Before we get started, the Amulet team would like to express their immense sympathy towards those affected by this week’s turn of events regarding the crash of $LUNA, the $UST depeg and the wider effect this has on the Web3 ecosystem.
Our goal is to draw core learnings from this event and think for the future, identifying how Amulet and its offering can benefit the whole of Web3.
What’s happened?
As many of you have been aware, there has been a crisis within the crypto community when $UST, Terra’s stablecoin, depegged from the US Dollar ($USD).
Stablecoins are designed to maintain their value with a fiat currency. Tether ($USDT), Circle USD ($USDC) are 2 of many famous examples of stablecoins pegged with $USD.
$UST is a little bit different. Most stablecoins maintain their peg because the issuers back up the value of their coins using asset reserves. Until earlier this year, Terra’s $UST did not have an asset reserve, but rather functioned as an algorithmic stablecoin – holding its value based on an on-chain algorithm that automatically strikes a balance between the stablecoin and another partner coin that props them up, which is $LUNA in this case.
Recent market events have caused $UST to depeg from $USD. As an algorithmic stablecoin, the partner coin for $UST is $LUNA. Broadly speaking, $LUNA is meant to be a shock absorber for the price of $UST. The depeg event occurred at a time when the industry has many new innovations brought by decentralized finance (DeFi) and uncertainties in the wider financial macros.
What’s this got to do with risk protection/cover options?
There are a variety of DeFi risk protection protocols out there that offer “Stablecoin Depeg cover,” a solution to protect your stablecoin assets against a depeg situation. Various DeFi providers offer De-Peg cover for $UST.
The next few days are going to be turbulent for these risk protection protocols as they wait to find out whether $UST can regain its peg. Should the situation remain the same or worsen, these risk protection protocols may face large pay-outs.
As with everyone, we hope that everything recovers incredibly quickly and that this incident doesn’t escalate further.
One of the reasons that other cover providers face the prospect of this challenging pay-out is due to the way they are set up. These pay-outs will have to come from underwriting reserves, made up by users’ staked funds in the protocol. Should there be a valid claim, these DeFi cover protocols face a dilemma:
- Pay out on claims and cause potential backlash from staking users disappointed that their capital has gone.
- Don’t pay out and lose all trust and credibility with policy holders, losing future users and as a result, unsustainable business models.
Amulet is different.
It was this scenario that we feared might happen that caused us to build Amulet in the first place in a different model.
Other cover protocols currently rent underwriting capacities from staking users via incentive programs. Therefore, there is potential for them to face the dilemma mentioned above.
Amulet is being built using its unique PCUV (Protocol Controlled Underwriting Value) model which is a more sustainable and scalable alternative. To minimize the loss of staked capital in the event of claim pay-outs, PCUV brings together a Yield Back Claims Pool, a treasury and other reserve layers.
This means that the structure that Amulet is being built on creates a multi-layered safety barrier around staked capital should there be any claims.
With a lower fear of loss and greater reserves to pay from, Amulet would be well-positioned to absorb losses during the recent $UST depeg. We know claim pay-outs are inevitable. The legitimacy of a cover operation in both TradFi and DeFi worlds is judged by its ability to stay solvent in extreme events. Amulet’s unique offering minimizes the effects on our users and the protocol itself. This is not the case in comparison with other DeFi cover protocols when the time to claim eventually comes knocking.
To understand more about PCUV and Amulet, please refer to our Litepaper: https://files.amulet.org/public/AmuletLitepaper.pdf
Once again, we want to reiterate our condolences to anyone who has been affected by the current plight. We’re trying to build simple, reliable cover protections for our global Web3 family.
If this sounds like an interesting problem that you’d like to solve, hop into our Discord, and join the cause. Be part of the Amu-nation.
Once again, stay safe and #WAGMI.