I think this is a great idea and Ease actually did this last year if you want to borrow from our legwork/code there GitHub - EaseDeFi/arShield | arShield - Google Docs. Only reason it’s been sunset is because we moved full focus to our Uninsurance model. I think coverage-wrapped tokens will play an enormous part in the DeFi coverage industry wherever they can be used, so this could be great for Nexus.
Use as much of our code as you can, but a lot will probably have to be reworked since it was before ERC-4626 and it was functioning off the arCore system which has since been sunset.
Technical Difficulties:
- Must protect against tomfoolery by people who could deposit a lot just to get you to buy extra coverage and have everyone in the vault pay too much.
- Must protect against scenarios in which users could buy hacked tokens cheap then enter the vault to try to share in the payout on previous value (depending on how your system works).
- Protocols may need a unique vault for each depending on whether they have farming/staking of their own, and rewards from that functionality will somehow need to be liquidated. If a protocol has extra rewards that won’t be able to be received in a Nexus-covered vault that’ll be a huge disincentive to enter.
- If the yield on a token drops a user could end up paying more for coverage than yield without realizing it.
- Figuring out oracles to liquidate tokens for coverage purchasing could be a bit of a pain. We started working with Umbrella network who I would suggest. They can easily add value of yield-bearing tokens (such as Yearn) so decentralized oracle functionality won’t be needed for each protocol. Other option could be to sell directly on dexes but that could require more cost in upkeep of the system and may also need unique functionality for each protocol for unwrapping then selling.
Less-obvious Benefits:
- Can create stacked risk vaults such as purchasing convex and curve coverage at once.
- Although I don’t know how much you’d want to go into risk management, there’s an amount of safety added by diversifying protocol coverage over a number of different vaults, so it’s theoretically safe to buy only partial coverage. Make sure users know the exacts if you do this though.
- If #3 is needed above, there’s a big UX (and even tax) benefit to users if you cash out rewards for them and either sell to underlying or purchase coverage.
- Godly UX if you add zapper and users can enter directly with Ether.
- Integration on checkout with protocols is made super easy if it’s essentially just one more zap that needs to happen to make it a fully-covered token. As easy as a checkbox to get covered if everything’s setup smoothly.
Ideally we end up living in a DeFi where users enter the space into a coverage-wrapped token almost without realizing it.