AMULET PROTOCOL
DeFi has experienced exponential growth since the summer of 2020 with the influx of hundreds of billions in capital and the emergence of multi-billion dollar protocols in just a little over two years. Riding this wave of explosive growth is a rapidly increasing demand for protection against blockchain risks. Crypto users often suffer losses from various threats, such as smart contract hacks, stablecoin de-pegs, market volatility, etc. In 2021 alone, $3B were lost to smart contract hacks. Among all available risk hedging tools, protection by way of cover has become the most prominent and effective approach to managing these risks. this is where the Amulet Protocol comes to play.
To begin with, what is Amulet Protocol?
Amulet Protocol is a decentralized risk protection protocol built for the Rust-based ecosystem, starting with the Solana blockchain. Amulet has designed an innovative and open risk protection model, which not only effectively addresses the common challenges of existing decentralized RPPs, but also creates a new paradigm shift for the whole risk management sector. Risk underwriting and claims lie at the core of any risk protection business. However, all existing decentralized finance (DeFi) RPPs have been facing a critical sustainability challenge for risk underwriting and claims. Amulet is creating the risk protection industry’s first Protocol-Controlled Reserves (PCR) approach in which Amulet will build up reserves and introduce a claim structure involving a unique Yield Backed Claim ("YBC") method. This is a significant change from the incumbent model of simply drawing directly on the underwriters' capital to make claim payouts. Amulet's vision is to offer simple, reliable cover for everyone in Web3. With the addition of Amulet, users in the entire Rust-based ecosystem will gain access to a new way to hedge various risks with cover product offerings.
Although Amulet has seen increased demand for cover products, less than 2% of overall DeFi TVL is currently covered. There is still a large void to be filled by RPPs. Despite Ethereum and its affiliated EVM (Ethereum Virtual Machine) ecosystems’ dominance in DeFi, other Rust-based public chains are rapidly maturing, spearheaded in particular by Solana. According to Amulet's research, TVL on Solana is growing 5x faster than Ethereum, and this growth is expected to be stronger given the distinctive strengths of Solana centered around its lower cost and higher throughput.
There are several notable impediments to existing decentralized RPPs growth and sustainability such as:
A. Capital and User Acquisition
RPPs are faced with a two-pronged problem of acquiring and retaining staked capital. There is inherent risk of losing principal while at the same time, intense competition for user capital across a high APY environment. Yield fluctuations alone can cause liquidity locusts to appear, causing many protocols to be at the mercy of stakers and forcing some to increase rewards just to retain staked capital. This does not appear to be a sustainable solution and could result in a debt spiral which becomes more and more difficult to get out of over time.
B. Network Building
Building up distribution channels to increase coverage and capacity while maintaining appropriate risk control is difficult. The importance of having strong networks cannot be stated strongly enough for RPPs. Their business and operating model is fundamentally that of a conduit for collective risk pooling and mutual aid. Oftentimes, having cover is an afterthought that occurs once a user or protocol has been rugged, hacked or somehow exploited even though these risks were known ahead of time. Investors and protocols that have cover can be liberated from some of these risks and delve deeper into their crypto journeys in a safe manner. Although it is an uphill battle, Amulet believes user education on proactive risk management to be a worthy endeavor.
C. Capital Management
In the event of catastrophic losses, underwriters might rush to withdraw funds to minimize the impact of such claims on their principal. While understandable from the underwriters’ perspective, this creates a potential threat to the protocol’s sustainability. Until the protocol reaches critical mass in funds (i.e. able to selfmanage payments for incoming claims with cover payments and associated investment earnings), that threat will remain omnipresent. This problem is further exacerbated by the lack of an effective risk management framework which makes it difficult to understand whether risks have been priced appropriately. Without effective capital management, protocol's run the risk of not having the necessary capital structure and allocations in place to guard against a "bank-run" on the protocol.
D. Claims Processing
It is difficult to ensure an impartial and efficient claim process while trying to align the interests of many different parties at the same time. For example, underwriters are incentivized to minimize payouts since they are paid based on the protocol's overall profitability (cover payments received less claims paid). However, claimants want to minimize cover payments and increase their potential payout. Satisfying these two parties already poses several challenges on top investor, community, and partner concerns, as well as the reputational challenges faced by RPPs in general. Apart from the common challenges listed above, the greatest challenge to existing DeFi RPPs lie in their underwriting and claim models. All existing RPPs have built their underwriting capacity by renting liquidity from underwriters and have been drawing claim payouts directly from them. This model of renting underwriting liquidity has several issues, chief of which is the question of the model's sustainability. Amulet intends to fix that.
BENEFITS OF THE AMULET PROTOCOL
1. Product Offerings
- Amulet plans to start with providing cover for smart contract vulnerability, stablecoin de-peg risk, custodian risk, and eventually expand to a much wider spectrum of different risk types such as default risk on lending protocols, NFT asset risk, price volatility risk, etc.
- In addition standalone cover products, Amulet will also customize cover bundles by wrapping two or more separate cover products or covered protocols in a single package deal, and provide portfolio-based coverage. This lowers costs, simplifies user experience, and broadens coverage for users.
- To help users with their cover purchase decisions, Amulet will be providing cover recommendations.Users will also have the flexibility of cancelling, renewing, or extending their cover.
- Amulet currently operates and builds on the Solana blockchain. In time and as its cover capacity and technologies develop, Amulet will extend its valuable suite of products and services to the growing userbase on other Rust-based blockchains (e.g. Cosmos).
2. Pricing Model
The risk protection business is an endeavor to hedge against uncertain future loss, in which the covered person trades risk with RPPs through payments for cover products. Product pricing is at the heart of any risk protection business and Amulet builds its pricing model based on proven practices and historical data.
- The aim of product pricing is to find and charge a fair, affordable, and competitive price for users. It should reflect the risks undertaken by the protocol and be quick to adapt to fast-changing risk settings. Amulet's pricing models enable it to get a fair estimate on expected losses, reduce costs for users, and enhance the protocol's long term viability. Amulet's pricing models take a multi-faceted approach when determining risk. For example, its Smart Contract Cover uses audit reports, operational history, team info, etc. to generate a base rating for a protocol. The base rating, along with protocol APY and supply-demand factors, will be used to determine a cover product's price. Supply and demand is typically measured via a bonding curve between price and cover capacity. Basically the more capacity available, the lower the cover product's price and vice-versa.
- Stablecoin De-peg Cover rely on economic simulations of historical data to test and identify the initial limits of the cover product, followed by further refinement through the incorporation of data from current market indicators and forward-looking assumptions. Amulet will carefully select and define these limits at the start, then constantly refine the product as it receives new information.
- As more and more data becomes available, Amulet will be able to develop and fine tune increasingly sophisticated data-driven pricing models with the help of Machine Learning technology. Amulet Litepaper.
3 Cover Acceleration Program
In order to bootstrap underwriting capacity for certain products and generate higher returns for underwriters, Amulet's Cover Acceleration Program (CAP) will engage with covered protocols' teams to accelerate cover adoption.
For example, when smart contract cover is launched for Protocol A, its initial price may be high due to limited capacity as underwriters may not have as strong an incentive to back the risk versus older cover products. Protocol A can incentivize underwriters with its native tokens or other rewards and additionally $AMT rewards jointly sponsored with Amulet. This helps to increase Amulet's cover capacity and reduce costs for cover purchaser while underwriters earn more rewards. Additionally, pool rewards allocated by Protocol A may serve as an additional buffer against claim payouts.
The CAP will initially apply to Smart Contract Cover before expanding to other cover products on Amulet. As Amulet sees it, everyone stands to benefit from the CAP. Users have access to more options for risk protection, protocols are able to attract more users, underwriters safely earn rewards on their principal, and Amulet is able to extend and expand its product offerings to more users.
Note: Users who lock their $AMT tokens with Amulet potentially accumulate significantly higher rewards than if they had simply staked for base rewards. Amulet also plans to accrue more value back to $AMT token holders and price by executing buyback operations, using treasury funds to purchase $AMT on open markets and re-distribute them back to $AMT stakers and lockers. Hence, with the value of $AMT rewards being tied directly to the protocol's performance over time, long term members who hold the most $AMT tokens benefit the most from Amulet's investments and core revenue stream.
Conclusion The risk protection sector, although a seemingly niche area, is critical to the safe and robust development of DeFi, much like how insurance or other modes of financial protection has been responsible for the massive growth of commerce into the global behemoth that we have today. Knowing risk protection needs have been met and potential risks mitigated is key to unlocking DeFi's global userbase and develop safetyminded DeFi.
How to learn more about Amulet protocol.
The best way to follow Amulet is by joining their Discord and following their Twitter to get updates on their product design and development, and also further detail on their roadmap.
Meanwhile, here is their litepaper for your perusal:
https://files.amulet.org/public/AmuletLitepaper.pdf
The core team will be present and all announcements will be released to their community first!
you can Join any of their social media networks below:
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