Covered Yield Tokens: pursuing the risk-free holy grail

Idle partners with Nexus Mutual in pushing for institutional-class covered yield

TLDR: In less than 24 hours since the launch of the Shield Mining campaign, Yield Token Covers on IdleDAI and idleUSDT raised 7.5m $DAI as liquidity and the yearly cost reached the minimum value of 2.6%.

Idle DAO partnered up with Nexus Mutual to launch Yield Token coverages on DAI and USDT pools.

Idle has always demonstrated particular attention to security, engaging with professional auditing firms (5 audits), and releasing a series of risk management procedures (e.g. DeFiScore framework, $500k bug bounty program, Integration Standard Requirements) to make the protocol resilient. As institutions look to get involved in DeFi, insured yield can eliminate some of the risks that currently prevent them to participate in the DeFi ecosystem.

Yield Token Cover adds a further layer of security to allow users to diversify and adjust their risk exposure, protecting deposits against failures in any underlying protocol and assets included in Idle’s aggregation layer. The policy indeed covers a full spectrum of risks, including de-pegging.

Example of Yield Token Cover application

Program Outlines

With IIP-9, Idle Governance approved the allocation of 15,000 $IDLE to incentivize staking in Nexus Mutual pools. Allocated incentives will be equally split across IdleDAI and idleUSDT Contract Stakers.

This Shield Mining campaign would bootstrap Best-Yield idleDAI and idleUSDT coverage — which represents more than 60% of Idle TVL — aiming to lower the premium to the minimum price (2.6%).

With a 6-month average APY respectively equal to 9.6% and 11.4%, the premium would represent a small portion of yield to pay for the risk reduction.

The program will run for 3 weeks, in line with past successful campaigns. $NXM holders can stake their tokens to provide claimable assets in case of losses and earn rewards via the Shield Mining program.

Here’s the how-to guide to purchasing DAI and USDT coverage.

Next steps

After the deployment of the token coverage, Idle Leagues will work on a feasibility assessment related to a built-in insurance strategy (i.e. Insured/”Risk-Free” yield strategy).

While UI integration represents the first step to drive users towards alternative protection features, the manual interaction generates friction.

Aligned with DeFi accessibility and composability, the strategic evolution of the initiative should be implementing such coverage into an Idle pool. In this way, the new covered strategy would automatically deposit funds in the Best-yield pool and take care of protection purchases.

Liquidity providers would receive a Covered IdleDAI token (name to be defined), giving room for additional composable use cases.

Secured composability, building the risk-free stack

Covered strategies will become available with another significant release: dynamic tranches.

This new product is currently under security review and would split risks & revenues into two main buckets (junior and senior). Idle Leagues designed Dynamic Tranches to allow financial institutions to diversify their risk and adjust their exposure to the interest-bearing token economy.

Tranches and coverage can work in parallel or combined in a single solution, adding to Idle’s product suite more structured institutional-class and “risk-free” products.

The yield products in DeFi which are yielding higher APY than yield products in traditional markets are currently moving the needle in terms of adoption. Instead of selling crypto for fiat, borrowers are staking digital assets and receiving digital assets in return. The reduction of custody, settlement, and escrow (labor-intensive, costly actions within the legacy system) to algorithmic actions are reducing the cost charged by the effort to perform these actions. These efficiencies, paired with the perception of higher risk, are why the yields are higher on decentralized systems.

However, efficiencies and mainstream adoption of DeFi technology will cause more loans to move into decentralized ledgers, allowing for even more variety, safety, and risk in these products. What Idle is lining up is a suite of products for a higher grade of customization of the risk curve and offer a staked risk management to both DeFi & TradFi investors by building more efficient yield-based instruments and derivatives.

Stay tuned for new releases!

Earn the yield you deserve without worrying about finding the best option, whether you want to optimize returns or risks.