When it comes to trading cryptocurrency, risk management is of utmost importance. Wide price swings can make or break asset holders at any turn.
There’s an overarching need for a much better way for DeFi users to go about hedging against potential asset loss in a price dip situation. In retrospect, the current attempts at stop losses on DEXs are nothing but a copycat of the CEX situation (stop limit, trailing stop orders), which are a huge mess at times and ladened with the same risks obtainable on CEXs.
Over two years ago, Bumper set out to revolutionise risk management for cryptocurrency users and introduce an innovative DeFi hedging solution.
How Bumper intends to do this is something worth looking into! Stay glued to the next paragraphs as we cross-examine the situation (problem) in conjunction with Bumper’s approach to keeping on-chain traders safe from unprecedented volatility et.al.
Bumpering your asset is akin to setting a stop loss on your portfolio without all the extra “annoying stuff”.
Ah, the familiar frustration experienced by countless seasoned traders when they meticulously set a stop loss order on a trade, only to be later greeted with the disheartening realization that their order remained untouched, leaving them to bear the weight of unexpected losses. And it doesn’t end there, using stop-sell orders leads to unintended losses especially when an asset is sold before the market goes the opposite direction, as well as the fees incurred from setting stop-loss orders — yeah! All of the above make up the annoying stuff.
Upon further reflection, why would anyone want to go through that anyway? Not at this moment when the sensible move is to shift gears towards trading on DEXs as opposed to CEXs. GMX's success story as well as the current proliferation of DEXs on Arbitrum and other L2s serve as undeniable evidence for any trader to make that decision to transition to DEXs.
So what could still be the spike in the pit between the divide?
The answer is not far-fetched! For more traders to make the switch, the risks that exist in trading assets need to be tackled. These risks range from censorship risks via centralized exchanges, mechanics that endear emotional trading, failure of orders to execute, and losses incurred from inherent crypto volatility.
Both crude and refined attempts have been made to curb downside volatility and asset loss through manual trading (not efficient - people have to sleep), Stop losses as we’ve mentioned earlier (not efficient - they can cause lots of unintended consequences, eg if the stop loss is triggered, then price rebounds), and Put options (very complex to use, especially for noobs). While they all have their downsides, it doesn’t make them totally inefficient.
Nonetheless, what crypto users truly need and deserve is a unique approach specifically designed to protect their assets against downside volatility while still adhering to the core values of crypto in terms of decentralization.
Bumpering your asset - The solution
Bumper introduces a novel approach to risk management for those interested in hedging against losses, combining elements from two of the aforementioned attempts i.e., Stop loss and Put options. This fresh perspective creates a unique construct to risk management for crypto assets with two (2) key actors: The Users that seek to protect their assets and the Users attempting to earn, playing a major role.
You can picture the protective users as those willing to hedge against a drop in the price of the assets they hold, while the earners are those who ensure that the process of hedging against losses works in order to earn yields.
Bumper’s solution helps users protect the value of cryptocurrencies like Ether and wrapped Bitcoin (wBTC) by holding deposits of a volatile token for a certain period. These deposits are pooled and generate a regular premium.
One way to think of this is like ‘buying into an insurance pool’ to protect the value of your crypto assets against volatility-pulled losses.
These premiums, once collected, are used to encourage deposits of a stable token into a separate pool, so the stable token supports the value of the volatile token. (Picture the US dollar tied to gold before 1970 and you’d have a pretty good idea of how this works.)
To properly understand how Bumpering an asset works, let’s look at the two elements mentioned earlier — users looking to Protect or Earn.
User Dynamics — Protection seekers and Earners
A protection seeker is a person who takes a price protection position in the protocol by contributing to the deposit pool. These users can make a claim for asset protection when the value of the supported cryptocurrency falls below their floor price and receive compensation as stable tokens. However, the original protected asset remains in the system.
As the protection-seeking user selects the time frame for which they intend to hedge their assets, they’re issued a synthetic Bumpered asset “bETH” in return. This asset is protected from downside volatility and risks and is also composable such that it can be used in different protocols.
The user’s (protection seeker) deposited asset is locked within the Bumper protocol for the set time frame(term). At the end of this time frame, two plausible outcomes exist:
- The asset is equal to or greater than the floor (the user’s selected protection price). In this case, the protected user retains their asset and can go about their day.
- The asset is below the floor. In this case, the protected user receives a stablecoin (USDC) equivalent to the floor price and goes about their day, while the decreased asset stays with Bumper.
This is basically a no-loss situation for the protected user and oh boy! Do the advantages abound!
If you're a DeFi maxi you can potentially see the benefits of playing around protocols with a synthetic token protected from the lows. The depositor is not only protected from negative price fluctuations but the possibility of yield generation without asset loss is also quite exciting. Specifically when it comes to providing liquidity using the bumpered asset; capital efficiency is achievable, and the risk of impermanent loss is reduced, as the underlying asset (in this case bETH) is protected from volatility. In turn, bumpered asset pairs can and will encourage liquidity in-flow into protocols with such pools integrated.
Earners or users seeking to earn, on the other hand, provide stablecoin in the system to profit (earn yields) from the negative price changes of the supported cryptocurrency. These users basically buy the downside risk from the protection-seeking users who pay a premium once their protection position is closed.
However, the protected user can also decide to renew their position akin to technically toggling the time frame by extension, or close their position. In closing a position, should the price be above the protected floor at the time of close, such user is allowed to withdraw the protected asset from the asset pool minus premiums. Users protecting their assets can also lay claim to their protection minus premiums at the end of the protection term, and withdraw ETH or USDC or both from the capital pool when the price of the protected asset is below floor.
Bumper is a decentralized and autonomous protocol open to everyone including arbitrageurs. To participate in its cryptocurrency market functions and community governance, users need to lock Bumper’s native token $BUMP in the system.
Having reviewed a really long list of protocols through the bear market, one thing is quite clear: only a few of these protocols take the R&D phase seriously. And although a lot of them might claim to do so, they don’t usually see it as important as it should be.
Bumper, on the other hand, understands the importance of stress-testing the system especially when it’s a completely innovative one. The goal behind the simulation procedure is to simulate how Bumper would perform against real historical price action and in various different market scenarios.
According to the team, effectively it was the 'crash test' for the protocol and served to provide evidence that Bumper was highly price efficient for Protection side, delivered better yields on average for those on the Earn side, and remained fully solvent in all situations.
One of the scenarios we found interesting and one that you could also possibly find interesting is the fact that during the crypto bear market, in 2022, while you and I were most likely “memeing” about how down our bags were, letting out slight sobs at every chance, we could’ve been on the other side of the room using the “I told you to Bumper your ETH” phrase to mug other affected people to death. Friends, we could’ve been 30% better off.
Another surprise (for us, maybe not for Bumper), is in the benchmark pricing when compared to traditional Put options. A Bumpered position was placed side by side with the Put Options equivalent using the Black-scholes model —calculating the protected position’s term and floor as against Put option term and strike, with a fixed interest rate of 5%. The result? Bumpered positions paid less premia when compared to the traditional Put option.
The Bumper simulation is a resource that assesses the protocol's economic performance by using real market data from previous years.
It compares previous data with different models and existing competing products in the market using digital agents and backtesting with the end goal of determining whether Bumper could operate in a dynamic environment while still meeting its economic objectives.
Bumper v1 will allow users to Bumper their assets (asset protection) as well as earn competitive yields from depositing stablecoin. In due course, other features will be added.
Bumper version 1.0 code-named “Auryn” will launch sometime in August 2023 on Ethereum.
Already, Bumper’s extensive economic simulations have yielded promising results, showing the protocol to be a viable, competitive, and simple alternative to options trading for hedging risk in the highly volatile cryptocurrency market.
Bumper opens the door to a multitude of possibilities in DeFi. The key, however, would be integrating Bumper tokens into other protocols unlocking capital efficiency amongst other things.
However, it’ll be interesting to see how Bumper performs both as a protocol where asset holders can Bumper their assets against risks and as a protocol attractive to competitive yield seekers.
As Digital MOB’s Chief Innovation Officer, Bogdan Gheorghe, puts it, “ . . . Bumper is one of the few projects tackling this crucial issue with the necessary seriousness."
We couldn't agree more.