Introduction to Bumper #5: Premiums and Fees
Bumper is a novel alternative to other risk markets, such as stop losses and Options desks, and the way it calculates fees and premiums is somewhat different.
In the Bumper protocol, the premium the Taker pays comprises two parts: a small, fixed element (essentially a network fee) and a dynamic premium.
Fixed Network Fee
When a position is opened, a small network fee is calculated by the protocol in advance and collected when the position is closed.
Dynamic Premium
Secondly, a premium is charged to Takers for their protection position, which is calculated dynamically based on the measured volatility in the market.
Whilst the fixed network fee is known in advance, the dynamic element is not fully realised until the end of the term.
But, we hear you ask, how can you enter into an agreement when you don’t know how much premium you will pay?
This is the unique and novel difference between Bumper and pretty much every other financial instrument in both the crypto and tradFi world.
The dynamic premium part is determined by the actual volatility of the market during their term, with Bumper measuring the price each time there is a fixed period of price difference.
This means in a time of extreme volatility, with prices going up and down like crazy, the premium will be higher than if there was little or no fluctuation in the price.
The proximity of the current price from an individual Takers floor price is also taken into account, with lower incremental premiums being levied if the current price is a long way above the current floor.
In other words, even though neither Makers nor Takers know how volatile the market will be, both know there is more likelihood any individual Taker will make a claim against the Makers’ pool of stablecoins in the event of high volatility and close proximity to the floor, and this is reflected in the premium levied on the Taker.
Instead of an individual Maker and Taker being engaged in a combative zero sum game, they are instead engaged in a game where risk is balanced between all the actors in the system.
The protocols smart contracts always calculate premiums fairly based on how the market actually reacts during the time the Taker’s position is open.
What this means for crypto enthusiasts is profound.
Bumper’s price protection protocol is provably fair and balanced, and more importantly, it creates a unique non-combative, non-zero sum environment suitable for professional traders, DeFi degens and crypto noobs.
Bumper is an example of exactly what DeFi was meant to do - allow for novel and innovative products to be brought into the market in a decentralised and trustless manner.
BUMPER INTRO ARTICLES:
#1 Takers - protect your crypto
#2 Makers - earn yield
#3 BUMP token
#4 Staking
#5 Premiums and Fees
#6 Pools
