Bering Waters Ventures presents its investment thesis in UNION, an innovative decentralized platform that is bringing a comprehensive suite of protection and risk mitigation products to Decentralized Finance (De-Fi).
De-Fi has become a digital gold-rush with the value of assets locked in De-Fi increasing 40 fold in the last year alone. Despite this success, De-Fi is still in premature stages and comes with a great deal of risk and economic challenges. De-Fi still resembles the wild west for many investors today.
Investors face the risk of losing their capital through hacks and exploits. They also have to contend with high gas fees that eat into the profitability of trades, which makes the space unprofitable for small investors. This is then compounded by the fact that it’s not particularly efficient to borrow against existing crypto holdings to fund other trades because lenders on most De-Fi platforms require that borrowers post collateral that is worth more than the loan they take out.
UNION is looking to address these challenges with comprehensive bundled protection and risk mitigation products for De-Fi.
UNION isn’t actually an insurance company but rather a platform that connects parties seeking steady yield from uncorrelated risk behaviors with those looking for protection. It’s a similar model to the way in which Uber provides ride-sharing by connecting drivers with passengers and facilitating the payment process; in this case, UNION provides a platform that connects the risk-takers (i.e. the investors willing to provide capital to insure against an event), with those seeking that protection.
Just as Uber calculates how much a rider should pay using an algorithm that factors in the distance, supply, and demand, UNION uses risk-pricing algorithms — the same ones used in the traditional insurance sector today — to determine what price premium a policyholder should pay.
UNION is addressing the major challenges existing today in De-Fi in three key ways:
- Protection against falling asset prices through Collateral Optimization (C-OP)
UNION’s first offering, named Collateral Optimization (C-OP), addresses the need to over-collateralize loans by replacing the additional collateral with protection against the price of their collateral falling in value.
If prices fall and the loan becomes under-collateralized, rather than the lender liquidating the borrower’s loan, the borrowers can call on that protection policy to cover the shortfalls of collateral value.
While there is a cost to the borrower, it’s a lot less than the opportunity cost of pledging 150% of their collateral for a loan (as is common today). C-OP is “composable” which means that it can be used as a lego building block of smart contract code to construct more complex De-Fi contracts.
2. Protection against high gas fees
Tokens losing their value isn’t the only economic peril that investors face. Rising costs, in the form of high gas fees that are charged to process transactions in De-Fi, can also impact profitability.
UNION is planning to provide protection against these fees with a similar financial instrument used for over-collateralization protection. In much the same way that C-OP uses a financial derivative as a means to hedge against falling asset prices, this insurance instead provides protection against gas prices rising; it’s the same financial product but in reverse. This means an investor can enter a trade with the certainty of facing a pre-determined maximum gas fee for exiting. This way, the investor can project the trade costs.
3. Protection against hacking and economic exploits
Smart contract bugs and hacks have become a significant problem for De-Fi. Hacks of this nature were nearly negligible in 2019, yet a year later over $100m has been stolen, and this number is likely to continue to rise. These exploits take two forms; the first is technical bugs in the smart contract itself.
Another type is an economic exploit which is a form of temporary market manipulation; for example, an attacker can orchestrate a complex set of trades which can artificially drive prices up or down on a decentralized exchange with low liquidity in order to manipulate the price of an asset.
While insurers already provide De-Fi insurance for technical bugs and hacks, it’s rare to find products that also cover the economic exploits, and that’s a gap in the market that UNION seeks to play in.
Technical and economic smart contract hacks are much more difficult to insure than issuing protection against token price changes. That’s because there is a level of subjectivity involved in determining if a hack has occurred and funds have been lost — with a decentralized protocol there isn’t one person or entity who can provide judgment; that decision has to be made in a decentralized fashion.
In UNION’s model, a council of decentralized decision-makers weighs in. Those decision-makers comprise holders of UNION’s governance token.
UNION has signed up numerous protocol and exchange partners including; Raze Network, Cellframe, Prometeus, Prosper, Galaxy Farm, and Avalanche.
Another partner that uses UNION’s C-OP product is called MOAR. MOAR which is actually a spin-off project from UNION; the UNION team had developed a lending protocol named ULend as a proof-of-concept and decided that to accelerate the adoption of its C-OP product it would spin it off as an independent project named MOAR.
MOAR uses UNION’s C-OP product thereby enabling users to borrow funds on MOAR without needing to over-collateralize their loans. This split allows UNION to continue innovating on protection, while MOAR increases adoption of UNION protection products.
While there are many insurance providers in De-Fi, we see UNION offering something quite unique in the marketplace today. For one, unlike many providers, UNION does not require that participants undergo KYC; an important feature given that De-Fi participants ultimately value anonymity and the ability to transact without friction.
Secondly, UNION provides a full suite of bundled protection products that extend across multiple protocols, incorporating protection in both technical and economic risks as well as providing protection in situations where multiple protocols are involved.
A Long Term Thesis To Drive The Industry Forward
Risk protection is a critical piece of the puzzle for De-Fi to become sustainable in the long term. Bering Waters Ventures believes in the importance of foreseeing the future, with a portfolio of multi-year strategic investments in organizations that are seeking to create impactful long-term change to the evolving space of decentralized networks. Union is one part of the extensive ecosystem Bering Waters Ventures actively supports.
About Bering Waters Ventures
Founded in 2019, Bering Waters Ventures is one of three businesses that form Bering Waters Group. The Venture arm focuses on research-heavy innovations in the blockchain and cryptocurrency space. It identifies and supports companies and entrepreneurs of various types and sizes, from undervalued projects to leaders in its sector. Its mission is to provide value to projects through its services and solutions offered across three companies of the Group and to leverage its extensive network of global investors in the areas of funding, market strategy, and development support.