The DeFi Insurance Protocol Cover (COVER) will introduce Credit Default Swaps into their product portfolio. The first project to benefit from this will be the upcoming lending platform Ruler.
Credit Default Swaps for Ruler Lenders.
Minimize defaults loan risks without liquidation. https://t.co/ezD8fJxJaC
— Ruler (@RulerProtocol) February 26, 2021
Cover and Ruler Unleash the Power of Fungible Tokens
Cover Protocol provides a simplified process for obtaining insurance, based purely on free-market principles. Users who want to insure themselves for a given time period stake collateral in order to mint to types of fungible tokens, cTokens, and ncTokens, in the same amount. Here, c and nc stand for claim and no-claim.
If no valid claims for damages have been filed by the end of the insurance period, the cTokens become worthless and the collateral is split up between all holders of the respective ncTokens. If a damage event occurs, anyone can post a bond of 10 Dai to submit a claim for governance voting. If the vote passes, a group of auditors, the Claim Validity Committee, will review the case and vote on the validity of the claim and the percentage of the collateral that should be awarded to cToken holders.
Since both cTokens and ncTokens can be traded on the secondary market, the coverage price is determined by the free market, rather than by price curves as is the case for first-generation insurance protocols like Nexus Mutual. Insurance takers simply sell their ncTokens on the secondary market and keep their cTokens for redemption in the case of a damage event. Likewise, coverage providers can either buy ncTokens or mint both c- and ncTokens and then sell the c-tokens.
Credit Default Swaps Will Enable Liquidation-free Lending
Ruler uses a similar token model, in which loan takers deposit collateral to mint both Ruler Capital Tokens (rc) and Ruler Repayment Tokens (rr). rcTokens represent the rights to receive the loan repayment, while the rrTokens represent the collateralized debt positions.
Thus, loan takers mint both token types and then sell the rcTokens at a discount in order to factor the interest rate in. To get their collateral back, they have to repay the loan alongside the rrTokens, otherwise, the collateral will be forfeited upon the loan expiration date. In order to avoid forfeiting their capital to rcToken owners, borrowers can also sell their rrTokens prior to the expiration date to a more liquid platform user who is willing to pay the loan back.
Under this lending model, the collateral is never liquidated, even if its value drops below the loan amount. In this case, borrowers don’t have an incentive to honor their debt and to forfeit their collateral instead. Thanks to the Credit Default Swaps introduced by Cover, lenders will be able to insure themselves against this risk.