BAKUP: Automated, Flexible, and Capital-Efficient Insurance Protocol for Decentralized Finance

TL;DR

BAKUP is a smart contract design that insures decentralized finance users against the vulnerability risks in third-party platforms and brings harmonization among three conflicting features: resilience against vulnerabilities, flexibility of the underwritten policies, and capital efficiency.

Abstract

This paper introduces BAKUP, a smart contract insurance design for decentralized finance users to mitigate risks arising from platform vulnerabilities. While providing automated claim payout, BAKUP utilizes a modular structure to harmonize three key features: the platform's resilience against vulnerabilities, the flexibility of underwritten policies, and capital efficiency. An immutable core module performs capital accounting while ensuring robustness against external vulnerabilities, a customizable oracle module enables the underwriting of novel policies, and an optional and peripheral yield module allows users to independently manage additional yield. The implementation incorporates binary conditional tokens that are tradable on automated market maker (AMM)-based exchanges. Finally, the paper examines specific liquidity provision strategies for the conditional tokens, demonstrating that a conservative strategy and parameterization can effectively reduce the divergence loss of liquidity providers by more than 47 % compared to a naive strategy in the worst-case scenario.

Figures (7)

• Figure 1: An illustration of interactions within the BakUp protocol.
• Figure 2: Interaction between user and core module.
• Figure 3: Flow of Trigger execution using Oracle module.
• Figure 4: A code snippet demonstrating oracle contract to detect de-pegging of stETH/ETH pair.
• Figure 5: Sequence of methods in the yield module with arrows indicating direction from caller to callee.