[Strategy Paper] Mining COVER with an Understanding of the Risk

  1. Deposit DAI into Cover Protocol to mint Claim and NoClaim tokens for an insured platform;
  2. Add extra DAI and deposit each token into their Balancer pools to provide liquidity;
  3. Deposit the BPT tokens to Cover Protocol’s Shield Mining section to earn COVER.
  4. The process can be rewinded any time.

Step 1: Invest

Step 2: Calculate Outcome of Events

There are 2 possible events afterwards: 1) A claim takes place, then the Claim token can redeem 1 Dai and thus have a value of 1 Dai; 2) No claim happens and NoClaim token has a value of 1 Dai.

Step 3: Computer the Weighted-Average Loss

We assume that the price of tokens are market-efficient reflection of the probability of a claim happening. Therefore, a 0.14 Dai Claim token suggests that there’s a 14% probability a claim will take place. Then, the probability weighted average loss of a liquidity provider is as follows:

Suggestions for the Team of Cover Protocol

In the above analysis, we can calculate the expected liquidity provider’s loss based on the Claim token price; and we know it’s due to market arbitrageurs. Then the Cover Protocol can be adjusted to factor this into consideration. Giving COVER rewards is not a sustainable strategy; it only reduces the value of COVER in the long-run. Especially if we all wish to see Cover Protocol becomes a billion dollar TVL protocol, then a huge mount (e.g. a few % of the value of the total liquidity) of COVER has to be issued as rewards.

  1. Having the insured platform compensating the liquidity provider. This can be done by EITHER the insured platform providing the mining rewards OR the insured platform be the major liquidity provider in the Balancer pools. (Specifically to this point, the insured platform should be given permission to halt tradings of its Claim and NoClaim tokens, to prevent other liquidity providers being front-run by arbitrageurs, in a known exploit event). This transfers the cost of liquidity provider to the insured platform, so this will discourage insured platforms to come to Cover Protocol.
  2. Having the users compensating the liquidity provider. This can be done increasing the Balancer pool fees. Or a one-time stamp-duty alike fee can be applied to a user (an address) who first buys or sells the tokens, e.g. 5% of an address’s first transaction on the tokens and subsequent transactions do not get charged this fee as long as it’s within the limit of the first transaction. The fees accrued here go to the liquidity providers.
  3. Having the arbitrageur compensating the liquidity provider. Here we can only define an arbitrageur to be someone who buys or mints tokens after knowing there’s an exploit (leading to a claim with certainty). We cannot prevent an arbitrageur from buying and selling before the price of Claim rises from where it was to 1 Dai. What we can do it to increase of the cost of minting after the exploit taking place and before the verdict from governance. This can be done by firstly introducing a minting cost, and allowing the liquidity providers to stake and lock their BPT till the end of the insured period, to justify its claim of the minting cost (and also rewards in point 2). The claim of the minting cost does not apply to those whose mints after the block (time) where the exploit happened — governance can decide on this as part of a claim.

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The Serenity Fund

The Serenity Fund

Zero market risk and stable return - risk neutralised cryptocurrency fund.