Introducing Payaso
An insurance protocol to protect against asset price volatility
The advent of AMMs (Automated Market Makers) allows individuals to act as a trading medium on the chain — providing liquidity or trading directly and swapping roles after a reversal of returns. It is fundamentally reversing the way centralized exchanges profited by monopolizing liquidity to generate profits.
As the market evolved, more SWAP products bring up with more derivatives. More attractive APYs (annualized returns) emerged, making liquidity mining a high-yielding chain asset strategy, but the boom has always been risky.
Under the AMMs regime, traders tend to have an informational advantage over liquidity providers. When the market is stable, liquidity providers can make substantial gains from APY subsidies. Still, when the market signals unilateral volatility, traders can often make decisions and act more quickly. In contrast, liquidity providers may suffer unlimited losses — including multi-token exposures, impermanent loss, and the possibility of drying up the liquidity triggered by systemic risk.
Let me take two examples:
Mike held 1000 USDT assets into the Uniswap LINK/USDT liquidity pool to provide liquidity at the end of 2019. 8 months later, the LINK price had risen by nearly 1000%, but Mike’s return had fallen by 44.72% due to providing liquidity.
Peter entered the same 1000 USDT assets into the LINK/USDT Uniswap liquidity pool in August 2020. A month later, the LINK price fell by 42%, and Peter ended up losing -38.4% of his assets.
Peter and Mike are passively exposed to multiple token exposures and impermanent loss compared to token holding or unilateral traders, not including traders’ risk of emptying their liquidity pools if LINK drops significantly.
I really like the openness and transparency of AMM, but we still need to think about many issues:
For example, in the case of gains don cover losses, how to continue to retain liquidity providers? If extreme market conditions occur, how can liquidity providers make faster decisions and actions? Should a purely open market need an insurance product to reverse hedge in addition to speculation?
In the past few years, I have mitigated the risks caused by market volatility through derivative transactions numerous times. Now I want to apply that experience to solving the problem of on-chain assets.
Insuring liquid assets
Unlike other insurance products you may have used, PAYASO does not solve the problem of “code attack risk” but instead reduces the risk of asset price fluctuations. PAYASO is a platform insurance protocol between the insurer and the liquidator.
On the platform, the insurer and the liquidator can issue a contract for the “price” (the percentage of stable currency exchanged) of the covered assets at a certain point in time, the liquidator issues a policy by pledging stable currency assets, and the policyholder pays a premium to the liquidator to complete the issuance of the policy. During the term of the policy, the insurer can choose to “step out” at any time to acquire the corresponding stable currency assets at the insurance price, to hedge the value of the assets it holds on the chain and reduce the potential risk of asset loss arising from liquidity or other chain activities.
The operational flow would be as follows.
PAYA
PAYA is the payment and governance token of the PAYASO platform and is generated primarily by rewarding liquidity providers and traders of insurance policies (insurers and liquidators).PAYA is the only token used by insurers to purchase insurance and can be staked to earn the platform’s fee (0.2%) reward. In our roadmap, the PAYASO team determines the types of insurance supported for the first generation of the product, but as PAYA tokens are created, it is up to the PAYA holders to vote on the types of insurance that will be launched.
Rules of the game for liquidators.
1. Preferably you want to select the date the subject matter is covered and the premium you want to charge.
2. Stakesufficient funds to cover the insurer’s cost of funds (stable currency) as a provision.
3. After the buyer pays the premium to take out insurance, the insurer must take insurance on the insurance’s due date. The provision (insurance guarantee amount) will be frozen by the contract automatically.
If the insured person is insured.
1. The liquidator will obtain the subject matter of the insurance in exchange for the cash.
2. If the buyer chooses to waive the policy, the liquidator’s obligation lapses, and the allowance is automatically unlocked (the amount of the insurance guarantee)
Being a liquidator can be rewarded with premiums, market premiums, and platform coins. Still, there are risks, such as wait times for on-chain trades- a problem in all trading scenarios. There are ways for liquidators to avoid the risk: a qualified Trader. “Time” is all within the cost of time calculation, for example, by adjusting the premium to avoid the pricing problems caused by the fast time out in a few deals when the block is congested. If the liquidator believes that the current protection is for a product that could fall quickly at any time, then some of the positions can be handled first through a platform such as Compound or Aave.
Besides, Payaso discourages liquidators from taking naked long positions as “bullish” speculators to acquire the underlying asset at a discount; we expect liquidators to have a comprehensive position hedging mechanism in place as a risk-free arbitrage mentality. The liquidator can manage potential net-long holdings in real-time with“ X ” and “ Y ” hedges while controlling potential hedging transaction costs within the premium.
The above is just a small part of the description of the work of liquidators. We will simultaneously launch a detailed work manual for the liquidator when the PAYASO product is officially launched, so that anyone can complete professional liquidity transactions through PAYASO.
