Understand the Cover Protocol Insurance Mechanism and Economic Model in One Article

This article was first published on Mars Finance, authored by Bite.

3 times! Within less than a week of being listed on Binance, the token COVER of the decentralized insurance protocol Cover Protocol surged from a low of $480 to a high of $1500, reigniting investors' interest in DeFi insurance and leading to a rise in insurance-related tokens. The last time this phenomenon was driven by Nexus Mutual (token: NXM).

This time, why is it COVER?

Although it cannot be separated from the strong support of YFI founder Andre Cronje (referred to as "AC") and the "catalyst" of centralized exchanges, fundamentally, more and more people are realizing that in today's environment of frequent DeFi risk events, insurance will be a key piece of the puzzle to solve this problem. In the future, insurance will ultimately become one of the most important infrastructures in the entire DeFi ecosystem.

Therefore, regardless of whether Cover Protocol can achieve great success, it is undoubtedly an excellent speculative topic in the realm of digital assets that are keen on concepts. Next, let us comprehensively understand Cover Protocol and its token COVER from several dimensions, including project introduction, highlights, token economics, and differences from other insurance protocols.

1. Project Introduction

Cover Protocol is a mutual insurance project built on the Ethereum network, upgraded from SAFE2 (which was upgraded from SAFE), previously known as yinsure.finance. Cover is a peer-to-peer insurance market aimed at building an insurance market for anything, but currently focuses more on the DeFi market. It can be said that as long as there is demand, Cover can provide an insurance market for anything, with the goal not limited to DeFi insurance and cryptocurrencies. COVER is the governance token of Cover, primarily used for voting on community proposals (such as whether to claim).

Basic Information:

According to official website information, the team is mainly composed of technical personnel, with core developers including: Alan, crypto_pumpkin, Kryptocucumber.

2. Economic Model

Cover operates through a dual-token insurance mechanism to set insurance prices, mainly referring to the homogeneous tokens CLAIM and NOCLAIM in the insurance market. This dual-token insurance model is the core of the Cover protocol's operation.

Users can generate collateral assets by depositing CLAIM and NOCLAIM tokens into the Cover smart contract. Each insurance contract includes the specified insured protocol, the collateral deposited (such as DAI or ETH), the amount stored, and the insurance expiration date.

In summary, the Cover protocol can be represented as "four-three-three":

1. Four types of tokens

DAI: Stablecoin, essential for market making.

CLAIM: The token representing the insurance claimant's rights.

NOCLAIM: The token representing the insurance demander's rights.

COVER: The reward and governance token.

2. Three liquidity pools

CLAIM-DAI pool

NOCLAIM-DAI pool

Cover-ETH pool

3. Three roles

These are the insurance demander, insurance provider, and market maker.

(1) Market Maker (MM)

Users who want to become market makers can deposit CLAIM and NOCLAIM tokens into the corresponding Balancer pools to provide liquidity, earn trading fees, participate in COVER mining, and receive COVER token rewards for providing liquidity. Insurance demanders and insurance providers can also earn additional income through market making.

(2) Insurance Provider (CP)

Users who want to become insurance providers can sell CLAIM tokens (earning premiums), while NOCLAIM tokens can be placed in Balancer for market making. Among them, NOCLAIM tokens serve as redemption certificates when no claims occur; insurance providers only need to retain NOCLAIM tokens to sell CLAIM tokens to complete underwriting. If a claim event occurs during the insurance period, the insurance provider will lose part or all of the collateral.

(3) Insurance Demander (CS)

If users want to purchase insurance for themselves, they can sell NOCLAIM tokens and retain only CLAIM tokens; they can also directly purchase CLAIM tokens on Balancer for insurance. CLAIM tokens serve as proof in the event of a claim; insurance demanders only need to retain CLAIM tokens to sell NOCLAIM tokens to complete the insurance. Insurance demanders can also directly purchase CLAIM tokens in the market to achieve insurance. If a claim event occurs during the insurance period, the insured can use CLAIM tokens to receive partial or full collateral compensation.

In summary, if no safety incidents occur by the expiration date, one NOCLAIM can be exchanged for one DAI; if a safety incident occurs, one CLAIM can be exchanged for one DAI. Additionally, at any time, one NOCLAIM + one CLAIM can be exchanged for one DAI (with a 0.1% fee). Of course, the insurance will terminate after a claim is made or the insurance period expires.

Currently, Cover supports insurance for 11 projects, with the coverage amounts for each project shown in the image below. The total insured amount across the platform is approximately $12 million.

3. Cover Claims

Cover claims are mainly divided into three steps: filing a claim, voting, and final determination by the committee.

Step 1: Filing a Claim

Anyone can initiate a claim by paying a claim filing fee. Each protocol's claim filing fee will have a multiplier effect to prevent spam attacks.

Step 2: Voting

After the claim event is submitted, voting will be conducted via snapshot. COVER token holders can participate in the voting to determine whether the claim is valid or invalid.

Step 3: Final Determination

The Claim Validity Committee audits the claim and provides a professional assessment report to determine whether it meets the claim standards and how much should be compensated.

The most recent claim payout was for Pickle Finance, which experienced a theft incident in November. After voting, the community approved the claim application, and the Claim Validity Committee unanimously agreed to compensate at a 100% ratio, truly demonstrating its value as insurance.

4. Token Economics

COVER, as a governance token, can vote on proposals submitted by the community and plays an important guiding role in the future development of the Cover protocol. The maximum supply of COVER is 160,000 tokens, with 87% (approximately 139,200 tokens) allocated to COVER community members; 70% can be obtained through liquidity mining in the next 12 months; 17% will be allocated to SAFE2 token holders, vesting within 90 days; 12% (19,200 tokens) will be reserved for the team, vesting over 3 years; and 1% will vest with the financial department of VER company upon launch.

After the first year of distribution, there will be an additional 10,000 COVER tokens in the second year, with annual growth halving thereafter. Of the new allocations, 90% will be allocated to shield mining, and 10% will be allocated to the fund.

5. Cover's Competitive Advantages and Disadvantages

In addition to Cover, the main insurance projects currently in the market include Nsure, Nexus Mutual, Etherisc, VouchForMe, and Opyn. Compared to other insurance projects, Cover has five main characteristics:

(1) It is not a liquidity pool staking model, but a peer-to-peer model;

(2) The market prices the risk, rather than fixed fees;

(3) Dual-token model;

(4) COVER's claim assessment introduces the Claim Validity Committee;

(5) No KYC required;

Of course, there are also some disadvantages, such as the high participation threshold for users, the inability to choose the insurance period, and the current token price appearing overheated, so please invest cautiously.

Conclusion

Due to the high volatility of digital asset prices and issues related to the security of smart contracts, traditional insurance companies are unlikely to meet market demand in the short term. Cover is currently just a microcosm of decentralized insurance. With the growth of locked assets in DeFi and the emergence of various new DeFi products, decentralized insurance will be essential for the DeFi market, and DeFi insurance may become the next focus for blockchain investors.

Reference Article:

Cover Official Website: https://docs.coverprotocol.com/product/tokenomics