Crypto risk managed by Bumper

We’ve previously featured Bumper, a novel DeFi platform which aims to radically shake up risk management in the cryptosphere, and looked at its potential for transforming a marketplace which in TradFi is a multi-trillion dollar industry.

At the time we wrote about Bumper, the protocol was in the final days of it’s pre-launch stage, so now, a few weeks further on, we’re going to dive deeper into where Bumper is at now and what the team behind the protocol have planned for the next stage of development.

We highly recommend reading this article about the project, but as a TL,DR recap, Bumper offers a simple, low-cost and price-efficient system to manage risk. It does this by establishing a two-sided peer-to-pool risk market, where one set of actors lock in crypto assets at a chosen price floor with a specific term length.

On the other side, other users are incentivised to provide liquidity for the hedge in return for yield derived from premia paid by the former.

What sets Bumper apart is its dynamic pricing model, which addresses some of the most significant criticisms of Black-Scholes, such as its reliance on historical volatility. Bumper employs real-time volatility metrics during the term of the position, offering a more adaptive and accurate pricing model.

Empirical Validation

Far from mere theory, Bumper has empirically validated its approach through comprehensive simulations that applied its solution to actual historical price action, including significant 'Black Swan' events, spanning multiple years.

An exhaustive analysis of the results of agent-based models which were employed to rigorously test Bumper's underlying mechanics confirms Bumper's ability to offer cost-efficient protection, produce generous yields for liquidity providers, all whilst maintaining full solvency, even in extreme market conditions. More importantly, Bumper is pure DeFi, and thus the protocol is autonomous, permissionless and does not require users to verify their identity or create an account.

Risk management is one of those use cases in which traditional products don’t translate too well into the crypto world. Basically the choice of risk management tools in the cryptosphere is to either set stop losses on an exchange, or buy puts on an options platform such as Deribit - and both of these have significant downsides.

Stop losses of course don’t always function as expected, and users can end up selling assets at lower than expected levels, or even worse getting stopped-out and missing out on subsequent upside gains if the market reverts (which it frequently does).

Options contracts inherently have a significant limitation in the pricing of premiums; the Nobel Prize-winning Black-Scholes model, the de facto standard for fifty years, is notoriously flawed in highly volatile markets—few of which are more volatile than crypto!

Bumper addresses these limitations, and appears to have come up with a truly innovative solution which is designed to minimise risk on all sides, rather than focussing on a purely profit-at-all costs zero-sum game where one side takes all.

Where is Bumper now?

We decided it would be good to go back and take another look at the protocol and get the low-down on the project since we last featured it.

The big news is that Bumper has now released version 1.0 of the protocol, and users can now open both protection and earning positions. At the moment, the only assets which can be deposited are ETH (for price protection) and USDC (for liquidity providers hoping to earn yield), but the team have publicly stated that they are working towards releasing support for additional assets.

Higher price floors

In the first few weeks after deployment, a bunch of new features have been released, the first being higher price floors. Until recently, the maximum level at which a user could purchase protection was 5% lower than the price at the time of opening. Now, the protocol is available with floors which go right up to just 1% below the current price, essentially giving crypto users an almost At-The-Money option for hedging risk.

Shorter terms

Alongside higher price floors, Bumper also now allows users to take much shorter policy terms. Previously, the minimum period for a position was 30 days, but now users can elect terms with expiries of 7, 14 and 21 days. Again, this positions Bumper favourably as a viable alternative for users hedging with options by users with much more flexible terms which allow them to reconsider and reorder their positions more frequently.

Bumper dApp

The dApp itself is a really cool 80’s retro themed dashboard which is pretty well laid out and simple to navigate. Although opening a position can be achieved in under a minute, there’s still plenty of metrics available for users who want to dig in a little more. What’s quite astonishing is that despite the complexity of what’s under the hood with Bumper is that it takes literally just a few clicks and just a small number of parameters to choose from when taking out a policy.

Users seeking protection simply choose the amount of ETH to protect, set their price floor and term length. Similarly, those looking to earn replace the price floor with a risk rating, selected from preset levels that match their personal risk tolerance.

The Bumper dApp

Future Developments

Bumper has announced work on new feature enhancements, including a system to estimate premiums for those seeking protection and adding support for Staked ETH. Alongside this, they are also investigating how to incorporate additional yield strategies to further benefit users, as well as touting additional chains and providing protection pools for a wider range of assets.

Arguably, the most pivotal development currently is the protocol's transition to the Arbitrum Layer-2 network. This would minimise gas fees for users significantly, and makes the protocol even more attractive for hedging and yield earning.

The Bumper Future

Despite launching during a period of low volatility, the protocol has ample usage cases which cater for many different trading strategies.

For example, whilst it’s tempting to think about hedging in terms of risk management in bear markets, because protection positions aren’t swapped into stablecoins immediately when price breaks below a floor level, Bumper allows users to gain the advantage of limiting the downside whilst still enjoying the same upside exposure. This demonstrates the value of Bumper in even the most bullish of markets as well as being a tool for the risk-averse.

With the introduction of new floors and terms, they have firmly positioned themselves as a serious competitor to the likes of Deribit and other options protocols, and have a team that’s grinding away to enhance features and usability in arguably very unfavourable circumstances for any DeFi project to be operating in.

At present, Bumper is not charging a protocol fee for users who open positions, although this is likely to change as TVL increases, and this in itself makes Bumper a very attractive proposition for crypto users looking to profit from volatility right now.

What genuinely excites us about this project is that the team behind it appears to have grasped a fundamental truth: DeFi has ushered in an era of entirely new financial tools that are absent in the traditional finance world, and risk management is arguably one area in which the crypto world is playing catch-up in.

With its cost-efficient model and simple to use dApp, Bumper are pushing the boundaries of what’s possible in the autonomous and permissionless world of decentralised finance, and we can easily imagine a day when “bumpering” ones assets becomes synonymous with prudent risk management for users across the spectrum of investors, from the greenest noob to the most sophisticated pro-trader.

Learn more about Bumper here, or jump straight in and try out the awesome retro-themed dApp.