Just a few months ago, crypto-bro’s were high-fiving one another as they were earning ridiculous returns depositing (and often constantly shifting) their tokens to chase the greatest yields.
That all changed following the collapse of a number of high profile platforms, and the resulting contagion marked a significant shift in the way DeFi enthusiasts looked to earn yield on their crypto holdings.
More conservative approaches are suddenly back in vogue, with the safety and solvency of protocols being first and foremost in the minds of yield-seekers, over and above high yields. Protocols which cater for this re-calibrated risk tolerance are destined to be become more attractive to users, as transparency, novelty and decentralisation are widely regarded as key for DeFi platforms to rebuild trust in the sector.
Bumper is a DeFi protocol which provides price protection for crypto.
What makes Bumper really interesting is how it minimises risk for all participants, rather than maximising profit for some individuals. This means Bumper is not the classic zero sum game which defines all other risk markets.
For sure, you may be someone who's utterly fearless, with a risk tolerance so high you’d be happy to wrestle an alligator whilst jumping out of a plane. In which case, Bumper may not sufficiently high risk for you.
But, after the great crypto implosion of 2022, a majority of DeFi players seem to want a better balance between risk and reward, and this is precisely what Bumper provides, not just for those who are looking to protect their crypto, but also for those who are looking to earn a yield by providing liquidity.
At its heart, Bumper is a risk market. It lets users protect the price of their crypto in the event of a Market downturn.These users want to make sure they don’t get utterly rekt if the price of their crypto crashes, but they’re worried they might lose out if market rebounds. As such, they’re prepared to pay a premium to protect their crypto’s price whilst still benefitting from the upside rips. We call these users ‘Takers’. Other users are happy to assume some of the Takers downside risk in return for the chance to earn the premiums they pay. They deposit stablecoins and become liquidity providers. Bumper calls these users ‘Makers’.
Instead of directly matching one protection seeker (a Taker) with a liquidity provider (a Maker), Bumper’s architecture uses pools.
On one side, all the Takers deposit their crypto into the Asset Pool and choose a ‘floor’ which is level at which the price of their crypto protection will activate. They commit to a term (from 30 to 150 days) which can be renewed if they so wish.
On the other side, all the Makers deposit their stablecoins into the Capital Pool, choose a Risk tier and also commit to a term (again between 30 to 150 days, and again, this term is renewable).
When their term expires, if the price of the crypto asset deposited by an individual Taker finishes under their chosen floor, then they leave their crypto in the Bumper protocol, and claim stablecoins from the Capital Pool, to the value of the floor (less their premium of course).
If this happens, it reduces the amount in the Capital Pool. This affects all the Makers slightly, but ensures that a single Maker isn’t on the hook to settle the Taker’s entire claim. Essentially, all the current Makers assume all the risk collectively, rather than individually against a single Taker position.
Conversely, the premiums paid by the Takers (as well as any left-behind crypto assets when they make a claim) add to the collective yield and value of the pool.
When an individual Maker decides to exit Bumper, they withdraw their proportional share of the Capital Pool, including whatever yields have been earned.
Depositing your stablecoins into Bumper gives all Makers the potential to earn yield, whilst reducing the personal risk of each of them individual, because all gains and losses are shared proportionally by them all collectively, depending on their chosen risk tier and how much liquidity they deposited originally.
Taker premiums (and thus, Maker yields) are determined by how volatile the crypto market gets.
That is not how volatile a market HAS BEEN up until the present, but how volatile it WILL BE (whilst your position is open). Of course, no one knows how volatile it’s going to be in the future, but hey, that’s markets for you.
Bumper doesn’t calculate the premiums charged to Takers up front.
In a complete about-turn to just about every other platform, premiums are levied based on how volatile the market is during the time the Taker has their protection in place.
If volatility is reasonably flat, and prices don’t move too much over any given period, Takers pay less premium, and Makers will earn a steady yield as the chance of a claim being made against the Capital pool is much lower than if the market is pretty froggy (or worse, dropping like a brick).
Premiums increase for Takers when Bumper measures that the market has become more volatile, and the proximity of the assets price relative to floor prices (in other words is is move closer to or further away from the floor prices).
The diagram below gives a good example of how risk is fairly balanced in periods of high volatility versus low volatility:
As Bumper’s smart contracts perform all the calculations, with no human intervention, each side knows that premiums will be fairly calculated, with higher volatility equalling a higher premium, and this is ultimately the agreement Makers and Takers are entering into. The Makers bail out the Takers if the market crashes, and in return, Takers pay a fair premium to Makers based on how the market actually moves.
One of the great advantages of the Bumper protocol is that it also allows ‘idle funds’ to be put to work earning additional income from third party yield farming protocols.
How does Bumper determine what constitutes ‘idle funds’? At any given point in time, there’ll be some positions which are due to close in the next few days, and some which are a fair way off closing.
Some of these soon-to-close Taker positions will be “above the floor” and are unlikely to end up claiming, whereas others will be “under the floor” with a higher probability of claiming against the Maker’s Capital Pool.
Bumper calculates how much liquidity is required in each Pool at any given time to ensure that all claims and withdrawals could be successfully processed without putting strain on the protocol.
Any surplus to this required amount, the so-called ‘idle funds’, can therefore be put to work, earning additional yields through farming on well-balanced protocols.
As a Maker in the Bumper protocol, you benefit not only from earning yield from Taker premiums, but also from automated yield farming which is managed by the Bumper smart contracts.
This means that Bumper can often derive better returns than a user simply depositing in the same yield farms directly, and is another great reason for liquidity providers to earn a yield on their stablecoins with Bumper.
When opening a Maker position, a user gets to choose their own personal risk tolerance. In Bumper, they are offered options 1-5, with 1 being the lowest and 5 denoting the highest risk.
The average risk tolerance of all currently open Maker positions is displayed on the dApp, allowing users who wish to deposit stablecoins and earn to gauge their level of acceptable risk relative to all other Makers.
For example, if the current risk level across the board is 2.5, a new Maker with a greater risk tolerance might select a higher risk tier of 4, or maybe even 5.
Choosing a higher risk tier than the average makes it slightly less risky for the other Makers who chose a lower tier, and in return the new Maker gains a slightly higher proportion of the Capital Pool relative to the others.
Choosing a risk tier which suits you is an important part of Bumper’s methodology, and as a Maker, you could select a tier which either maximises your potential gains, or further minimises your overall exposure to risk.
Bumper requires users who are opening either Maker or Taker positions to hold some unstaked BUMP tokens in their wallet to be used as a bond, with these tokens being locked (unable to be spent) until the position is closed.
This prevents a sudden huge amount of inflow causing the system to become unbalanced on one side or the other.
It also de-incentives equally sudden outflows of users withdrawing or closing their positions early, as to do so would result in them forfeiting their bond.
This makes BUMP a true utility token, creating regular demand, and reducing its susceptibility to the sort of high-frequency trading that is widely seen across the market. This is good for everyone who is a BUMP token holder.
There are other great reasons to hold the BUMP token too, not least is that token holders have gain governance rights, granting them the ability to raise, and vote on, Bumper Improvement Proposals (BIPs).
Bumper also occasionally pays incentives to participants in certain circumstances. These incentives are based on the amount of BUMP tokens which are bonded to open positions, and are automatically calculated when positions are opened, and issued on close.
Incentives are weighted towards those users who have been BUMP token holders for the longest time, thus encouraging crypto enthusiasts to buy and hold the protocols’ native BUMP tokens.
Whilst Bumper is accessible to all and extremely simple to use, there are a few very interesting nuances baked into the protocol that allow yield-seekers to tailor a strategy suited towards their own risk-reward appetite.
Bumper isn’t just a way to earn yield, it’s also a value-added tool which is attractive to prospective users because it actually solves real-world problems for crypto enthusiasts.
This is why DeFi exists, and novel and innovative financial tools such as Bumper are the reason that so many crypto enthusiasts are drawn to Decentralised Finance in the first place.
Want to get a run down of what makes earning a yield with Bumper so attractive? Check out this article.
If you’d like to ask questions, we encourage you to join in with our community, and for those who want to get a few more of the technical deets into the Bumper protocol, we recommend reading our Litepaper.
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