFi. The barrier to accessing CEX derivatives is high for many people due to regulatory restrictions and costs. Additionally, prominent derivatives exchanges like BitMEX have been prone to cascading liquidations in times of market volatility, severe price wicks that wipeout positions deep in the book, and other order flow issues.

Centralized derivatives are the most familiar to DeFi users. These include most derivatives/margin products on major exchanges like Binance, FTX, Deribit, OKEx, and the CME. Due to their familiar risk management design to TradFi, they’re likely the first to be used by institutions looking to hedge exposure to major digital assets like BTC and ETH.

The explosive growth in the CME’s open interest for futures and options is indicative of this trend continuing.

Centralized derivative products are easier to use for most investors, and their liquidity is currently far superior to their decentralized counterparts, with Binance alone raking in more than $18 billion in derivatives volume in 24 hours. If you’re looking to hedge your exposure to the price of a crypto asset during market volatility, CEXs are likely your best bet. The downside is that CEXs run against the broader ethos of DeFi, meaning that they custody your assets, require onerous KYC/AML processes (precluding many users), and typically have higher position size minimums.

Conversely, if you have a strict taste for decentralization only, then the burgeoning market for decentralized derivatives can meet your needs.

Decentralized Derivatives

Platforms — Opyn, Hegic, dydx, DiversiFi

Advantages — Non-custodial, no KYC, composablepooled liquidity model is exceptionally popular (intuitive yield generation for LPs), large future design space. The potential for decentralized derivatives should not be understated. Composability is powerful, and the financial tinkering around collateral models, exchanges (e.g., AMMs), and improving capital efficiencies are more than promising.

Disadvantages — Limited liquidity, pooled liquidity models are prone to systemic risk (see below about Hegic + Opyn), do not provide coverage for vulnerabilities in DeFi, are complicated for retail users, vulnerable to oracle manipulation and other exploits. Decentralized derivatives are currently challenging for many users to understand. They are burdened by designing user-interfaces around complex underlying protocols, and their concept is only understood primarily within DeFi circles.

Current decentralized derivatives include on-chain options such as Hegic and Opyn and futures/swaps on platforms like dydx. Decentralized derivatives platforms provide the same price-risk hedging opportunities as their CEX counterparts with some distinct trade-offs.

The immediate benefits are that the platforms are non-custodial, don’t require KYC/AML, and are composable. The downsides are that they currently lack liquidity, are complicated to use, and are prone to many of the vulnerabilities that plague other DeFi protocols — such as oracle manipulation and technical/economic exploits. For example, Opyn, an on-chain options market, was exploited for $370K in August.

Decentralized derivatives open up an entire design space of possibilities, however.

Options platforms like Hegic, which uses a contract-by-request (CBR) options writing model, and Opyn, a peer-to-contract (P2C) options market built on Convexity, utilize “lazy capital” in a way similar to Uniswap, Compound, and other major DeFi protocols, which have proved enormously popular. In such models, liquidity providers deposit their assets into a pool of assets available for users to swap (DEX), farm (YFI), etc., earning LP tokens proportional to their stake deposited of the fees/yield generated from the pool.

The pooled liquidity model makes it very simple for buyers on Hegic and Opyn to enter into options contracts, but it gets complicated for the options writers, who are the liquidity providers.

Hegic liquidity providers are the options writers, as the Hegic liquidity pool basically takes the other side of any options buyer’s request — including deep OTM calls. Similarly, Opyn utilizes a fungible oToken model representing a claim on a contract’s payout for buyers. Writers can sell newly minted options and receive premiums based on an arbitrary amount of crypto assets.

Both models differ from centralized order-book systems like Deribit.

One of the immediate downsides of Opyn and Hegic compared to Deribit is that their options tend to be priced higher, and the collateral in the liquidity pools backstopping the platforms is at solvency risk if a bunch of deep out-of-the-money (OTM) calls are exercised concurrently. The risk of the system is socialized among LPs rather than being confined to counterparties in the typical order book-style market.

However, LPs on Hegic stand to earn lucrative revenue streams if the platforms remain stable, theoretically even outpacing conventional options writers returns on platforms like Deribit without the hassle of actively managing and hedging multiple positions.

Decentralized futures/swaps platforms like dydx offer non-custodial, composable, and no KYC advantages but still lack liquidity and diversity of trading pairs compared to CEX behemoths like Binance. On the positive end, they offer attractive yields via variable-rate borrowing/lending that is highly dependent on traders’ demand for leverage, which is strong in DeFi.

Derivatives-based price risk hedging, while useful, is not the silver bullet we’re looking for in DeFi to deter the growing exploit debacle — it’s just one crucial piece of the puzzle. If you want to minimize your exposure to an asset’s downside risk, no matter what your situation, CEX and decentralized derivatives can help.

But what if you want to sleep peacefully knowing that you can file a claim against your collateral posted to a DeFi protocol in case some buggy code is wielded by a malevolent party to steal your funds from a liquidity pool? Enter insurance platforms.

Insurance Platforms

Examples — Nexus Mutual & Nsure

Advantages — Can provide coverage for a vast array of vulnerabilities and threats to DeFi investors, offer appealing yields to liquidity providers/underwriters, pushing innovation in DAO-based governance, large future design space.

Disadvantages — Mostly only provide technical-oriented discretionary smart contract coverage, do not offer bundled products that cover layers of the DeFi stack, lacking in sophisticated products (e.g., CDS), lack of secondary markets for trading risks that enable the insurance market to scale based on organic market demand — leads to problems like WNXM becoming the de facto market for price discovery and the emergence of decentralized insurance products (e.g., yInsure) underwritten by a KYC-only Mutual.

DeFi insurance platforms resemble TradFi insurance models in many ways. They are based on pooling, transferring, and sharing risk using weighted probabilities and the law of large numbers to maintain the solvency of capital pools underwriting the claims for members. The goal is to reduce the possible volatility of outcomes — with the expectation that results will converge to the average expected value if the number of event exposure is large enough.

However, DeFi-based insurance platforms, such as Nexus Mutual and Nsure, share profits and risk with the DeFi participants directly, with protection for risks explicit to DeFi, such as discretionary smart contract coverage via a technical exploit of the underlying code. Notably, premiums on DeFi insurance platforms are not negotiated directly between counterparties, such as a centralized shareholder insurance company and its claimants in TradFi. Instead, they are dynamically priced based on the supply and demand of the system’s capital and coverage.

Current DeFi insurance platforms exist on a spectrum of decentralization, with some (e.g., Nexus) requiring KYC while others (NSure) do not. The platforms are community-governed, with claims processing conducted via DAO-based models. The community-based governance methods for processing claims and proposing new coverage options for users makes them among the most fascinating DAO-based experimentation on Ethereum at the moment.

These platforms go beyond simply price-risk hedging and enter the insurance model where claimants are protected from adverse, unforeseen events. Price hedging speculators may look to the code and fundamentals that insurance platforms address directly, pricing unforeseen risks that lay outside the scope of futures, options, and perps — such as economic exploit risk for an aggregated yield farmer using Curve vaults.

One of the critical advantages of insurance platforms built on a permissionless network like Ethereum is transparency. The health of key performance indicators (KPIs) for the system is visible to all participants, adjusting in real-time. The downside is that the platforms are much more complicated than price-risk hedging derivatives such as dydx and CEX platforms.

How They Work

DeFi insurance platforms operate via a community of participants, including the underwriters (i.e., liquidity providers and risk assessors), governance token holders (vote on claims), and claimants — the buyers of protection contracts.

Like most popular DeFi protocols, insurance platforms rely on the pooled “lazy” capital model. Underwriters, who are liquidity providers, stake an asset into a capital pool representing coverage for a discretionary smart contract exploit on a specific DeFi protocol — such as Compound. Their stake represents a proportional claim of the capital pool’s revenue, which is mostly premiums paid by protection buyers that want coverage.

Underwriters are essentially betting that the contracts covered in the capital pool they’re pouring liquidity into (e.g., Compound) won’t get hacked. For example, if Bob stakes Dai on Compound’s capital pool on Nexus Mutual, he continually earns a portion of the pool’s premium from protection buyers equivalent to the proportion of his Dai to the total pool. If Compound is exploited, however, and the event is covered under the capital pool’s contract language, then a portion of Bob’s Dai will be used to pay the claimants from the capital pool.

That’s why risk assessment by underwriters can become a lucrative income stream for the astute risk assessor. By divvying up his/her funds between capital pools based on their risk/return profile, he/she can make outsized gains if they believe individual capital pools are mispriced.

For the purchasers of coverage, insurance platforms represent a backstop for a potential flaw in a contract that they are farming or generating revenue from. Buyers pay upfront (the premium) for a contract explicitly detailing the contract’s length (e.g., one year), type of coverage, and other pertinent details.

Premiums for protection buyers decrease as more capital from underwriters flow into pools, meaning risk assessors view the premiums as sufficient coverage for the risk they undertake. Premiums increase for buyers of protection when less capital flows into a specific protocol’s capital pool — meaning premiums decrease as capital in the pool relative to the covered amount increase, given the underwriters’ view that they are adequately compensated for risk, and there is enough capital supply. The inverse is true for liquidity providers (risk assessors), who earn higher premiums for staking capital on riskier (i.e., less liquid) capital pools and lower premiums for staking in less risky pools.

Because of their dynamic pricing and capital models, insurance platforms in DeFi have significant long-term potential.

They can cover discretionary events throughout DeFi and rely on community-governed decision-making via claims processing using governance tokens. Community-governed platforms can vote to embrace marginal cases if the circumstances are agreeable when the coverage’s contract language is not explicit.

However, they do have some shortcomings. Current platforms like Nexus Mutual only offer discretionary smart contract coverage, which explicitly details coverage for technical code exploits and not economic exploits — like the flash loan arbitrage maneuvers that are becoming so popular of late.

Coverage also does not extend to the intertwined protocols in exploits, such as manipulating the Curve Y pool to steal funds from a money market protocol. Nor is coverage bundled (reducing costs) or inclusive of the multi-layered threats facing DeFi — from the transaction settlement layer to the mempool and smart contract level. Some insurance platforms, like Nexus Mutual, even require onerous KYC/AML procedures, precluding many users from the platform and obstructing their potential capital inflows.

Compared to price-hedging derivatives, insurance platforms offer more nuance for asset protection, a broader future design space, and attractive yields for liquidity providers. They’re a new frontier for the DeFi market, which means they’re complicated and come with some notable limitations concerning coverage options, but they provide a new avenue to restitution of lost assets in cases of DeFi protocol exploits.

Insurance platforms are another critical piece to the defensibility of assets in the Dark Forest of Ethereum, but they’re not the rest of the puzzle. To round out the current triage of buckets, we need to examine one of TradFi’s most coveted institutional products — structured risk.

Structured Risk Platforms

Platforms — BarnBridge & Saffron Finance

Advantages — Add sophisticated risk products to the DeFi sector (e.g., yield sensitivity hedging), introduce fixed yield and risk products, a massive design space enables the creation of CDS and even derivatives not available in TradFi, transparency of complex instruments for hedging risk. The recent deluge of structured risk products in DeFi is a testament to the excitement around their potential. Eventually, they should serve as a critical onboarding tool for institutions looking to enter DeFi.

Disadvantages — Very complicated for most users, can lead to unforeseen risks if too complex, token holders are disincentivized to hold tokens at the end of liquidity incentive epochs. Structured risk products are some of the most complicated instruments for a retail investor to use.

Structured risk products are a lynchpin of TradFi. They are widely used by institutions and professional traders to obtain a fixed return based on a designated risk profile over longer time horizons. They include sophisticated products, such as tranched risk instruments that represent various types of debt. However, structured risk products are often highly convoluted and opaque to investors, manifesting in systemic risk like what was experienced in the 2008 financial crisis.

DeFi’s composability and inherent reduction in costs/barriers in custody, settlement, and escrow enable high yields, making them enticing yield products for macro participants starved of yields in a low interest-rate environment. But risks in DeFi are high stemming from the complexity and unique risk profile of DeFi (e.g., layer one, smart contract, economic risks, governance, etc.), which largely preclude institutions and other large players from entering the system.

For institutions accustomed to more nuanced risk management tooling for complex investment strategies, a lack of a yield curve, including fixed yields, is a non-starter for their participation in DeFi. More complex derivatives and structured risk instruments are needed to bundle and tailor products to the specific demands of participants in a composable financial system — including institutions.

Structured risk platforms in DeFi address the issue by using the advantages of distributed ledgers, particularly transparency and efficiency, to build a foundation for the creative engineering of more precise risk instruments. Structured risk instruments can address the need for bundled asset protection and the eventual migration of other debt onto decentralized ledgers.

Importantly, structured risk products can help mitigate the downside of broad-spectrum unforeseen risks, such as with a credit default swap (CDS), which protects against non-linear, unforeseen tail risks. And paired with the transparency advantage of permissionless ledgers, a CDS can be creatively engineered further without the TradFi downside risk of opacity that leads to systemic problems like what occurred in the 2008 Financial Crisis.

Structured risk products are only just emerging in DeFi. Two platforms offering structured risk products in DeFi are BarnBridge and Saffron Finance. They have some notable differences, so let’s go over a brief primer of structured risk products.

How They Work

Structured risk instruments are designed to give investors exposure to a pre-packaged set of investments with varying tiers of risk and non-traditional payoff structures. At a high level, this means that structured risk products are usually separated into tranches (i.e., levels) of risk for an investment exposure to a specific asset class.

Applied to DeFi, the best way to understand their general format is via looking at BarnBridge’s Smart Yield Bonds.

BarnBridge is a fluctuations derivatives protocol for hedging yield sensitivity and market price. It pulls together risk from multiple protocols, normalizing the risk curve and offering risk mitigation on yields, bond ratings, and prediction market odds. The Smart Yield Bond product is a tranched interest rate volatility hedging vehicle. It’s separated into 3 tiers:

  1. Senior Tranche — Lower Risk, Lower Yield
  2. Mezzanine Tranche — Medium Risk, Medium Yield
  3. Junior Tranche — Higher Risk, Higher Yields

To summarize, tranched DeFi products are a way of gaining fixed risk exposure to different aspects of the market — whether that be yield, price, etc. Senior tranches are less risky (i.e., first money in, first money out), while junior tranches are the riskiest — higher yields for more risk exposure.

For example, if BarnBridge’s Smart Yield is accruing 1,000 Dai in interest over a fixed period, the junior tranche would receive a higher allocation of the interest payment, while the mezzanine and senior tranches would receive a lower percentage. The inverse is true for potential losses, where the junior tranche absorbs a higher percentage of any losses experienced by the Smart Yield Bond product compared to the higher tranches. It’s a double-edged sword.

Besides the transparency of risk factors and yield allocation to investors, DeFi structured risk products are also available to anyone. This is a marked departure from TradFi, where senior tranches are often oversubscribed by major institutions and the riskier lower tranches aren’t even in the purview of the average investor.

Saffron is also intriguing in how it differs from BarnBridge. It is an asset collateralization and dynamic exposure platform to liquidity providers of capital pools offering customized risk and return to users. Saffron standardizes the method for tokenizing on-chain collateral that enables leveraged staking and advanced risk management products.

This means that Saffron protects liquidity providers from the unknown variety of systemic risks facing DeFi protocols by divvying up capital allocation to interest-bearing pools over epochs, where returns are then distributed based on specific tranches selected by users. It’s a clever way to narrow down investor decision-making and reasoning about types of systemic risk facing DeFi protocols. For example, choosing the AA tranche would ensure the safety of an investor’s principal investment should any type of systemic risk (i.e., economic or technical) be exploited by a malicious user that drains funds from a protocol like Compound.

The upper tranche (AA) has a lower yield, but its investors are covered in capital loss scenarios (e.g., smart contract bug) by the principal and yield earned by the lower A Tranche.

Interestingly, with the risk-aversion of degens in DeFi, the senior tranches are actually undersubscribed in tranched products so far. For example, Saffron Finance’s bottom tranches (S and A) are rapidly accumulating the most capital compared to the more protected upper tranches. The bottom S tranche balances the two upper tranches, so they are in constant equilibrium. It’s so popular right now because it accrues 95 percent of the SFI (Saffron’s token) generated per liquidity epoch right now.

It’s another example of how crypto degens love yield and generally have shown an aversion to risk management.

Overall, structured risk products are a boon to asset protection and advanced risk management in DeFi. They may appear complex at first glance, but the fusion of distributed ledger transparency with intuitive UX should make them exceptionally popular in the coming months and years — even to retail users. In particular, their potential lies with the unabated financial engineering they empower. Imagine derivatives products for hedging fluctuations in prediction markets, loan instruments offering various tranches, and complex derivatives addressing the layered, intertwined risks facing DeFi protocols.

Those innovations are right over the horizon. However, there is a noticeable gap in market demand for fusing the advantages of what all the platforms above do into a single technology stack. Enter UNION.

The Opportunity for Asset Protection Ingenuity — UNION

At UNION, we’re building a platform that can serve as a cornerstone for asset protection products on DeFi — federating the characteristics of the platforms above and designing modular tools for instruments to arise based on market demand.

The future vulnerabilities and risks of DeFi are impossible to project, mainly due to the composability of DeFi and the resulting superfluid collateral of open financial protocols. Designing platforms that cover explicit demand for certain risk management types (e.g., discretionary smart contract coverage) may attract significant capital and users. But the ideal pathway for providing comprehensive protection products widely used in the future lies with building a technology stack that is conducive to meeting protection needs — whether it be retail users, professional traders, or institutions.

If DeFi protocols are composable, then asset protection platforms need to be composable and inclusive as well.

Current asset protection platforms approach the massive design space for asset protection with a narrowed focus. Leaning towards a specific audience of users, existing products are limited in scope. They do not account for composable risks that are intertwined via the numerous layers of Ethereum’s technology stack.

For example, accounting for the dearth of available data and the scope of potentially unknown smart contract vulnerabilities, the explicit language around bugs in code for smart contract coverage is insufficient. Instead, if coverage is modelled after a CDS, it could extend to non-linear, unpredictable losses that result from the smart contract layer — not merely whether a bug was exploited. Such an instrument would offer coverage for situations like economic exploits using flash loans, oracle manipulation, and any other unforeseen event.

UNION combines a distinct governance model, bundled, full-stack protection, secondary markets, and an open (no-KYC) ecosystem to serve as the bedrock for asset protection on Ethereum. Developers, traders, and institutions can subsequently build on top of UNION, creating and issuing instruments based on what the market requires — not what project teams think the market needs.

Below, we outline some of the key characteristics and design considerations of UNION, and how they push the asset protection needle significantly forward in DeFi.

UNION’s Model

Open, no-KYC, DAO-governed platform for the creation and development of complex derivatives for layered risks based on market demand. UNION can offer siloed, standalone protection instruments or bundled asset protection options covering an array of layers and risks of DeFi from the layer one through the mempool and to the smart contract technical and economic risks. UNION is an open, inclusive platform that provides modular tooling and encourages creative financial engineering based on organic market demand.

The platform includes the following features:

  • Bundled protection with different layers of coverage and segregated protection writer exposure.
  • Decentralized, no-KYC for lowering the barrier to access for users.
  • Secondary markets for managing and trading risks for both buyers and protection writer. More akin to Lloyd’s of London model than Nexus’ closed primary market bounded by KYC and an internal bonding curve.
  • A multi-token governance model that divests governance from the market dynamics of buying and supplying protection.

UNION is a foundation for building diverse coverage products with different risk profiles for a dynamic ecosystem of users with specific demands and needs. The platform is not reliant solely on a tranched derivatives model, capital pool model, or derivatives-based price hedging. All of them can be incorporated into a single ecosystem of different pools, coverage, and instruments.

KYC/AML — No — low barrier to access.

Asset Protection Offering — Bundled coverage pools addressing all layers of the DeFi stack (e.g., layer one, smart contract, transaction gas), secondary markets for reinsurance, and stokes the development of complex derivatives for asset protection.

Governance — A three token system:

  • UNN is used for governance — voting on protection claims, related conflict resolution protocols, adjusting risk parameters, and adjusting incentive programs.
  • uUNN is given to buyers of protection, representing their rights to a protection policy (can be traded on secondary markets).
  • pUNN is given to liquidity providers of protection pools, representing the percent share of the pool they are supporting (can be traded on secondary markets).

The 3-pronged token model prevents conflicts of interest like what happened to Nexus Mutual with yInsure and SAFE tokens by separating governance from protection/policy tokens.

Two governance layers using UNN:

  1. Community Stakeholders

Community Stakeholders — Participate in governance processes such as claim assessment and proposing new protection contracts/instruments in return for economic incentives. Can even delegate governance rights to others.

UNION DAO — Arbitrator for polarizing community stakeholder decisions and fail-safe for overriding decisions detrimental to the UNION ecosystem.

Robust 3-layer claim assessment model where each pool acts as its own decentralized community (layer one) that can be escalated to contributors of all pools (layer two), and finally escalated to the UNION DAO (layer three), which is comprised of professional adjudicators with a significant stake in the UNION ecosystem.

More details about the challenge protocols and other aspects of governance and claims processing can be found in our upcoming piece.


  • Bundled protection encompasses the layered risk of DeFi applications operating on permissionless blockchains. Segregates protection writer risk exposure while providing coverage from the bottom to the top of the DeFi stack.
  • Robust capital and supply and demand-based pricing model taking influence from tried and tested TradFi asset protection.
  • The initial suite of products includes (but not limited to) transaction gas coverage, over-collateralized ratio product, and smart contract coverage — all of which have product-market fit in DeFi right now. They will have organic demand upon their release.
  • Liquid secondary markets for risk-sharing between protection writing protocols (e.g., reinsurance). Benefits also include solvency margin relief, arbitrage opportunities for mispriced protection risk, and access to the expertise of other protection protocols.
  • Inclusive, no-KYC platform.
  • A governance framework that divests governance decisions from protection contracts and tokens.
  • Allows for the creation of protection pools on-demand and the issuance of complex derivatives instruments (e.g., CDS, CDO, etc.) to meet a variety of market needs.

The persistent exploits of DeFi protocols will continue. Preventative measures have proved a wholly insufficient match for the financial engineering of malicious entities. The DeFi attack surface will only continue to balloon as composability and Ethereum’s problematic interdependencies increase. The market needs to transition its focus to robust asset protection, insurance, and risk management tooling quickly or face a similar form of growth bottleneck that scalability caused Ethereum over the last few years.

Only until robust asset protection and mature insurance modelling are thriving on Ethereum can DeFi truly realize its full potential. Until then, DeFi users should familiarize themselves with the options at hand and understand the risks of yield farming or providing liquidity to various pools without the assurance that funds are SAFU in the case of the next inevitable exploit.

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Disclaimer: UNION is not an insurance company and UNION does not sell policies of insurance.


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