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We should offer insurance though COVER Protocol

#1

Incognito offers some of the best rates for single asset liquidity pooling. The thing that stops me from investing more is that there is some risk involved. If that risk could be mitigated through an insurance policy, I would definitely provide more liquidity.

COVER Protocol is a market-driven decentralized insurance provider for projects like: Harvest, SushiSwap, AAVE, and Yearn. Adding Incognito to the list would definitely increase our userbase because users would feel safe using a “new” blockchain project for shielding or providing.

https://app.coverprotocol.com/app/marketplace

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#2

Welcome to the community NibblesnBytes…and thank you for the post and suggestion you make about insurance … :sunglasses:

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#3

COVER would be cool but it would only work on the Ethereum blockchain. Making sure that the custodian holders don’t just take the crypto funds is something that is one of this project’s downfalls.

edit with that being said that protocol is interesting. We could use something like that within the provide feature set to collateralize deposits.

#4

Having the coverage on Ethereum blockchain is a benefit. If there is some catastrophic issue on Incognito, it’s nice to know that you can recover funds on a separate blockchain. I also asked the Cover team, and they said they would be willing to cover non-Ethereum projects like Incognito. Ideally, for them, if the volume is low then Incognito could provide some PRIV to the LPs to incentivize pooling for Incognito insurance. This would be a cost for Incognito but could be good marketing.

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#5

I’m interested how they would cover a completely different blockchain where collateral is backed by a single network coin. The cost of PRV is based upon the usage of the network itself and what people think PRV is worth, nothing more. It’s not backed by anything. As such if they would accept certain worth for certain collateral (based upon PRV value) we would find that when we would issue an insurance claim the collateral worth would be so small as to make the claim either invalid or completely worthless.

Simply put insurance is a scam; as all you guys should know if you owned a car or paid for health insurance. At the end of the day you will be paying more into it over the long term then you will ever get out of it. If the project fails, where a sizable enough custodians take the deposited amounts, making PRV and the Pcoins equivalents pretty much worthless, there is little that insurance like that can do to help recover any lossed funds to the LPs. That’s the simple fact and one of the risks of this project.

#6

Interesting idea

#7

My apologies, I didn’t fully explain the insurance from the start. The collateral for all policies is currently DAI. So a user might take out a $1000 policy that covers any loss of funds from hacks, custodial issues, protocol failure… This policy might cost around $10-50 for 6 months of coverage. The cost is variable because it’s market-driven, we’ll get to that in a bit. So a user can now invest $1000 on the Incognito and if something happens, they know they can recover $1000 DAI.

Voting: In the event of a mass loss of funds to Incognito, there will be a vote. All of the people holding COVER will be able to participate. If the majority votes that a loss of funds happened, then all “Incognito Claim” tokens will become redeemable for 1 DAI. COVER holders are incentivized to vote honestly otherwise trust in the system will go down making the COVER worth less.

2 token system: For each covered protocol, there is a CLAIM token and a NOCLAIM token. They are minted at the same time. 1 DAI = 1 CLAIM + 1 NOCLAIM. In the middle of coverage, they can both be combined and redeemed 1 CLAIM + 1 NOCLAIM = 1 DAI. In the event of a loss of funds, a vote happens, and then only CLAIM is redeemable for DAI, 1 CLAIM = 1 DAI, and then NOCLAIM is worthless. If the protocol makes it to the end of the coverage period, then 1 NOCLAIM = 1 DAI, and the CLAIM is worthless. Coverage providers can hedge that there wont be a hack and buy the NOCLAIMs and normal users will buy the CLAIM to hedge for a hack.

Pooling: Pools are set up in Balancer with the initial price of 0.10 DAI = 1 CLAIM and 0.90 DAI = 1 NOCLAIM. Liquidity providers add to the pools and collect fees on trades. Users buy and sell coverage as needed. Prices change with the market trust in Incognito. Arbitrageurs ensure that there is balance in the CLAIM vs NOCLAIM prices (the combined price will always be around 1 DAI).

Lastly, Cover incentivizes people to provide liquidity by rewarding them with a valueless governance token COVER. This is used in the voting step. Incognito could offer an additional incentive by offering PRV to the liquidity providers to encourage insurance for Incognito and bring new users aboard.

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#8

Yes the protocol methods are quite interesting. And in a way you can insure your funds via a secondary policy if a custodian was to act maliciously and steal funds. The problem is proving the stealing of funds has caused loss by the depositors. Unlike ethereum or other blockchains with transparent provable methods to show if someone is a bad actor incognito uses ring signatures which makes transactions private but also makes this kind of verification much harder to do.

Simply making a claim that your funds are taken is not enough because you need to run unwrap the ring signature. With developments of private shielding amounts and otherwise that protects the privacy of transactions, shielding, and withdrawals, there is unfortunately going to be a point where even if you claim wrong doing you will basically need to be handing your wallet’s private keys to prove that it is in fact correct. For both your incognito wallet and your private withdrawal wallet.

While you might think that CLAIM tokens are correctly voted in an honest manner the simple fact is they don’t NEED to honor your claim. It is up to people you don’t know that have a personal interest in keeping as much liquidity as possible to make more policies to make more profit overall. Insurance companies do not operate to pay out. They operate to make money and will do everything they can to not pay out. It would probably come down to the policy itself. When it comes to private claimants where individual users are saying custodians have took the funds this becomes very problematic.

Let me give you an example which collateral policy holders will almost always say in the case of a claim where the funds stolen were stolen via custodial dispute. User A has 10 XMR and goes to withdrawal. His wallet does receive a transaction BUT it only contains 0.0000001 XMR. He makes a claim, under his policy that insures custodial issues, that there is obviously a custodian issue. So the CLAIM token providers take a look, but wait they can’t really. Transactions are private and the incognito chain encrypts the overall transaction proof. Well that’s a problem. The claimant needs to give away both his incognito wallet’s privacy and his monero wallet’s privacy. Even if he does all that they can still deny the claim. Because he can’t prove he is not the custodian who took the funds.

Let me give you the overview. User A is in fact a bad person. A person who wants to fraudulently redeem a policy they are not rightfully owed. User A gets in as a custodian in a private cryptocurrency. He then selectively reduces the withdrawal transaction FOR HIS OWN TRANSACTION to make the policy claim. He can literally not lose from doing this. Because if incognito catches it they refund 150% (I believe) equivalent value in PRV to the affected depositor; which is himself. If it does go through he can try and do the policy claim. At the end of the day he either gets exactly the funds he has (and can do it again) or he makes money off the backs of the coverage providers. Either way it’s worth trying for bad parties.

It just doesn’t work for this kind of project. There is too many different ways people can be tricked into thinking that something is wrong when it isn’t and something is right when it isn’t. The insurance will work on transparent blockchains because a simple transaction can be used as the clear proof. When you work on private blockchains there is massive issues with the claimant processes.

#9

It might be more difficult for private coins, you’re right. You are also right that custodians have to be overcollateralized, so single user issues are minimized. Cover is not intended for losses to a single user, more of for if something affects the entire system or >50% of the users. This would be an event posted on all crypto news pages. Dev’s would be able to confirm the incident.

For the voting process, it’s COVER holders that get to vote and not the NoClaim holders. COVER is distributed to token holders and there are 13 projects. So there are 26 different CLAIM and NOCLAIM tokens. Only the 1 Incog NoClaim token would be negatively affected. If COVER is distributed to all the token holders evenly, then 25/26 of the COVER should vote honestly. If they are dishonest and don’t cover a project when they should, then the value of COVER would drop.

Insurance isn’t for everyone, but right now diversification is my only protection. I only have a little on Incognito, because that’s all I’m willing to lose on this project. I’d be willing to put more if there was some additional protection. Thank you for your counter arguments.

#10

I think my answers come off so forceful and people think it is confrontational. I’m just trying to make my view point known. Not trying to argue but just to discuss.

I can understand why someone would want some kind of insurance when going into these network systems without a tested protocols. It is a very unstable place where funds can be lost from the most simple thing.

#11

Considering they cant secure their own smart contract, I would advise against even thinking about them.

https://www.binance.com/en/support/announcement/200da2a0f3c74706841a9214fd55c94d