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Optionality
Overview:
Our optionality architecture is perhaps the simplest and most secure approach to Defi coverage. “Optionality” uses no voters and no claims-processing components. Instead, we use something akin to a put option on redemption tokens to provide coverage.
Architecture:
When you deposit into Compound or Alpha Homora (or any number of other Defi protocols), you receive redemption tokens with the right to withdraw the underlying assets. For example, cUSDC is Compound’s redemption token for USDC [1]. Redemption tokens are used in many DeFi protocols, including yield farming vaults and other money markets.
In our optionality architecture, underwriters sell put options on these redemption tokens. By purchasing these put options, policyholders acquire the right to trade their redemption tokens for the underwriter's capital at any time while their policy is active.
At launch, we will be taking a conservative approach. Underwriters will deposit base-level assets like USDC or WETH to underwrite coverage for these redemption tokens. However, the underlying asset will vary depending on the type of redemption token. Some examples:
Redemption Token
Underwritten By:
cUSDC from Compound
USDC
aWETH from Aave
WETH
3CRV from Curve
USDC
Later we will allow underwriters to underwrite with productive assets, and enable the same assets to be used for underwriting multiple pools. These changes add risk to the protocol, but significantly improve underwriter returns while reducing premium costs for policyholders. These changes will be necessary if underwriters are to receive acceptable returns in the long-term.
Use Case:
Say we're looking to protect USDC deposits on Compound. To underwrite, underwriters deposit USDC into Third Wall’s cUSDC coverage pool.
Anyone can purchase this Compound USDC coverage by paying premiums to the underwriter pool. In return, they get the right to trade their cUSDC for USDC from the underwriter’s capital at any time while their policy is active.
What you get with this architecture is the certainty of knowing you always have assets backing you up that you can claim at any time. This power allows any crypto user to use DeFi with absolute confidence.
Last modified 7mo ago
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