Compared to Nexus Mutual, the implementation path of Cover Protocol (referred to as Cover) is more "geeky". It uses the mechanism of "prediction markets" to determine the pricing of insurance.
The mechanism of "prediction markets" can be seen as a gamble: for a future event, there are two possibilities - it will happen or it won't. If the market expects the probability of both outcomes to be 50%, then participant A and participant B each contribute 0.5 USD, making a total of 1 USD in the pool. When the outcome of the event is determined, the person who predicted correctly takes the 1 USD from the pool. If the probability of one outcome is relatively high, for example, the probability of it happening is 20% and the probability of it not happening is 80%, then A would contribute 0.2 USD and B would contribute 0.8 USD, and the winner takes 1 USD.
In Cover, the pricing of insurance is determined by the mechanism of prediction markets. For each insurance target, anyone can mint covTokens by collateralizing DAI. covTokens are divided into two types - CLAIM and NOCLAIM. The former represents the right to withdraw collateral after a risk event occurs, while the latter represents the right to withdraw collateral if the risk event does not occur. They are always minted in equal pairs.
For example, an insurance target could be "Loss caused by a protocol vulnerability or economic loophole in the 88mph protocol within six months". You can collateralize 1000 DAI and mint 1000 CLAIM tokens and 1000 NOCLAIM tokens for this insurance target. If you do nothing after minting, you can definitely retrieve 1000 DAI after six months because your tokens already encompass all possibilities, regardless of whether the risk event occurs or not. If you are the coverage seeker, you can sell NOCLAIM tokens on the market and keep only the CLAIM tokens. If the market consensus is a 95% probability that the risk event will not occur, then the price of each NOCLAIM token would be 0.95 DAI. Selling 1000 NOCLAIM tokens would earn you 950 DAI, making your insurance premium rate 5%. When the risk event does not occur, your 1000 CLAIM tokens cannot withdraw the collateral of 1000 DAI, but the counterparty who purchased 1000 NOCLAIM tokens with 950 DAI has the right to withdraw 1000 DAI. The 50 DAI insurance premium serves as income for the seller. If you are the insurance seller, you can mint CLAIM tokens and sell them while keeping the NOCLAIM tokens. This way, you can earn 50 DAI initially and retrieve the collateral of 1000 DAI after the insurance period ends and the risk event does not occur.
In this case, insurance is entirely determined by the market, where covToken minters provide the asset scale of insurance, and the insurance cost is determined by the market prices of CLAIM and NOCLAIM. The entire process has no entry barriers, and anyone can interact with the contract.
The claim application mechanism in Cover requires the involvement of an arbitration organization. First, the claimant needs to fill out the materials and pay a fee (e.g., 50 DAI), which will be refunded once the claim application is approved. After the report is submitted, it will go through community voting. Once the voting is approved, the Claim Validity Community (CVC), composed of professional contract auditors, will determine the authenticity of the risk event and the proportion of losses to decide the compensation result. Claimants who dispute the result can pay a higher fee to skip the community voting process and directly enter the committee arbitration stage.
Cover V2 protocol added the mechanism of insurance leverage, which achieved the function of covering multiple insurance targets with a single insurance payout by issuing multiple types of CLAIM tokens for one insurance target, similar to Nexus Mutual.
The comparison between Cover Protocol and Nexus Mutual is shown in the table below.
Due to the departure of core developers, the Cover protocol eventually ceased operations in the summer of 2021.
For the insurance sector, most users of the protocol are not actually policyholders, but rather come for the liquidity mining profits based on the protocol. In this sector, we see the same problem as with 88mph, where market participants are still high-risk users and are not sensitive to the risks of the protocol.