Amulet Protocol ("Amulet") is a decentralized risk protection protocol ("RPP") built for Rust-based ecosystems, starting with the Solana blockchain. Amulet has designed an innovative and open risk protection model which not only effectively addresses the common challenges of existing decentralized RPPs, but also the whole decentralized risk protection sector.
With its Protocol-Controlled Reserves ("PCR") approach in which Amulet builds up reserves and introduces a claim structure involving a unique Yield Backed Claim ("YBC") method, Amulet's model is a significant change from the incumbent model of simply drawing directly on the underwriters' capital to make claim payouts.
Amulet's vision is to offer Simple, Reliable Cover for everyone in Web3. With the addition of Amulet, users in the entire Rust-based ecosystem will gain access to a new and sustainable way to hedge various risks with cover product offerings.
DeFi has experienced exponential growth since the summer of 2020 with the influx of hundreds of billions in capital and the emergence of multibillion-dollar protocols in just a little over two years. Riding along this wave of explosive growth is a rapidly increasing demand for risk hedging
Crypto users often suffer losses from various threats, such as smart contract hacks, stablecoin de-pegs, market volatility, etc. In 2021 alone, $3B were lost to smart contract hacks. Among all available risk hedging tools, protection by way of cover has become the most prominent and effective approach to managing these risks.
Although Amulet has seen increased demand for cover products, currently less than 2% of overall DeFi TVL is covered. There is still a large void to be filled by RPPs.
Despite Ethereum and its affiliated EVM (Ethereum Virtual Machine) ecosystems’ dominance in DeFi, other Rust-based public chains are rapidly maturing, spearheaded in particular by Solana. According to Amulet's research, TVL on Solana is growing 5x faster than Ethereum, and this growth is expected to be stronger given the distinctive strengths of Solana centered around its lower cost and higher throughput.
Ecosystem TVL Growth
Solana’s rise as a major layer 1 solution promises an alternative realm of possibilities. The broader Rust-based ecosystem is now $30B large. While there has been tremendous ecosystem growth and a large influx of top-tier talent into the space, this growth also invites more risk of attacks and bad actors.
At the moment, risk management solutions are still relatively scarce or non-existent on Solana and the Rust-based space at large, presenting Amulet with an incredible and unique market opportunity. Amulet expects major demand for its cover products and other risk management solutions along with Solana's continued growth and adoption.
There are several notable impediments to existing decentralized RPPs growth and sustainability:
Capital and User Acquisition
RPPs are faced with a two-pronged problem of acquiring and retaining staked capital. There is inherent risk of losing principal while at the same time, intense competition for user capital across a high APY environment. Yield fluctuations alone can cause liquidity locusts to appear, causing many protocols to be at the mercy of stakers and forcing some to increase rewards just to retain staked capital. This does not appear to be a sustainable solution and could result in a debt spiral which becomes more and more difficult to get out of over time.
Building up distribution channels to increase coverage and capacity while maintaining appropriate risk control is difficult. The importance of having strong networks cannot be stated strongly enough for RPPs. Their business and operating model is fundamentally that of a conduit for collective risk pooling and mutual aid. Oftentimes, having cover is an afterthought that occurs once a user or protocol has been rugged, hacked or somehow exploited even though these risks were known ahead of time. Investors and protocols that have cover can be liberated from some of these risks and delve deeper into their crypto journeys in a safe manner. Although it is an uphill battle, Amulet believes user education on proactive risk management to be a worthy endeavor.
In the event of catastrophic losses, underwriters might rush to withdraw funds to minimize the impact of such claims on their principal. While understandable from the underwriters’ perspective, this creates a potential threat to the protocol’s sustainability. Until the protocol reaches critical mass in funds (i.e. able to self-manage payments for incoming claims with cover payments and associated investment earnings), that threat will remain omnipresent. This problem is further exacerbated by the lack of an effective risk management framework which makes it difficult to understand whether risks have been priced appropriately. Without effective capital management, protocol's run the risk of not having the necessary capital structure and allocations in place to guard against a "bank-run" on the protocol.
It is difficult to ensure an impartial and efficient claim process while trying to align the interests of many different parties at the same time. For example, underwriters are incentivized to minimize payouts since they are paid based on the protocol's overall profitability (cover payments received less claims paid). However, claimants want to minimize cover payments and increase their potential payout. Satisfying these two parties already poses several challenges on top investor, community, and partner concerns, as well as the reputational challenges faced by RPPs in general.
Apart from the common challenges listed above, the greatest challenge to existing DeFi RPPs lie in their underwriting and claim models. All existing RPPs have built their underwriting capacity by renting liquidity from stakers and have been drawing claim payouts directly from them. This model of renting underwriting liquidity has several issues, chief of which is the question of the model's sustainability. Amulet will fix that.