Downside Risk Protection in DeFi with Bumper
On this week’s episode of Meet the Founders, Jonathan DeCarteret, CEO of Bumper and his COO, Gareth Ward joined host, Gordon Paul to discuss the product they are building to solve the issue of price volatility for crypto traders. With retail investors coming into the…
On this week’s episode of Meet the Founders, Jonathan DeCarteret, CEO of Bumper and his COO, Gareth Ward joined host, Gordon Paul to discuss the product they are building to solve the issue of price volatility for crypto traders.
With retail investors coming into the DeFi markets, and the broader markets in general in droves, sophisticated tools for hedging exposure and mitigating risk are less understood. Where professional traders might utilise options strategies to protect downside risk to their underlying positions – effectively buying insurance – simplified solutions for the less educated audience are few and far between. Bumper aims to help tackle this problem by developing a socialised options marketplace for DeFi that emphasizes a simple UX for participants – whether it be makers or takers of protection. Jonathan and Gareth joined Paul Gordon to tell us more about their platform and roadmap.
(00:33) Jonathan graduated with a degree in artificial intelligence and spent his time after school starting, growing and exiting a succession of businesses. Most notable of these businesses was a company called Switch which grew to the UK’s 60th fastest-growing company. He’s been on a trajectory of switching sectors, starting with companies in the creative sector, to tech, and more specifically fintech and then eventually uncovered cryptocurrencies in 2016 and has since remained in the space.
Gareth has also spent the majority of his career in creative and technical roles and owned a couple of businesses in tandem. His call to crypto came when he started the duo’s previous company Index, before making a transition to start their new company, Bumper, a year ago.
Lessons from Index
(02:15) The story begins in 2017 when Gareth and Jonathan met as crypto traders in a time where the ecosystem was gaining mainstream attention and the Initial Coin Offering (ICO) craze was in a full burn.
While they were trying to navigate profit-making opportunities as traders away from the emotional roller coaster of volatile coins, they figured they could focus on emerging projects that could give them more stable passive income in a bid to diversify their portfolio.
Gareth, who is a fun of digging that the next rabbit hole to find where the next nexus of breakthrough was going to emerge put together a master node of assets that they could generate income from and Index, their first company was born.
(03:40) “Index was born out of creating an index of these passive income yield-bearing assets that we could assemble into a basket that would allow you to hold those and earn a passive income from,” Jonathan explained
Although Jonathan had had an impressive history of starting and exiting businesses, Index came with its unique issues; from managing a community, technical challenges, regulation issues, a constant bombardment of fighting fires they fought for three years.
Bumper’s story began in 2020 when Bareth and Jonathan began to see the meaningful emergence of DeFi.
(06:31) “… for us, this was the whole purpose we got into crypto; the notion that money is programmable, it can exist in an ecosystem with no counterparty risk, that you could structure financial instruments and
products in a super-efficient way were the reasons that we got into crypto in the first place and we managed to convince the stakeholders in the business that we really should be focusing on this area,” Jonathan explained.
The founders started by asking themselves if there was a way to solve the holy grail problem of volatility in the crypto markets.
(07:32) “..to protect yourself from volatility which has always been a big bug for us, your options are options desks, or you’re going to take a stop loss or hedge yourself with another asset class…none of those is particularly accessible. They’re not clear and easy to use and they’re not a cost-efficient way,” Jonathan stated.
Bumper presents a true and honest market that takes asset price risk, smashes it with a sledgehammer into a million pieces, distributes that risk among pulled liquidity, surrounds it all with cascading
mechanisms and backstops it with the potential reserve, Jonathan said.
The net result is a bulletproof protocol that can deal with any volatility that crypto can throw in, Jonathan added.
Bumper in Detail
(09:37) You may protect the stability of a crypto asset this way; you hedge the price at say a $1,000 and when the asset drops below that $1,000, you swap out of it into a stable coin, protect it, let it drop back further and then come back up before you purchase again. However, what happens is when it starts oscillating across that floor, you have a huge amount of slippage, a lot of trading fees and transaction costs.
A model would show that the more reactive you are (say taking such decisions every minute vs once a day), it becomes completely untenable. Bumper has been built as a far greater platform to solve for that slippage.
The schematic shows that there are two parts of the protocol; the unstable asset pool (for example ETH) and a stable reserve pool (like USDC). Then there are the “takers”; they’re the ones who take out a protection policy, they put in their asset (ETH for example) and they get a representative token back and they pay fees.
The fees head straight to the “makers” who are the liquidity providers that deposit stable coins and earn yields. Yields are earned in two different ways; premiums from the takers minus the protocol admin treasury fees, and the money in the reserve, minus the clip.
Instead of engaging the reactionary swap scenario detailed previously (because it doesn’t work), the protocol treats it more like an aggregated ledger.
(11:49) “It looks at the aggregated position in the pool, it has a bunch of ratios that it needs to look at between the pool and the reserve, liability asset to reserve ratios, the reserve to liability ratios, all kinds of different parameters that it looks at and they need to meet a minimum level. If that drops below any of those parameters, then effectively the protocol is out of balance and it kicks in a bunch of balancing mechanisms to bring that back in line. That means the reserve can meet any liability of the pool,” Gareth explained.
If the protocol is out of balance, a couple of steps are taken to rebalance it. One of such primary approaches is the fee yield. This is a first-order-dynamic incentive-based mechanism and this is essentially the premiums.
They are dynamic and they change based on a bunch of variables. That will increase the premiums that incentivize makers to come into the protocol because they can earn more yield and disincentivizes the asset for the takers.
Then there are the auxiliary mechanisms through which the contract
will be open to arbitrages to help rebalance the protocol. In the worst-case scenario, Bumper has the community permission to do a manual trade to rebalance the wheel.
Assuming there are instances where the deficit sitting in the reserve is not able to rebalance the protocol, the deficit is run through risk tranches supported by different makers with different risk upsides. The higher the risk, the higher the yield.
(13:41) If that does not rebalance the wheel, the prudential capital reserve (a cash reserve) is then used to back up the balance.
Which Crypto Assets Does Bumper Support?
(17:30) While the product would be launched with the counterbalancing pair of ETH and USDC, it is going to make room for any asset class.
(17:40) “The beauty of the Bumper is it is expandable to any asset class you throw into it. In release two, we’ll be expanding into Wrapped bitcoin, Rent Bitcoin, (the larger ERC20 tokens larger erc20 tokens on the unstable asset side) and then multi-denominated stable coins on the other side like USDC, USDT, DAI. I think there are some clever things we can do where the stable coins would all be in one massive pool to balance lots of little pools of unstable assets,” Jonathan said.
In release 3, there are possibilities of “bumpered” $COIN or $TSLA, stocks that have been tokenized with an added protection layer.
Plans for Regulation
(20:55) “We are planning for a regulated version of Bumper that would be accessible by institutions like Tesla that hold crypto on their treasury and have a fiduciary duty to take a hedge on them…There’s the idea that could tokenize your property, and bumper the price to protect is something that we can easily adapt to” Jonathan said.
(23:08) Bumper is looking to incorporate L2 solutions in its roadmap when the solution is more evolved and mature. According to Jonathan, Bumper raised 10miilion and rejected a further 32 million, after a 9-month scoping and design phase that thoroughly prepared them to pitch their product.
(25:38) On 8th June, the company will be delivering its first smart contract which will allow people to deposit USDC into the protocol to bootstrap it and will receive the bump token as a bonus reward for that liquidity. Also, only LPs that deposited will be eligible to partake in a pre-sale where they’ll be able to convert some of that USDC to the bump token at the pre-sale price. In mid-August, there will be a public sale, before the full protocol in its entirety is launched at the end of the month.
The second release which would come with benefits of interoperability of different asset classes would be delivered in the fourth quarter, Jonathan said.
Risks of DeFi
(27:16) The founders recognise two major risk factors socialized with DeFi especially as seen from the influence of the past year: hacking and regulation.
(30:36) “…regulation is there to protect consumers but more often than not
it prevents the consumer from participating in the opportunity. It drives the general financial opportunity into the hands of the few and DeFi
is a beautiful example of something that could allow the very opposite…regulation is not sensitive to that point,” Gareth noted.
Biggest Opportunities of the Industry
DeFi promises to eat traditional finance from the inside out and replicate it, said.
(32:59) “…if you look at things like Central bank digital currencies that could act as just a turbocharger to the DeFi ecosystem and all of a sudden you have huge amounts of traditional fiat money that is now compatible with DeFi, that is going to make the whole thing explode,” Jonathan said.
Gareth also anticipates a metaverse with a parallel financial system powered by DeFi is adopted to replace what we have now.
How to Get Involved
(34:14) The company’s website, bumper.fi hosts all the information one would need to participate in the product. It is almost looking forward to hiring hire level operations and social media personnel to his repertoire of engineering talents and.
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