As total value locked in DeFi continues to rise, so does the need to protect that value. Insurance an emerging sector, allowing users to protect their deposits from technical and financial risks within major money protocols like Compound or Maker.
The advent of DeFi insurance will allow the encompassing markets and protocols to mature as users can protect themselves from the risks associated with the nascency of DeFi at large.
1/ We’re excited to announce at we’re live on mainnet at https://t.co/ohSqfHGcnf! For the first time you can protect your @compoundfinance deposits against both technical and financial risks at https://t.co/ohSqfHGcnf. https://t.co/6NPVOpryyl
— opyn (@opyn_) February 12, 2020
Today, the main insurance protocols for DeFi are permissioned, leaving the majority of the space uninsured in the event of a smart contract hack or exploit. DeFi will ultimately need a permissionless insurance platform to create a new composable money lego for the broader ecosystem. In the future, we can theorize that DeFi protocols will begin offering insurance packages natively in an application. Imagine committing a deposit on Compound where users are given the option to purchase insurance on their deposits, effectively reducing the overall return while drastically lowering the risk.
Opyn went live with the alpha version back in June of 2019. The original goal was to build a non-custodial margin trading platform on top of Ethereum, Compound, Uniswap, and Dai, allowing anyone to go long or short on ERC20’s on a permissionless and intuitive platform.
However, in February 2020, Opyn announced their transition with the main net release of an insurance platform leveraging Convexity Protocol. The Convexity Protocol whitepaper was published by Zubin Koticha (who is also the founder of Opyn) back in November 2019, likely as a by-product of the work done attempting to build a non-custodial margin trading platform.
It likely became clear that the use fungible tokenized options contracts had a much wider range of powerful use cases beyond a margin trading platform, resulting in the launch of Opyn as a permissionless insurance platform.
Protection, insurance, and hedging is a vital piece to any mature financial system. DeFi will be no different. In order to successfully build a robust, decentralized and financial system, there must be a set of rules (i.e. protocols) for protecting its users.
The proliferation of a composable insurance platform will allow DeFi to proliferate into an open economy for the global population. Opyn is taking a unique approach to this by leveraging permissionless tokenized options contracts to protect its users across a range of financial risks.
How does it work?
Opyn is built on Convexity Protocol – a generalized options protocol built on Ethereum allowing DeFi users to create and sell put and call options. Due to its incentive-compatible design, Opyn is completely non-custodial and trustless, requiring no claim assessors or risk assessors to validate claims.
In traditional finance, put options work as insurance by giving the buyer the right to sell a set stock at a specified price within a predefined period. This means that no matter how low the stock goes, the investor can always purchase the stock at the agreed-upon price.
In DeFi, put options can be used as a form of insurance in the instance that Dai or cDai ever loses its peg. If it does, users can always purchase that asset at the strike price (i.e.$1), effectively providing the user with coverage in the instance that Compound or Maker is ever compromised.
too many people equate bank deposits = infallible
imo insured cDAI is the best risk-adjusted yield product on the market right now
— 찌 G 跻 じ MBA, CFA, FRM, CFP, NGMI, HFSP, HENTAI (@DegenSpartan) March 6, 2020
One of the interesting things about Convexity Protocol is the permissionless nature. With that, Convexity allows options sellers to earn significant premiums on their collateral by depositing ETH, minting put options, and selling them on the open market and earning a premium. If the option expires (i.e. no hacks), the collateral is returned to the option’s seller where their net gain is the premium earned from selling the option.
If Compound or any other covered protocols or platforms are attacked and the option’s buyer exercises the option, the option’s seller loses their collateral. In this case, the return for the options seller is the premium – collateral.
All of Opyn’s insurance covers are in the form a fungible tokenized options contract called oTokens, making Opyn’s insurance a new composable block for the broader DeFi ecosystem. Users who mint oTokens can sell them via Uniswap and even supply liquidity to the permissionless token exchange protocol to earn an additional return on their holdings.
As it stands today, Opyn only supports insurance on Compound deposits, Dai, and USDC. The limited coverage is largely due to the nascency of the platform. In the coming future, we can expect Opyn to expand coverage into other DeFi protocols once the platform has been battle-tested in a live environment.
How to get involved?
If you’re looking to buy insurance via Opyn, you can do so by visiting the official website here. For those interested in learning more about the permissionless insurance platform and Convexity Protocol, you can read the whitepaper here.