Bumper is a novel DeFi protocol that augments traditional derivatives markets. Bumper’s market design allows anyone to freely participate in hedging price risk in a way that is simple, provably fair, and eliminates counterparty risk. It’s also entirely decentralised, existing purely on-chain to provide maximum transparency and security.
In the Bumper ecosystem, two key players drive the dynamics: Takers, who open 'Hedge' positions, and Makers who open 'Earn' positions. Bumper develops asset price protection for Takers, and yield opportunities for Makers in a way that is secure, efficient, and fair.
Takers wish to protect the price of their cryptocurrency assets, ensuring they do not fall below a certain level (in USD value), in the event of a significant downside price movement. Equally, they don’t want to miss out if the price of their assets rise.
Their process begins with visiting the Bumper dApp and connecting their wallet, deciding on the amount of asset to protect, a floor price, and a position duration.
When a Taker’s position ends, one of the following outcomes occur:
WHERE ASSET PRICE >= FLOOR PRICE
If the current price of the asset is equal to or above the chosen floor price, the Taker receives their original asset back, minus a premium.
WHERE ASSET PRICE < FLOOR PRICE
If the current price of the asset is below the chosen floor, the Taker receives stablecoin to the value of the floor price, minus a premium.
So, even if the asset price falls below the floor price, and then suddenly reverses, bouncing back well above the floor within their term, the Taker continues to enjoy the upside of the value going up, an outcome which would not have been possible had a stop loss on an exchange been used instead.
Makers are liquidity providers aiming to capitalise on yield opportunities for assuming Taker price risk. Upon connecting their wallet to the Bumper dApp, Makers decide the amount of stablecoin to deposit, their preferred risk Tier, and the position duration.
Unlike many DeFi protocols where liquidity providers just deposit tokens to earn yield, Bumper allows Makers to also select a position ‘Risk Tier’, which determines both their exposure to risk and their profit potential, similar to the way that Takers select a price floor.
Makers can see their current yield via the dApp, although because yield varies over time, an individual user's yield is only finalised when they close their position and exit the protocol.
Behind the scenes, Bumper operates with protocol-controlled pools that efficiently manage Taker and Maker deposits. These pools ensure the seamless calculation of premiums, maintaining a delicate balance.
One of the most important concepts to understand about how Bumper protection works is that when the price of an asset falls below the protected floor it’s not immediately sold for stablecoin. This is in direct contrast to what happens with a Stop Loss on an exchange.
This means that many of the ‘under the floor’ positions exist unrealised much of the time under normal conditions. Deposits from Takers do not need to be immediately swapped back and forth between the pools, thus minimising transaction costs and slippage. Instead, funds in the protocol are ‘borrowed’ between the pools.
Taker and Maker deposits are aggregated into protocol-controlled pools. Unlike centralised exchanges that match buyers with sellers directly, Bumper facilitates all interactions between users and pools. This pooling mechanism presents two key advantages:
Bumper's distinctive design comprises four liquidity pools (two for each asset type), deviating from the standard two-pool structure found in many DeFi protocols. This innovation allows Bumper to efficiently calculate premiums based on internal liquidity, dynamically manage the transfer of beneficial ownership between stablecoins and assets, and enhance the overall market depth. The four-pool system ensures a smooth and unhindered participation experience for market participants.
Every time a position is opened or closed, Bumper recalculates premiums and incentives based on the aggregated liabilities of Makers and Takers.
Under normal operation, the ratio of the total value of assets to the number of stablecoins held in the protocol will change. This occurs as the protected asset price fluctuates, and as Takers and Makers asynchronously open and close positions.
Maintaining these ratios is core to Bumper’s operation, and where they diverge too far from their targets, an “Arbitrage” mechanism activates to rebalance that market’s pools. This is triggered by external actors who can access a profitable trade offered by the protocol.
The protocol is currently designed such that each asset included in Bumper’s protection scheme has a unique market supporting it, allowing for an Asset and Capital Pool pair. One pair is one protection market, and multiple protection markets are supported for different assets. Different stablecoins can also be used for each Capital Pool
Premiums and Yield are calculated at the pool level and change over time. Premiums accumulate over time, and Yield fluctuates over time, based on the volatility of asset prices and internal protocol liquidity. Payout figures for Takers and Makers are finalised at the end of their term, unless that user decides to renew their position instead of exiting, or prematurely close their position.
The premium is calculated through two sets of risk measures - one for asset price volatility, and the other for liquidity coverage.
A Trading Fee is levied to users at the start of their term, calculated from the value of their deposit, which goes to the protocol’s Treasury.
BUMP tokens may also be issued as an incentive to users when they take out a position, if they are an early protocol adopter (i.e. up to a certain value of TVL), and if the new position assists the liquidity balance. In both cases, these bonus BUMP tokens are automatically calculated and credited to the user’s position.
