Tidal Finance ($TIDAL): customized insurance for cryptocurrencies?

Tidal finance has developed a protocol to protect capital invested in Liquidity Pools (LP) from data breaches and hacks through insurance pools.

The DeFi space grew exponentially in 2020— unperturbed by the general uneasiness surrounding the pandemic. By the end of the year, the total value locked (TVL) in LPs have grown from $500 million to $27 billion. 

Attracted by the prospects of blockchain technology and its huge potential returns, LP providers had deposited billions in dollars worth of crypto assets to the advancement of the DeFi subsector.  But with increased hacks and security breaches, LPs are becoming significantly more skeptical about their investments. This is where Tidal Finance comes in with a solution.

Background

Chad Liu, the founder of Tidal Finance, is an engineer and mathematician who had noticed that the Defi industry was stagnated by insufficient risk tolerance.

And in 2020, Liu was introduced to Co-founder Dan Raykhman (now CTO), with whom he shared the same vision. Liu had a background in finance and business. And together, they ventured to capitalize on their expertise to build a decentralized insurance market — now Tidal Finance.

What is Tidal Finance?

Tidal finance is an open market that allows users to create programmable insurance pools for different asset configurations. 

Essentially, Tidal Finance is a market that encourages the creation of liquidity pools while also providing the resources necessary to protect the LP provider’s capital.

Tidal gets LP providers to create reserve capital for different pools. This way, many mutual cover pools are created. Whenever a user wishes for additional protection for (insure) his capital, he can purchase any of the available mutual coverage.

Tidal finance is built on the Polkadot network where it functions similarly to Balancer, but with improved security against loss capital, to improve liquidity for various emerging crypto assets.

Insurance Pool

Tidal Finance provides a framework that allows users to create customizable insurance pools. Each pool, regardless of asset-pair, can be covered by different terms (premium, cover period, etc.) LPs are then at the luxury of choosing which pool best satisfies their needs. There are currently 3 asset pairs that are covered: COMP.DAI, Aave.ETH, and Uni. (ETH, WBTC).ETH.

How Tidal Finance Works

The platform is an open market. That is, it only provides the tools needed to create an insurance pool. Therefore, users can configure pools using these tools to create an abundant insurance market that offers different conditions and terms (for different pools of protocols, tokens, and other assets) to LPs looking to stake their digital assets. 

At the heart of every insurance pool is a Reserve Smart Contract. Here, reserve funds are provided by LPs. This helps to increase the reserve capital efficiency, protocol auditing, and improve risk management.

To ensure that the insurance pool created is sustainable, a vetting process is carried out while the insolvency risk is examined. And if the pool is assessed to hold out, it is allowed into the market where LPs and Insurance buyers can interact freely.

How Tidal Finance works
How Tidal Finance works (Image credit: Tidal Finance)

Basic Single Asset vs. Multi-Asset Pools

Basic single asset pools involve coverage for single asset types. While the risks involved are straightforward and pretty easy to calculate, the rewards are comparatively smaller.

On the other hand, multi-asset pools combine different assets and smart contracts to make a fairly complex insurance pool. It allows sufficient leverage as well as risk for high reward potentials.

Features of Tidal Finance

Tidal Finance is an aggregate of highly functional features that allows the creation of an insurance pool. 

Pool Creation Template

Insurance pool templates are created by choosing from the available list, smart contracts, and assets to be covered. Then, other parameters can be customized, including the coverage duration and leverage ratio.

Auditors can now look at the template to assess the insolvency risk during the vetting process. 

Approved pool templates are made available on the Tidal market for LPs to use. Furthermore, LPs can find pool templates that meet their specific token/protocol needs. 

Pool Statistics and Ranking 

The Tidal market provides a statistical display of the performance of available pool templates. The statistical data are collected from previously created pool templates.

Each pool template is indexed into a ranking list. The ranking provides the weighted average of key metrics, including current & max pool capital, current and max return on capital, current and max covered amount, capital reserve ratio, etc. 

Users can also search through available pools using the ranking order. 

Controlling Algorithm

Tidal uses algorithms to regulate the activities of pool creators to mitigate risk exposure. The combined effects of several algorithms guide pool creators to manage risk effectively. At launch, tidal would provide a list of rules to guide the activities of each insurance pool. These rules were constructed to mitigate risk and ensure the success of insurance pools. 

Controlled algorithms that would be initiated at launch would enforce these guidelines.

Earn returns with Tidal Finance liquidity pools

Tidal Finance also lets you provide liquidity into their 3 liquidity pools to earn returns. The lockup period ranges from 30-90 days and the apparent return ranges from 20% to 300%.

Tidal Finance liquidity pools
Tidal Finance liquidity pools (Image credit: Tidal Finance)

Tidal Token ($TIDAL)

Tidal Finance’s token $TIDAL is the native token to the Tidal platform. The token is vital to the platform’s smooth operation as it allows holders to vote on important decisions regarding the project and rewards all the various participants.

When the Tidal protocol generates revenue, holders of the $TIDAL token are entitled to a percentage of it based on their staked amount and purchased amount of covers. This scheme is intended to incentivize users to participate actively in the Tidal community. Other than the small percentage reserved for this purpose, the rest of the revenue is deposited in the treasury wallet, which is an emergency backup fund for insurance pools running out of reserves. 

The distributed percentage is adjusted frequently to prevent inflation.

Governance

The tidal protocol is managed by a Decentralized Autonomous Organization (DAO). It is made up of stakeholders that are LPs, Pool creators, and other users. But any other holder of the token qualifies as a member of the Tidal DAO.

Members of the DAO are able to propose changes and vote on them in a transparent approach. However, issues with higher stakes are left to the deliberation of long-term holders alone. 

Partnership with Reef Finance

Tidal has partnered with another member of the Polkadot ecosystem, Reef Finance. The aim of this partnership is to promote decentralised smart contract insurance solutions to increase security for platform users. In particular, Tidal Finance will be empowering Reef Finance users by allowing them to create customized insurance pools.

Conclusion

Individuals and other entities are likely to be motivated to participate in liquidity pools when their capitals are safeguarded. This would provide the much-needed liquidity for upcoming blockchain projects and accelerate the growth of the cryptocurrency industry.

Designed to launch on Polkadot’s network, one of the highest growing crypto ecosystems in 2020, Tidal Finance holds high expectations among investors and liquidity miners. Could Tidal truly bring forth the long-overdue coverage needed in the DeFi space? Online time will tell. LPs, for one, would definitely be rooting for it.

The information provided in this article is intended for general guidance and information purposes only. Contents of this article are under no circumstances intended to be considered as investment, business, legal or tax advice. We do not accept any responsibility for individual decisions made based on this article and we strongly encourage you to do your own research before taking any action. Although best efforts are made to ensure that all information provided herein is accurate and up to date, omissions, errors, or mistakes may occur.

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