Introducing Flash Coverage Swaps

Hello everyone,

We are very excited to announce there will be a substantial improvement to the liquidity model of our coverage tokens. By taking advantage of flash loans and our binary token system, we are able to eliminate our 2 balancer pools, replacing them with a single 50/50 NOCLAIM/DAI pool.

Note: this change only relates to the balancer pools and will only affect newly launched protocols/expiries after today. The fundamental fungible tokens model of Cover V1 has NOT changed. This is not Cover V2.

Benefits of Flash Coverage Swaps

Using a single 50/50 NOCLAIM/DAI pool is a large improvement over our previous dual pool model, and we would like to detail the main benefits of this new model below:

  • Cheaper coverage and less slippage! With our new model, farmers buy NOCLAIM to farm for rewards and/or earn trading fees, which effectively decreases the price of CLAIM tokens ( 1 CLAIM = 1- NOCLAIM token price). In our previous liquidity model, incentivizing liquidity for the CLAIM/DAI pool was difficult because, 1) Market Makers wanted to keep their CLAIM to hedge; 2) Farmers would purchase CLAIM to farm, which would distort the price of coverage.
  • More trading fees for NOCLAIM pool liquidity providers! Due to our usage of flash liquidity, for every CLAIM $ amount traded, there is always a greater NOCLAIM $ amount worth of volume. This essentially means any CLAIM trading volume generates 5–20x as much trading volume in the NOCLAIM pool. Combined with minimal impermanent loss, market making becomes much more attractive!
  • More platform revenue! Through flash loans, $1 for every CLAIM purchased and sold will pass through the protocol, experiencing the 0.1% fees charged by the protocol. This means that the protocol will earn increased fee revenue, directly benefiting from any CLAIM trading volume.
  • Operation cost savings! Balancer pools are notoriously expensive to deploy (almost 1 ETH each). With the new change, we will only have to deploy a single Balancer pool per coverage

The catch is that because flash coverage swaps are more complex than a balancer trade, they will incur a higher transaction cost. We will be looking into ways to improve this for our users.

Changes for Cover Protocol Users

There are a few differences for our users after this change is implemented on a supported protocol. We outline the changes below, please be aware of them.

For buyers and sellers of CLAIM, not much will change. The new process will be executed through our zap tool. You will no longer need to go to Balancer to trade for CLAIM, our router will handle the full process outlined earlier in this post for you.

As a market maker, previously you would farm bonus rewards by providing liquidity to two separate pools, a 98/2 NOCLAIM/DAI pool and a 80/20 CLAIM/DAI pool. But now you will only be providing liquidity into a single 50/50 NOCLAIM/DAI pool with more trading volume. There are a few side effects of this that market makers need to keep in mind.

Since you will be providing liquidity in a 50/50 NOCLAIM/DAI pool, if you minted CLAIM/NOCLAIM you can still hold your CLAIM as coverage for the NOCLAIM half of your pool share value. If there is an incident that results in a total loss and NOCLAIM goes to $0, if you don’t exit early, the value of your share of the pool will also trend towards $0.
Holding the CLAIM you obtained from minting to market make will protect you from half of the damages in this situation. But since providing an equivalent value amount of DAI in the pool is required, we advise market makers who want to protect themselves in the case of NOCLAIM approaching $0 to purchase extra CLAIM (as coverage) for themselves. Another option is to pull your liquidity from the NOCLAIM/DAI pool immediately after the incident before the price has time to adjust.

If you are farming bonus rewards by purchasing NOCLAIM, please keep the above in mind. A total loss hack will cause the pool to approach $0, so we advise you to either act quickly and exit before the market can react to an incident, or purchase coverage for the relevant protocol to protect yourself in this case.

How Flash Coverage Swaps Work

We have built zaps to interact with the protocol that uses flash loans. This will make the user experience of purchasing and selling CLAIM, easier.

The process of buying CLAIM is as follows:

  1. A user wishes to buy CLAIM, and executes our zap.
  2. The zap then flash loans DAI from dydx (with lowest fee ~2wei).
  3. The loaned DAI is deposited into Cover Protocol to mint CLAIM/NOCLAIM.
  4. The newly minted NOCLAIM is then sold on market for DAI.
  5. The newly minted CLAIM is sent to the user.
  6. The user is charged remaining costs and fees in DAI.
  7. This received DAI is then used to pay back the flash loan.

The process of the zap for selling CLAIM is as follows:

  1. A user wishes to sell their CLAIM on market and uses our zap.
  2. The zap flash loans DAI from dydx (with lowest fee ~2wei).
  3. The flash loaned DAI is used to market buy NOCLAIM from Balancer.
  4. The zap takes the users CLAIM.
  5. Now that the zap has both NOCLAIM and CLAIM, it redeems them for DAI.
  6. The zap uses most of the DAI from redemption to pay back the flash loan.
  7. With the flash loan paid, the remaining DAI after trading fees and protocol fees is sent back to the user.

The process for buying/selling NOCLAIM is simply using the balancer pool as you normally would.

All details can be found on our doc site here.