Bumper, a decentralised finance protocol, offers a unique solution for crypto holders seeking protection against downside volatility. This analysis explores the key features of Bumper's protection mechanism and provides insights into the benefits for protection buyers.
Protection in the Bumper protocol is achieved by users locking their crypto assets (for example ETH) into the protocol’s smart contracts after selecting a term (from 30-150 days) and floor price (customisable between 70% to 95% of the current asset price).
On expiry of the term, if the price of the underlying asset is below the floor price, users exit redeeming USDC stablecoins at the floor value, minus the premium applied.
If the price is equal to, or above, the floor value, then the user exits reclaiming their locked crypto assets, again minus the premium.
Alternatively, users may elect to renew their protection term with new variables.
Bumper is an autonomous DeFi protocol in which all functions are managed and enforced by smart contracts, eliminating the need for users to store their crypto assets on a third party platform or perform identity verification.
Users protect their discreet crypto tokens, and in order to open a position must hold a sufficient amount of the platforms native BUMP token, which is bonded for the term of protection, and returned when the position closes.
Dynamic Premium Calculation
Premiums for protection are calculated incrementally, and applied to the asset pool as a whole, rather than individual positions, based on three crucial factors:
Bumper's protection mechanism has been extensively modelled using historical price data. The results indicate that Bumper's protection is highly effective in mitigating downside risk, even during periods of extreme market volatility.
The table below shows the cost of protection for various assets on specific dates, along with a comparison to comparable put options contracts on the crypto options platform Deribit.
Across all backtesting, buying protection from Bumper is on average 30% cheaper than observed market prices for ETH Put Options (Black-Scholes-based).
The following chart shows average Bumper premia versus average costs of a comparable put purchased on competitor crypto options platforms, highlighting the average cost of protection to be significantly lower for Bumper users.
When users open a protection position, their assets are locked into Bumper’s smart contracts, and they are returned a ‘bumpered’ asset representing their position in the pool.
These bumpered assets can be potentially used in a wide range of DeFi scenarios, as they represent the underlying asset with the downside volatility removed at the level of the price floor.
For example, this could mitigate against the possibility of forced liquidation of a loan position should a bumpered asset be used as collateral. This innovative feature can be seen as a new form of DeFi primitive which could have far reaching benefits in the wider crypto ecosystem.
Bumper offers several advantages over buying put options on traditional options desks:
The most common form of risk management employed in the cryptocurrency markets is the stop loss. Whilst stop losses are a free tool which simply allow users to place an order when certain conditions are met, Bumper offers several advantages:
Bumper offers incentives to early protocol users buying protection, with a share of up to $250,000 in BUMP rewards.
Rewards are distributed on an emissions curve as shown below, weighted in favour of early users, larger position sizes and longer terms.
As a tool for hedging risk, Bumper is unrivalled in the market. The protocol offers protection that is significantly cheaper, simpler and is an overall more efficient form of risk management than options platforms, with the potential to disrupt the entire industry as a system for wholly new DeFi primitives.
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