Amulet Protocol

Amulet Protocol (hereafter referred to as Amulet) is a decentralized insurance

protocol built for the Rust-based ecosystem, starting with the Solana

blockchain. Amulet has designed an innovative and open insurance model,

which not only effectively addresses the common challenges of existing

decentralized insurance protocols, but also creates a new paradigm shift for

the whole insurance sector. Risk underwriting and insurance claim lies at the

core of any insurance business; however, all existing decentralized finance

(DeFi) insurance protocols have been facing a critical sustainability challenge

for risk underwriting and claims. Amulet is creating the industry’s first

Protocol-Controlled Underwriting (PCU) approach, in which Amulet will build

up its own underwriting capabilities and introduce a claim structure involving

a unique Yield Backed Claim (YBC) method. This is a significant deviation

from the incumbent insurance models of renting underwriting capability from

capital providers to a more sustainable underwriting and claim structure

controlled by the protocol. Amulet is creating the industry’s first

Protocol-Controlled Underwriting (PCU) approach, in which Amulet will build

up its own underwriting capabilities and introduce a claim structure involving

a unique Yield Backed Claim (YBC) method. This is a significant deviation

from the incumbent insurance models of renting underwriting capability from

capital providers to a more sustainable underwriting and claim structure

controlled by the protocol.

Introduction

DeFi has been unstoppable since the summer of 2020, with Total Value

Locked (TVL) growing 27x from $9.7B in Sept 2020 to $261.2B as of writing.

With the growing market size, the demand for risk hedging is also

experiencing its own growth phase. Crypto users often suffer loss from

various threats, such as security hacks to smart contracts, stablecoin

de-peg, market volatility, etc. In 2021, security hacks alone caused over $3B

in losses. Among all risk hedging tools, insurance has become the most

prominent and effective approach to manage these risks. Although we have

seen an increasing demand for insurance products, currently less than 2% of

overall DeFi TVL is covered by insurance. There is still a large coverage void,

creating the need for more insurance protocols. Despite Ethereum and its

affiliated EVM (Ethereum Virtual Machine) ecosystems’ domination in DeFi,

other Rust-based public chains are rapidly maturing, spearheaded by Solana.

According to our 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 lower cost, higher throughput, and

strong potential for Web3.

Solana growth and Ethereum growth

Solana’s rise as a major layer 1 solution brings with it the promise of an

alternate realm of possibilities. The broader Rust-based ecosystem is now

$30B in size. While there has been tremendously positive ecosystem growth

and top-tier talent brought into the space, this growth also opens up

increased risk of attacks and bad actors. We foresee the demand for

insurance and other risk management solutions on Solana, and the broader

Rust-based ecosystems to soon experience its own boom. However,

insurance availability is still non-existent on Solana and scarce on the

Rust-based space. This presents a unique blue ocean opportunity that

Amulet will service immediately to address increasing market demand for

safety.

Existing Challenges

While we believe our mission is achievable, there are

several notable challenges for existing decentralized

insurance protocols that confines the sustainability and

growth of the protocol:

A. Capital and User Acquisition

B. Network Building

C.Capital Management

D. Claims Processing

A. Capital and User Acquisition

Insurance protocols 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 form,

causing many protocols to be at the mercy of their stakers and forcing some

to increase rewards to simply retain staked capital. In our view, this

is not a sustainable solution and causes a debt spiral

that becomes more and more difficult to emerge from over time.

B. Network Building

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 enough for insurance protocols. Insurance

is a conduit for collective risk pooling and mutual aid. Oftentimes, insurance

is an afterthought that occurs once a user or protocol has been rugged,

hacked or somehow exploited even though these risks are known ahead of

time. Investors and protocols that use insurance 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 to educate users and our future partners on

proactive risk management, we do believe it is a worthy cause to champion.

C. Capital Management

In the event of a catastrophic claim, stakers could race to withdraw funds to

minimize impacts on their principal. While understandable from the

underwriters’ perspective, this creates a potential threat to the protocol’s

sustainability. Until a protocol reaches its critical mass and can pay for

incoming claims with premiums and associated investment earnings, that

threat will remain present. Without an effective risk management framework,

it becomes difficult to understand whether risks are priced effectively, and

capital is well-allocated to protect against these “bank run” scenarios.

D. Claims Processing

It is difficult to ensure a trustworthy, impartial claim process with reasonable

cost, whilst aligning the interests of different parties on claims. For example,

policy underwriters are incentivized to minimize payouts since they are paid

based on the overall profitability (premiums received less claims paid);

however, claimants want to minimize premiums paid and increase their

potential payout. Satisfying these two parties already poses several

challenges without consideration for investors, community members, the

impact on partnered protocols and insurance protocol’s reputation. Apart

from the common challenges listed above, we think the deepest challenges

to existing DeFi insurance protocols lie in their underwriting and claims

models. All existing insurance protocols build their underwriting capacity by

renting liquidity from staked participants and draw claim payouts directly

from this rented underwriting pool. This imposes heavy liquidity challenges in

the event of claims, placing the protocol on an unsustainable path. The

existence and understanding of these problems lead to Amulet’s innovations.

Platform Design

Solution Overview

The design of an insurance protocol normally entails

balancing several core components including:

- Risk Underwriting: how to acquire assets to properly underwrite risks.

- Product Offering and Distribution: what types of risk are insured, how

to define and price them, and how to distribute the products to users.

- Claims: how to decide on the claim result and handle claim payouts.

- Capital Management: how to manage capital on the platform to

maintain sufficient reserves.

- Tokenomics: how to create and distribute value to token holders.

There are many other factors to consider in this design, which will be covered

briefly in the following sections. Meanwhile, we will use Solana as the

ecosystem to illustrate our designs in this paper as the mechanics are

transferable to other Rust-based ecosystems. At a high level, the core design

for the above components is listed in the table over the next few pages..