How Does Cover Protocol Work? - Decentralise #50
Yearn Finance and Cover's decentralised coverage market
Cover Protocol and Yearn
Earlier this month I wrote about Cover’s merger with Yearn.
Since then the PieDAO community voted in a Yearn Ecosystem Pie that provides broad exposure to the growing Yearn family and will ultimately allow easy metagovernance (voting in each token’s governance proposals using DOUGH).
To better understand the Yearn ecosystem I’m going to be writing a brief overview of each project.
Let’s get started.
Will | 🥧 PieDAO @williambrealey1A Snapshot vote for $YPIE has been submitted. 🥳 Yearn Ecosystem Pie will feature metagovernance. Easily take part in governance across the whole @iearnfinance ecosystem with $DOUGH. $YFI $SUSHI $KP3R $CREAM $AKRO $PICKLE $COVER Vote now 🗳️ https://t.co/fP9TzNMNKc https://t.co/uVHZ9E7Bnq
So what is Cover Protocol and what role will it play in the Yearn ecosystem?
Cover is a decentralised coverage system operating through a peer-to-peer market of fungible tokens. Anyone, anywhere can gain decentralised defi protection without needing KYC.
“The long term vision for Cover Protocol is to allow anyone to buy coverage on anything.”
How Does Cover Work?
The system works through automated market makers using Balancer pools.
Market makers deposit DAI collateral in exchange for CLAIM and NOCLAIM tokens (1 DAI produces 1 CLAIM and 1 NOCLAIM). The tokens can be added to a Balancer pool to earn liquidity provider fees, establishing a market that others can interact with. Market makers also receive Balancer Pool Tokens (BPT), which can be staked with Cover for extra rewards in a process known as shield mining.
The CLAIM token can be used to access the deposited collateral if a claim passes through the claim management process. The NOCLAIM token can be used to access the deposited collateral if no claim passes this process during the pre-determined coverage period.
In the event of a successful claim the CLAIM tokens will be worth the underlying $1 of DAI collateral, and NOCLAIM tokens will be worthless. If there is no successful claim the NOCLAIM tokens are worth $1 and CLAIM tokens are worthless.
In this way the market can assess the risk and set the coverage price for any chosen platform, essentially betting on the likelihood of a certain protocol experiencing a an issue.
The system’s design should be familiar for anyone who read the article I did on Catnip’s decentralised prediction market.
Anyone can file a claim, paying a claim file fee which is returned if the claim is successful. This claim file fee increases each time a claim for that protocol is submitted to prevent spam.
A claim file will trigger a Snapshot where holders of the COVER token can signal their support or opposition to the claim. Read all about Snapshot here.
The final decision goes to the Claim Validity Committee, a team of auditors who are economically rewarded for their time. If 50% of the committee support a claim it will be approved.
Cover Protocol has managed to build upon an existing technology and create a highly valuable and innovative new service.
This is why we DeFi.
Composability allows for constant and rapid iteration and a stream of new services for users.
I’m happy to see more user-focused protection emerging, especially fully decentralised and permissionless offerings that don’t require KYC.
The project has already demonstrated itself, paying out 282,035 DAI to users affected by the Pickle attack.
Now that Cover is part of the Yearn ecosystem it stands to benefit from both the network, reputation, and developer talent.
I think it’s definitely going to be one to watch as we move forwards.
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