Whitepaper
Decentralized insurance and credit derivatives release platform in Web3.0 era
Last updated
Decentralized insurance and credit derivatives release platform in Web3.0 era
Last updated
In the traditional financial industry, banks (debit & credit), insurance (risk management & hedging) and securities companies (trading) are the three pillars underpinning the financial market. While in the DeFi market, the two sectors of debit & credit and trading business compete well, with new projects still springing up, there is still a blue ocean (unknown market space) in insurance field with very limited number of new projects emerging at present.
The total value locked across DeFi protocols has reached 10 billion US dollars, with risks and accidents occurring frequently. At present, only two projects, NXM and yinsure, provide insurance services. In addition, a large number of DeFi coverage projects on NXM are sold out, which strongly proves the market demand for decentralized coverage products.
Projects of NXM and Cover have not built their own solvency judgment oracle, and the relevant compensation is decided by DAO. Since the tokens are distributed centrally to coverage sellers, and DAO judges that compensation and incentives are incompatible, , token holders tend to prefer short-term gains to compensation regardless of the facts of risk. NXM can even make different decisions on 9 applications for the same risk incident in the same project (BZEX).
Crypto asset holders need credit risk hedging facilities The crypto assets hosted on centralized financial services reach 328 billion US dollars. On account of so many runaways with fund, crypto asset holders are in urgent need of credit risk hedging facilities.
Oldmoney needs credit risk hedging facilities Traditional media have seriously demonized the crypto industry, so oldmoney, eager to enter the market, lacks trust in the centralized institutions of the crypto industry. Therefore, it urgently needs a proper project to provide risk hedging services to the new entry funds. In particular, as tokens cannot be withdrawn from okex, it further aggravates oldmoney's anxiety about the crypto industry.
Traditional financial institutions are built on the strongest core of credit. Central counterparty such as ISDA or Shanghai Futures Exchange acts as counterparty to all traders. There is not a strongest core of credit in the crypto industry. The credit ratings of Binance and OK are the same, which means that Binance cannot provide guarantee for OK, that is, it is not feasible in theory for Binance to issue an OK running away to CDS.
In this case, the code-based smart contract is the strongest core of credit, which replaces the role of central counterparty of traditional finance to issue the highest-level credit derivatives.
To sum up, there is an urgent need for a new coverage in the field of crypto assets that can solve the above problems - INS3.
Ins3 has two insurance modes, one of which is more like today's commercial insurance companies with some of the features of CDS. In terms of capital structure, insurance shareholders make capital contributions to bear the solvency risk and obtain cover price income. In addition, the insurance policy of Ins3.finance can be transferred, which has the tradable characteristics of CDS;
To put it simply, commercial insurance is more like a bet on whether or not an accident with a low probability of risk occurs with cover price paid by customers and cover amount compensated by insurance companies. Due to the large amount of compensation for accident with low probability risk, the insurance companies need to prove that they have solvency after the risk accident, which is the concept of solvency capital.
For example, an accident insurance with a cover price of RMB 100 for a cover amount of RMB 100,000, that is, the insurance company takes out RMB 100,000 and the customer takes out RMB 100 to bet whether the accident happens. In practice, the insurance company only needs to prove via the solvency report that it has the solvency of RMB 100,000.
The law of large numbers proves that commercial insurance companies can continually make profits as long as the low-probability risk events are sufficiently dispersed and insurance companies have the advantage to pricing.
The other is mutual coverage, which is more like a lottery pool with retained cover price to pay for risky events.
Ins3 will operate these two lines of business at the same time. Due to the small scale of the mutual coverage lottery pool at the beginning, the commercial coverage business will be first developed, the dual-line business model will be adopted after the amount of assets from mutual coverage under custody gradually becomes larger.
The two business lines of Ins3 share two infrastructures of investment strategy and oracle.
Overall business line
Share infrastructures
Mixed business line of commercial coverage and CDS
Oracle
Business line of mutual coverage
Decentralized arbitrage trade
The underwriter is also the coverage seller and the staker
The underwriter carries out staking for a safe project as the solvency capital of INS3, while the coverage seller gets 70% cover price income. The underwriter owns capital n, and the cover amount of each project is m, thus undertaking the staking of k projects with 10 times leverage as many as possible, wherein 10n = k*m,
The staking fund in case of any loss will be used to compensate policy holders. In 99.5% cases, the actuarial capital model can guarantee safe compensation, and if it is higher than 99.5%, the team will offer reinsurance by auctioning tokens to reimburse the excess solvency amount. Compared with the current staking, in which the decentralized insurance products must be locked for three months, there are three modes for the staking of ins3 by free quit, cancellation of insurance policy, and NFT quit, which is much freer than NXM.
Coverage purchaser
The policy holder can purchase coverage on INS3 without KYC. Once the oracle judges that the solvency conditions are valid, the policy holder can be compensated with the purchased cover amount from staking fund. If the customer wants to cancel coverage, he or she can choose to cancel or sell the insurance policy on uniswap and moonswap.
The way mutual coverage works is more like a lottery pool model. Everyone bets that a risk event may occur to a project, and the person who wins the bet (the oracle judges that the solvency condition is true) wins the retention cover price in the lottery pool; If the bet fails (the oracle judges that the solvency condition is not true), the cover price is retained into the lottery pool.
In order to ensure that the solvency is credible enough, we have built a decentralized oracle, and judge whether the solvency conditions are valid through the mode that anyone can verify the results. For oracle certification mining, ITF tokens will be pledged. For inconsistent results, the pledged ITF tokens will be forfeited, or otherwise given as rewards.
Project type
REIMBURSEMENT
The Exchange
Market performance and asset information can't be accessed from the exchange for 30 consecutive days, or tokens can’t be withdrawn from the exchange for 30 or 90 consecutive days.
DeFi
The equity token like cDAI by Compound and Yearn by yETH stays at a price 50% lower than that of deposit for 30 consecutive days.
IPFS cloud hashrate
No IPFS tokens are generated at the mining address for 30 consecutive days.
Stabile coin
The market price of guaranteed stablecoin is 90% lower than that of the fiat money it is pegged to for 30 consecutive days; The market price of unguaranteed stable coin is 60% lower than that of the fiat money it is pegged to for 30 consecutive days.
INS3 is not just an insurance platform, it's also a good place to release decentralized credit derivatives. Standard CDS tokens and nonstandard NFT tokens will be generated during its service, which can be used by customers for exchange or staking.
INS3 policy ensures that CDS standard ERC777 token (upgraded from ERC20) can be traded with at any place or the customer may cancel the insurance at any time. Besides, customers will save INS3 cover note and USDT in Moonswap and Uniswap to provide liquidity for CDS token and obtain LP as token rewards will be available as you store LP tokens into INS3.
NFT tokens will be generated as soon as customers apply for staking. Since N items are selected out of 100 projects and the cover amount varies for each project. That is, staking token is a NFT token. Therefore, when customers want to quit staking, they may choose to transfer NFT tokens, which is highly flexible than the staking of on-site deif coverage which requires funds to be locked for 3 months.
When customers carry out token staking, they will get ITF rewards for staking.
INS3 plans to launch the product on CeFi (exchange), CeFi (other), DeFi, stablecoin and IPFS cloud hashrate.
INS3 aims to launch 100 coverage items for exchanges all over the world at the end of this year.
For the coverage of exchanges, see Appendix 2 Product Covered Exchanges. Exchange API has gone through oracle test and docking and will be launched online at proper time.
It covers centralized borrowing and lending, e.g. centralized trust by Renrenbit, Paypal & Bitgo and centralized dark pool by Wootrade.
NXM and INS3 coverage items will be launched before February 28, 2021. DeFi products on public chains TRX, BSC, EOS & Conflux will be covered too.
INS3 is expected to provide the following coverage items for stablecoins at the beginning, offering underlying coverage service for DeFi projects such as DeFi.
Item
Country
Website
USDT
United States of America
BRZ
Brazil
BiLira
Turkey
DZAR
South Africa
The first IPFS cloud hashrate coverage items that are expected to be provided by INS3 are as follows:
IPFSMain
6Block
IPFS original hashrate
1475
ARS system
IPFSUnion
IPFS cloud hashrate coverage provided by INS3 is the underlying asset of the IPFS cloud computing power of exchanges, which facilitates the exchange to participate in the hedging for runaway of mine pools
For traditional finance, actuarial pricing ability serves as the core and the most competitive edge of insurance companies. Actuaries enjoys high ranks and income in the division of national economy. Different from the way that NXM links cover price with the amount of staking and prices for the default rate with staking expectation, INS3 uses an actuarial model consisting of an expectation model, a KMV model and a scorecard on the chain for finalizing the cover price.
The expectation model maps the cover price in the amount of Staking owned by customers.
Cover Price
Cover price
Risk Cost
Risk cost
surplus margin
30%
cover amount
Cover amount
cover period
Cover Period
The risk cost is related to the exponential decrease of the staking amount. The annual cover price will be 85% when the staking amount is 0, and 2% (the lowest) when single-project staking amount exceeds USD500,000. This actuarial model drew on NXM.
Cover price of credit coverage = cover amount × (risk-free interest rate + expect default rate).
Based on KMV model,
Where V represents the value of company assets, μ is the drift rate of asset value, δ is its volatility, and dW is the standard Wiener process.
Assuming that the debt maturity is T, the equity value of the company is E, the liability is D, and the risk-free interest rate is r, according to the option pricing theory, then
Then the default distance DD is worked out in this way:
And the best default point is estimated as this:
Where α is the short-term borrowing multiplier, SD is the company’s short-term borrowing, β is the long-term borrowing multiplier, and LD is the long-term borrowing.
In practice, we take DeFi 's lock-in volume and the sum of the number of coins deposited in public hot wallet on the exchange and the market value of the coins as assets, the cover amount as debt, and the volatility of platform coins or project governance tokens as volatility to establish a mapping relationship with current project risk.
DD = (marketcap + TVL - sumCover)/δ
Where marketcap is the market value of tokens, TVL is lock-in value or market value of the wallet, sumCover is the sold cover amount while δ refers to the volatility.
Kucoin cover price simulation (SumCover represents test chain data and may not be accurate for reference)
date
marketcap
TVL
sumCover
DD
mapping annual cover price
Sep. 24, 2020
9021.4
42658.63
0
1551778
4.62%
Sep. 25, 2020
9018.7
45358.63
0
128994
5.95%
Sep. 26, 2020
9091.6
0.50
0
45109
13.66%
A scorecard model is developed for information on the chain of every DeFi project.
Among them, smart contract risk weighs up for 45%, collateral risk accounts for 20%, liquidity risk accounts for 10%, protocol management right risk accounts for 12.5%, and oracle risk accounts for 12.5%.
For details about the scorecard model, see Appendix 1 Scorecard
DeFi projects will be more quantified for their quality by means of the scorecard and will be reflected by the cover price. The score keeps an inverse linear mapping relationship with annual cover price, i.e. the cover price will be 2% for the core of 10 while 85% for the score of 0.
The INS3 actuarial model integrates the expectation model, the KMV model and the scorecard model for joint actuarial pricing. It takes full consideration of market expectation and the data on the chain and shows better actuarial precision, stability and accuracy than other decentralized insurance products available.
Modern financial enterprises publish information and governs through solvency. For example, banks in the world mainly follow the Basel Accord. As to insurance, European insurance companies follow E.U. Solvency II, Chinese insurance companies follow C-ROSS solvency protocol, which is used for reference in building the capital model by INS3's developer team based on their work experience.
A sound capital model ensures that INS3 will continue to operate under the actuarial assumption that it will not go into liquidation for a rate of 99.5%.
Actual capital: refers to the assets that can be freely disposed and can be used for compensation to the cover note holder. The assets accepted by INS3 are digital currency assets hosted under specific smart contracts.
Minimal capital: refers to the amount of capital required by the INS3 Foundation to enable INS3 to have appropriate financial resources for the purpose of prudential self-regulation to cope with the adverse impact of various quantifiable capital requirements on solvency.
Solvency: solvency = actual capital / minimal capital, when the solvency is above 100%, INS3 will continue to operate under the actuarial assumption that it will not go down at a rate of 99.5 %.
Just like NXM, INS3 builds a complete solvency monitoring and control model, while yinsure haven't built any related model.
INS3 measures the minimum capital of quantitative risks such as insurance risk, market risk and credit risk according to the relevant provisions of the solvency self-regulatory rules, and considers the loss absorption effect of risk dispersion effect.
MC vector represents insurance risk, the row vector for minimal capital for market risk.
M correlation coefficient represents the correlation coefficient matrix.
Digital currency price risk exposure EX is the recognized value of the investment, and the basic factor RF0 is assigned as follows
MC = EX * RF0
RF0
USDC
0
DAI
0
USDT
0.02
WBTC
0.35
ETH
0.5
The minimal capital for various market risks is summarized by the correlation coefficient matrix, and the calculation formula is:
Where MC market represents the minimal capital for market risk.
Market risk correlation coefficient is as follows:
USDC
DAI
USDT
WBTC
ETH
USTC
1
1
1
0
0
DAI
1
1
1
0
0
USDT
1
1
1
0
0
WBTC
0
0
0
1
0.9
ETH
0
0
0
0.9
1
Risk exposure of coverage is the risk exposure of any coverage, where basal factors are RF0=0.4, MC = RF0 * CoverEXP,
If CoverEX is the coverage that has been sold out, the minimal capital for insurance risk is:
The most important source of income for insurance companies is investments in the traditional market. INS3 will distribute capital investment amount based on the principle that 99.5% of insurance companies will not go into liquidation.
The way of Buffett to success is making large investments with cheap insurance funds. Excellent insurance companies all hire a good deal of investors. Our team has a long-term verifiable history during which we have earned high returns in the secondary market so that we can improve long-term and stable arbitrage profits with staking capital and provide support for token price. But the investment scope of DeFi coverage is very narrow. First of all, DeFi coverage funds cannot be invested in DeFi projects for a long time, nor can they be directly invested in CeFi. As a result, staking funds cannot participate in the current mainstream crypto strategy but can only participate in short-term decentralized arbitrage business, such as liquidation and arbitrage between dex. INS3 team has participated in liquidation for a long term and is one of the largest decentralized liquidation teams in the market now.
Investment strategy:
keeper makes profits by participating in the liquidation of DeFi projects such as comp, dydx and makerDAO
Arbitrage between dex
Arbitrage between ex and cex. The assets of cex will be published on the chain through API on a regular basis
50% of the income from investments will be distributed to staking holders.
INS3 token is ITF, with a maximum cap of 10 million. The current distribution model is as follows:
The specific release process for each distribution is as follows:
Mode of distribution
Distribution ratio
Remarks
Foundation DAO
7%
Fully used as costs for PR, marketing and offline activities. It shall be released simultaneously with mining
Early sponsor
5%
Used to give back to FC community of conflux that sponsored the INS3 D&R team. It shall be released simultaneously with mining and unlocked in half a year. This part of distribution may be completely destroyed
Team
0%
The Team accounts for 0% based on its commitment and belief in the DeFi cause
Bottom position reimbursement
9%
Used to reimburse reinsurance for more than 99.5% of risks (auctioned in token determined by DAO). It shall be released simultaneously with mining
Mining by oracle validator
8%
It is linearly halved and released by the validator based on the cover price to be validated through the oracle mining process, that is, the first 1% is the liner release of a validated cover price of 1 million; the second 1% is the liner release of a validated cover price of 2 million...the eighth 1% is the liner release of a validated cover price of 128 million
Trusted oracle node
10%
Reward trusted oracle nodes. It shall be linearly released according to the validated cover amount and token staking amount
staking mining
30%
Reward the staking mining process. It shall be released according to one U-standard fixed return rate of 10%~45%
Liquidity insurance mining
10%
Give mining rewards for policies on moonswap and uniswap as well as token LP
ITF liquidity mining
21%
Give mining rewards to users who provide liquidity for ITF transactions
ITF holders can vote on the actuarial model and whether to reimburse the reinsurance.
1. 50% of the investment income from the commercial coverage business line is used to repurchase ITF
2. 30% of the cover price of the commercial coverage business line is used to donate the mutual coverage business line at the preliminary stage, and then used to repurchase ITF
3. 5% of the balanced funds of the mutual coverage in each period is used to repurchase ITF
4. 100% of the investment income from the balanced funds of the mutual coverage is used to repurchase ITF
5. Staking funds of failed oracles are used to pay ITF dividends
This part is not a final decision, and ITF is likely to be a "meaningless" governance token
Part
Score
Evaluation
Smart Contract Risk
Smart Contract Risk(45%)
Errors, bugs and unexpected outcomes in smart contracts can cause real financial harm. These risks can be minimized by proactive code audits and formal verification from reputable security firms.
Financial Risk
Collateral (20%)
While all of the current platforms use very conservative collateral factors, the highly volatile nature of crypto assets means that these high collateral factors may still be insufficient.
Liquidity (10%)
The currently scoped platforms all attempt to incentive liquidity by using dynamic interest rate models which produce varying rates depending on the level of liquidity in each asset pool. However, incentivized liquidity does not mean guaranteed liquidity. The absolute level of liquidity is used.
Centralization Risk
Protocol Administration (12.5%)
One of the biggest contributors to centralization risk in DeFi protocols is the use of admin keys. Admin keys allow protocol developers to change different parameters of their smart contract systems like oracles, interest rates and potentially more. Protocol developer’s’ ability to alter these contract parameters allows them to cause financial loss to users. Measures like timelocks and multi-signature wallets help mitigate the risk of financial loss due to centralized elements. Mult-signature wallets help mitigate this risk by distributing control to a larger number of developers, meaning that the loss or compromise of a single private key cannot compromise the entire system. Timelocks help mitigate risk by allowing protocol users to exit their positions before a change can take place.
Oracles (12.5%)
Another large element of centralization risk in these protocols is oracle centralization. There are many different flavors of oracle systems being used to power these protocols. Some protocols use a fully self-operated oracle system while others use externally operated oracles like Uniswap and Kyber. Samczsun's writeup on oracles and their ability to cause financial loss provides good background information. The oracle centralization score is not focused on whether these price feeds are manipulatable or not (they all are), but whether a single entity can manipulate them with ease. In the self-operated model, it only takes the oracle owner to manipulate its data. Decentralized oracles can’t be manipulated in the same way, \ but may not always represent the fair market value for an asset, which is why developers building on top of decentralized oracles opt to use price volatility bounds to defend against these types of attacks.
