A cover creator prioritises digital asset security and risk mitigation. They create cover pools to offer their user base and investor community a choice in the way they manage their exposure to risks associated with their platform.
Cybercrime, hacking, and exploits have been a common practice, resulting in large losses over the past few years.
The most vulnerable segment has been on-chain protocols. These projects often find themselves highly exposed to smart contract coding errors, loopholes, and vulnerabilities. If these risks are not adequately addressed projects may either not run as intended or worse, render them a victim of cybercriminal activity. This can result in thousands and even millions of dollars in damages and loss. Not to mention the decrease of support and confidence in the project.
The frequency of incidents and the sum of assets stolen from DeFi protocols surpassed the damage from centralised crypto exchanges over 2021; depending on sources, the number is around 2B$ losses from DeFi vs 1B$ losses from CeFi. And so far traditional insurers have been reluctant to accept crypto service providers as clients. Leaving aside the difficulty of regulatory considerations, the level of understanding about DeFi and Web3 projects is extremely low amongst traditional underwriters. To make things worse, there is very limited historical data available for use by actuarial teams to work on pricing models. As a result, if there is little data on which to evaluate and price project or market risk, the options are limited to either refusing to take on the particular risk or charging a very high premium to mitigate the uncertainty.
Neptune Mutual is a new entrant into the space of financial protection of digital assets, and it is proposing a new approach that is designed to solve some of the structural problems faced by traditional underwriting models. Neptune Mutual offers a peer to peer marketplace whereby anyone can choose either to become an underwriter (aka liquidity provider) and earn premiums from this investment or to become a cover policyholder and benefit from the cover policy (underwritten by the liquidity providers) in the event of a validated hack or exploit.
For cover creators that create project-specific cover pools in this marketplace, there are numerous benefits over-and-above a traditional insurance model.
Firstly, the financial protection is specific to each project and so premiums and payouts are not affected by the risks associated with other projects.
Secondly, if an incident does arise, then as Neptune Mutual has adopted a parametric model, there is only the need to validate whether or not the incident has triggered all the parameters of the cover policy: this typically takes around 7 days following which either the incident is validated in which case all cover policyholders can claim a payout, or the incident is not validated in which case no policyholders can claim a payout. This system avoids the need for individual claims to be evaluated one by one.
The consequences of this are that Neptune Mutual cover policies will resolve financial claims within a matter of days after an incident, whereas the administration of evaluating hundreds or many thousands of individual claims could take weeks or months to complete for a traditional insurance solution after an incident.
With a Neptune Mutual cover solution in place, projects can build a closer relationship with their user and investor communities alike, and establish a protection mechanism that inspires confidence due to its ability to resolve incidents quickly and because of the guaranteed nature of payouts in the event of a validated incident.
So who exactly are and should be cover creators?
Who Are Cover Creators#
Cover creators are usually the owners/creators of CeFi platforms (ie crypto exchanges, crypto custodians, OTC trading platforms), DeFi or metaverse projects, digital asset managers, or, in fact, any team who is looking for a solution to safeguard their ecosystem and protect users of their product and services from hacks and exploits.
A cover creator creates a cover contract and specifies the parameters that define the risks being covered and the terms and conditions under which the policy will payout to policyholders.
In order for a cover policy to work successfully, a cover creator must think carefully about the parameters of the policy, the exclusions, and any pre-conditions that must be fulfilled in order for the policy to function effectively.
Cover creators need to burn 1000 NPM tokens and they will also need to stake 4000 NPM tokens or more. The higher the stake, the more visibility the cover pool will receive in the cover pool marketplace.
Cover Creation Best Practices#
To make cover policies appealing to a community, creators can follow these best practices when it comes to creating a cover on Neptune Mutual:
- Before a cover creator launches their cover pool on Neptune Mutual, it is recommended they create a proposal to list their project’s token on Neptune Mutual’s staking portal; this will help improve the project’s exposure to Neptune Mutual’s community. Through Neptune Mutual, a user who participates in a cover creator’s project can support the project’s development and success by providing liquidity and staking PODs (see below).
- Specify clear and concise rules about how and when a cover incident occurs.
- Work with the Neptune Mutual team to set floor and ceiling prices for the cover policy that correspond to the level of risks being underwritten.
- Collaborate with the project community on promoting the cover pool.
- Offer a reassurance fund to make the cover pool more attractive to liquidity providers. Following validation of an incident, a share of the reassurance fund is transferred to the liquidity pool to minimise liquidity providers’ losses.
- Provide POD staking rewards to liquidity providers. This is a mechanism in which those who provide liquidity to the cover pool can choose to stake the special kind of ERC-20 token called PODs (Proof of Deposits) that they receive when they provide liquidity. Cover creators can choose to reward the POD holders (liquidity providers) with their project’s native token. This incentivises liquidity providers to join and collectively underwrite the security risk of the cover creators project.
Conclusion#
Neptune Mutual parametric cover offers a new approach to CeFi, DeFi, and metaverse projects looking to provide financial protection to their ecosystem of digital asset owners. The system helps build confidence in the project because of the attributes of parametric cover that enable it to resolve incidents rapidly and provide guaranteed payouts to policyholders in the event that a hack or exploit is validated by the community.
Neptune Mutual cover helps to increase the resilience of digital assets and increase the confidence the community places in blockchain projects. Parametric covers protect projects and their crowdfunding communities.
