How to earn an additional yield on REX: BUCK Protocol Guide to Insurance Pooling
BUCK is a money market protocol that connects multiple independent agents to produce a blockchain credit facility, an insurance pooling mechanism and an interest-bearing commodity-backed stable cryptocurrency. Built on the EOS blockchain, the protocol is permissionless, transparent and free to use.
Out of 3 main use case, BUCK Protocol can be used for Insurance Pooling. It allows individual agents (further on: insurers) to receive passive income on their EOS (REX) and presents them with arbitrage opportunities.
In this article, we will explore how Insurance Pooling works and how to become an insurer of the protocol via Scatter.
How it works
Debt
To understand how insurance works, one has to grasp how debt in BUCK Protocol works. A similar guide on debtors may be a good wrap-up.
Essentially, debtors bring $BUCK into existence by locking EOS as collateral into the contract. In this way, $BUCK gets minted and every $BUCK is overcollateralized at a rate at least equal to Collateral Requirement.
Insurance
When the amount of collateral locked and debt owed by some debtor goes below Collateral Requirement (which happens when EOS/USD declines), part of the debt and collateral gets transferred to the insurer at a discounted price. The maximum amount of debt received is determined by the insurer beforehand by specifying Insurance Collateral Ratio. ICR can be changed at any time.
The amount of debt received is guaranteed to be not greater than the following formula. The amount of collateral received is such that the USD value of EOS collateral received is LF times more than the USD value of debt received. (e.g. if EOS/USD = 5 and LF = 10%, then for every $BUCK of debt received, insurers gets 0.22 EOS). This presents insurers with an immediate arbitrage opportunity, which if they realize, gives them an immediate profit of 10%.
Example
Suppose EOS/USD = 5. Suppose I have an insurance position with ICR = 300% and 100 EOS collateral locked. Suppose LF = 10%. Suppose EOS price declines so that EOS/USD = 4. Suppose I’m chosen for liquidation. Suppose I receive the maximum possible amount of debt (given my ICR), which is
Debt Received = ((100*4)-0)/(300%-100%-10%) = 210.5 $BUCK
Collateral Received = 210.5 / 4 * (100%+10%) = 57.9 EOS
In this way, I become a debtor. My DCR is 157.9 * 4 / 210.5 = 300%, which is exactly what was specified by ICR.
To stop being a debtor and make a profit, I buy 210.5 $BUCK for 52.6 EOS, send $BUCK to the contract, which gets burned and unlocks my new collateral of 100 EOS + 57.9 EOS. In this way, I have made 57.9–52.6 = 5.3 EOS or 5.3% profit on my initial deposit.
Passive income
In addition to the profit made by arbitrage, liquidators also receive passive income. The amount of passive income is a function of:
- ICR and Collateral
- Interest Rate and Insurance Ratio
- How much $BUCK there is in circulation
- How many insurance funds there is and what ICRs they have
Example
Suppose EOS/USD = 5 . Suppose I have 100 EOS as Collateral with ICR = 400%. Suppose Interest Rate = 9.5% and Insurance Ratio = 20%. Suppose there is 100k $BUCK in circulation. Suppose there’s 50000 EOS of collateral in insurance, such that total value of Collateral/ICR is 12500
Then my annualized return will be: (100/4)/12500*(100k * 9.5% * 20%) /5 = 0.76 EOS or 0.76% return on my deposit.
Who should use BUCK Protocol for Insurance Pooling?
Anyone who thinks that EOS/USD will grow in the long term.
Scatter How-to-Use Guide
Opening insurance CDP
Go to https://scruge.world/buck
- First, one has to login with Scatter.
2. Then, one has to deposit EOS into the contract.
The system will automatically convert deposited EOS into REX.
3. After that, one has to open an insurance CDP:
In this case, I’m opening insurance(DCR = 0) CDP with collateral of 50 EOS and ICR = 300%
Arbitrage
After some time, you may be chosen for liquidation. Note from this point on, you are considered a debtor. To stop being a debtor and avoid paying interest on the debt and move back to receive the insurer’s passive income, you will have to repay debt.
In the example above, you would need to have ~15.25 $BUCK to close CDP. If you don’t have enough $BUCK in your balance, you would have to buy $BUCK from other exchanges that listed $BUCK or directly from the contract. To buy $BUCK from the contract, you would need to sell some EOS.
Trade will be executed after the update of the oracle at the new price (the Oracle updates every 10 minutes). Before a trade is requested, EOS is withdrawn from your balance, so you would need to have enough EOS on your balance. Trade can only be executed if there’s somebody else willing to buy $BUCK, so in case of lack of liquidity, trade can take more than 10 minutes.
FAQ
What about REX?
All the collateral is stored in REX. The yield on REX belongs solely to the insurer. REX yield is realised when withdrawing funds from the contract.
Is there any delay on withdrawing EOS from the contract?
There’s a 5-day delay from the moment of depositing EOS into the contract. The delay is due to the maturity of REX. Insurance positions can be closed/reparametrized at any time.
How can I be sure that nobody is using my EOS collateral?
EOS collateral is stored on-chain and can be monitored in any block explorer.
How safe is it to use the contract?
The contract has been independently implemented in different programming languages and checked against the formal specification via random tests. Possible attack scenarios have been explored and corrected for. With that being said, the interface is the major possible security threat, so it is strongly advised to view Scatter transactions before signing them.
What is the optimal ratio of ICR?
It strongly depends on an individual’s risk preferences and EOS/USD projections. We would advise ICR of at least 250%.
Who determines EOS/USD price?
The price is determined by the Oracle. The price gets updated at least every 10 minutes. The Oracle is controlled by the founding team. The founding team doesn’t benefit from liquidations, therefore there are no incentives for us to disturb the price. The Oracle takes the price of BTC/USD, EOS/USD and BTC/EOS from the major exchanges and takes the median price of EOS/USD. Please note that we don’t include any Tether pairings.
Who determines the Interest Rate?
The Interest Rate is determined by the Founding Team based on the market conditions. In the first month of launch (until July) Interest Rate can be increased or decreased within 3-day notice. Starting from July, Interest Rate will be set for a period of month with the only possibility of reducing the Interest Rate (meaning that Interest Rate can’t be increased until October ).
