Token model protection is to tokenize homogenized events, then the protection contracts of events can be traded in the market freely. Homogenized events mean that the probability of the occurrence of the events has no relation with the identities of the parties to the contract, but is only related to objective external conditions.
Workflow of the protection token system
To mint a protection token for a certain event, one needs to make a full mortgage, which means staking the maximum potential payout to mint one protection token. The potential payout is staked in the policy pool. The minted protection tokens are fungible tokens and can be exchanged and transferred.
The staked potential payout in the policy pool is controlled by smart contracts. If the certain event happens at the expiry date, then the protection token holders can use their tokens to claim the payout. If the certain event does not happen at the expiry date, the staked money will be sent back to creators automatically.
Before the expiry date, creators can redeem their staked money by burning the protection tokens. The maximum total amount of redeeming is the total amount of protection tokens that the creators have ever minted.
Since protection tokens are fungible tokens, we use AMM swap pools to trade protection tokens with other tokens. The swapping mechanism is the same as Uniswap V2. When someone wants to swap tokens in the pool, the product of the amount of tokens on two sides remains unchanged. The transaction fee will be charged when the trader puts the tokens on one side of the swap pool, which is 5 % at DEGIS platform currently. The transaction fee will be used to reward liquidity providers. DEGIS will be the first one to provide liquidity for both sides based on our pricing model, then the pool will start running and the price will be decided by the market.
Creators can sell their protection tokens and earn profits. If the certain event according to the protection policy does not happen at the expiry date, creators can get back their staked money and these profits will be the final earnings. If the event does happen, they will lose their originally staked money. Some cautious creators may repurchase the protection tokens after selling, and redeem their staked money to avoid loss of principal.
Creators can also choose to be liquidity providers by putting the paired tokens on both sides of the swap pool. In this way, they can earn low-risk transaction fees. The risk for liquidity providers is that if the price of the protection tokens fluctuates a lot, the impermanence loss may be larger than earned transaction fees. To avoid possible large impermanence loss near the expiry date, DEGIS will close the swap pool three days before the expiry date. Traders can not swap in the pool after closing, but liquidity providers can withdraw their liquidity.