About the Bumper protocol's pool - Balancing crypto price protection and yield generation
Bumper is a DeFi protocol providing alternative crypto price risk markets. It uses a novel architecture that differs significantly from Options desks and Spot trading exchanges.
As Bumper’s architecture is quite complex, in this article we will explore the basics of how Bumper’s pools function, without getting overly technical.
If you haven’t read up on Bumper’s core value proposition yet, we strongly recommend reading the flashpaper for a brief overview of what Bumper does and how it functions.
Overview
Many DeFi protocols structures employ a pair of pools, with each being the repository for a single digital asset or token.
Bumper uses a similar structure, but with the addition of two additional pools for each token type, making a total of four pools (or as we call it, a quadrature of pools).
In the Bumper ecosystem, all user interactions take place between a user and a pool with no direct interaction between individuals. The manner in which these pools interact with one another is key to how Bumper maintains its liquidity levels at all times.
These four pools are:
- The Asset Pool
- The Asset Reserve Pool
- The Capital Pool
- The Capital Reserve Pool
Each asset type features two pools, and it is worth imagining each pool as a bucket into which different crypto’s are placed. Sometimes, different assets are moved between the pools internally, without needing to perform lots of buy or sell operations on external exchanges.
The Asset Pool and Asset Reserve contain the same cryptocurrencies (for example ETH), while the Capital Pool and Capital Reserve contain stablecoins (e.g. USDC).
Bumper’s key job is ensuring that the pools are always in a healthy and solvent state, so that individual Makers and Takers withdrawals are settled without delay.
Each pool is managed automatically by the protocol’s smart contracts, with no 3rd party human intervention, and can be recalibrated to match a range of price volatility scenarios by governance decision.
Let’s dive in and take a look at each.
Asset Pool
When a Taker (that is, someone seeking protection from downside volatility) enters, they deposit their crypto asset into the appropriate Asset pool. In return, they are given a “Bumpered asset” which represents their position in the pool. For example, if they deposit ETH, this goes into the ETH Asset Pool.
When a Taker closes their position, if the price of their protected asset is equal to or above their chosen floor, they withdraw from the Asset Pool - in other words, they get their original tokens back, minus the premium.
Otherwise, if they close below the floor, they claim USDC from the Capital Pool, leaving their originally deposited assets behind in the asset pool.
Either way, they return their Bumpered asset token(s) to the protocol, and this is burned as it no longer represents a position in the protocol.
Asset Reserve Pool
Every so often, under certain conditions, tokens which are held in the Asset Pool are transferred into the Asset Reserve pool. The tokens which are shifted account for only those which are collectible, in other words, the premiums which have been charged to the Takers, and the assets which have been left behind in the protocol by Takers who have claimed USDC.
Assets which are captured by and shifted into the Asset Reserve Pool represents a potential income to Makers as long as all of the protocol’s ratios are within range of their target. In this case, surplus crypto in this pool is manifest into the Capital Pool over time via liquidation into stablecoins.
Capital Pool
The Capital Pool is the main store of stablecoins into which Makers deposit when they open a position.
Takers whose positions close beneath their floor claim from this pool, as do Makers who are withdrawing.
Capital Reserve Pool
The Capital Reserve Pool is a secondary, virtual store of stablecoins which is employed to assist the protocol in managing price volatility.
Stablecoins are deposited into the Capital Reserve Pool over time when crypto captured by the asset pool is liquidated.
This pool can also be employed in several shortfall scenarios, including satisfying Taker and Maker USDC claims if required.
How Bumpers’ pools exchange value The balance of each pool is determined by the existing state of the pool, current asset prices, and interactions by users which either increase or reduce the balance in a specific pool.
This means not only are deposits pooled, but so are premiums, and by extension, yields.
For example, premiums are not charged to individual Takers directly, but to the Asset pool as a whole, and at the end of a Takers term, their individual share of the accumulated premiums levied by the pool is deducted from the claimable amount they can withdraw from the protocol.
On the other side, Makers take their proportional share of the Capital Pool with them once they withdraw from the protocol. Earned yields or potential impermant losses are spread across the pool, with the final calculation of the amount they withdraw on closing their position based on their initial deposit size, the current state of the pool and their chosen risk tier.
Furthermore, as users interact with a pool rather than being engaged in a direct zero-sum combative game against another user, this prioritises minimising individual losses over maximising individual profits. You can read more about this here.
Rebalancing
How Bumper rebalances can get pretty complicated, and for those who want to learn more about how Bumper’s rebalancing works, we highly recommend reading the Litepaper, but here are the basics:
Bumper shifts assets and stablecoins between pools and reserve pools under specific circumstances, with each pool having a unique set of rules governing when tokens may be transferred to another pool.
Thus, rather than constantly exchanging assets to and from different currencies, Bumper’s rebalancing mechanism minimises slippage and gas fees, whilst ensuring the internal solvency and health of the protocol.
Each pool has a primary function and an “expected” or default use for the tokens within the pool, but in the case of extreme system stress, the different pools have both secondary and tertiary uses (see table below), essentially providing a short-term backstop in the event of extraordinarily high volatility or low liquidity.
Balancing each pool is crucial to the way in which the protocol operates, and monitoring and responding to liabilities is core to Bumper’s architecture.
Pools for additional assets
As new crypto assets (such as Algorand, Wrapped Bitcoin etc) are added to the Bumper protocol for protection, a new market (quadrature of pools) is established for each asset-stablecoin pair.
This ensures that one specific asset does not affect the operation of the system with regards to another asset, and essentially means that Bumper has the ability to provide protection for a wide range of cryptocurrencies, and the potential for other novel financial products and services to be developed alongside the protocol.
Summary
Although most users will likely be unconcerned with the intricacies of how Bumper works, it is worthwhile having a basic understanding of at least why the protocol uses such an architecture, and the underlying benefits of such a design.
The quadrature of pools employed by Bumper maximises capital efficiency and minimises the cost of swapping assets on chain, including spread, slippage, and the requirement for any user intervention, and thus supports the decentralised “DeFi-not-CeFi” nature of the protocol. This design (or, as our CTO might say,
“maximum practical decentralised automation”) is key to the Bumper philosophy.
And most importantly, whilst complex under the hood, Bumper’s pools are ultimately designed to ensure the smooth operation of the protocol, with specific regards to solvency, the security of user funds, and to maintain a balanced and well-functioning system at all times.
If you’re one of those who wants more techie info about it, we recommend jumping right in and reading the Litepaper, but you are also welcome to join us in our Discord and ask questions too!