Cozy is an open-source protocol that enables investors to participate in automated and trust-minimized protection markets.
Protection markets mitigate the risks often associated with investing in decentralized financial (DeFi) markets and applications. Because DeFi application protocols might seem more vulnerable to hacks and exploitation than traditional financial instruments for some investors, Cozy provides a platform for protecting assets against losses programmatically. Investors with confidence in DeFi application security can use the Cozy platform to earn interest by supplying assets to a protection market.
The two key components of a protection market are:
A money market with a liquidity pool of digital assets.
A trigger contract that specifies a condition to protect the assets in the pool against.
There are three main ways to participate in a protection market:
As a protection market developer, you create the trigger contract that protects assets if a specific trigger condition—such as a sudden, sharp decline in value—is met in one or more protocol markets.
As a protection market supplier, you deposit assets to be used in a protection market pool and earn interest from borrowers who pay for the having their deposited asset protected against losses. If you think that a market is not likely to lose funds—that the trigger condition is unlikely to occur—you can use Cozy to earn interest by providing protection.
As a protection market borrower, you deposit collateral and borrow against it with a reduced rate of return in exchange for protecting your deposit against the condition defined in the trigger contract. If you borrow from a protection market and the trigger condition is met, the collateral you deposited remains safe and any outstanding debt is cancelled.
For a closer look at how Cozy protection markets work, see Case Study.
With protected borrowing and investing, you borrow assets in a protection market to protect your position against losses if the condition contained in the trigger contract occurs. You pay interest to receive this protection. If the trigger condition occurs, the collateral you deposited is safe. If you have any outstanding debt for borrowed assets, you no longer have to pay it back.
Participants in a protection market pay a small fee on their potential earnings to reduce the risk of holding a particular asset. For borrowers, debt cancellation is essentially the insured event that they have paid their premiums to guard against.
To get started with protected borrowing:
Open the Cozy website in a browser.
Connect to your wallet.
Deposit collateral on the Your Funds page.
Click Protected Borrowing and select a protection market.
Borrow assets from that protection market.
Borrowed assets are transferred to the your wallet.
Borrowers pay an interest rate until they repay their borrowed assets. If the trigger condition is met, the debts are cancelled and borrowers can withdraw their collateral.
If you are confident that a condition contained in a trigger contract is unlikely to occur, you can supply assets to a protection market and earn interest from investors who borrow from the protection market.
You continue earning interest as long as the protection market operates without having its trigger condition occur. If there is a hack, exploit, or other problem that triggers protection in the market where you have supplied assets, all outstanding debts in that market are forgiven. The interest you earn is your reward for taking on the risk associated with the trigger condition. In evaluating the risk involved, you should consider how likely it will be for a particular market's trigger condition to be satisfied.
To get started with providing protection:
Open the Cozy website in a browser.
Click Provive Protection.
Select a protection market.
Select an Asset to supply to the protection market.
You earn interest until you withdraw your supplied assets.
If the trigger condition is met, debts are cancelled and you can withdraw your share of the remaining funds in the protection market.
You must be able to write a trigger contract to develop and deploy a protection market. You can learn how to write trigger contracts using the scripts in the Cozy Developer Guides repository and the Create a protectionmarket guide.