ZIG, Insurance NFTs and Fund Value Formula all play a vital role in the implementation of Zignaly’s Insurance Protocol. However the protocol is incomplete and unimplementable without the Drawback Percentage. This percentage plays a unique role in Zignaly’s insurance ecosystem as it is the only metric out of the 3 previously discussed, that actually triggers the insurance smart contract upon certain conditions being met. The Drawback Percentage allows for the implementation and automation of smart insurance as all logic and mathematical models are coded into the smart contracts that the NFTs are built upon. Crypto trading, due to its nascency and technological innovation, experiences extreme volatility in both price and market hype. Due to this, depending on the chosen trader, a lot of money can be made and lost in all facets of the industry. Trading bitcoin and other alt coins back and forth for profits (AKA spot trading) is less volatile and risky, than betting on the price of crypto assets going up and down, and doing this with borrowed funds (AKA futures trading).
‘Futures’ is a much more lucrative avenue to make money, as exchanges like Binance allow you to trade with up to 125 times your capital; but this also comes with extreme risk as a user's account can be completely emptied out if a trade doesn’t go as planned. All in all, there are many different types of trader profiles and with the market constantly changing, there needs to be a way to gauge and assess the various traders looking to offer their followers insurance on Zignaly.
Drawback Percentage Mechanics
This metric within Zignaly’s insurance protocol is known as the drawback percentage. A trader that is looking to offer insurance to their followers is assigned a drawback percentage. This percentage refers to the amount of acceptable loss the trader is allowed to play with, before the insurance NFT smart contract is auto-triggered and a claim is initiated. Typically a low drawback percentage correlates to low risk while a higher drawback percentage means the trader takes more risk and typically trades in high risk environments where both big losses and big profits can occur.
Drawback Percentage Formula
The formula for the drawback percentage has 3 components, which are all related to each other in order to come up with the most accurate representation of both trader performance and market sentiment.
The first component represents the ratio of positive trades, while the second represents the ratio of negative trades conducted by a trader. The third factor is built into the system to assess the trader’s open position performance. At the end of the month, all negative open positions are deemed closed at current market prices and this ratio is then multiplied by the previous 2 factors.
The third factor is included to provide a better baseline for what the drawback percentage could look like in the worst-possible-case scenario for that month. Finally, the factor of safety at the end represents a measure of the level of risk associated with the provision of insurance under current market conditions, and takes into consideration factors such as volatility of market and major price-affecting events during the relevant month.
If losses beyond the drawback percentage are realized, the insurance smart contract is triggered and the user is paid out accordingly. If there aren’t any losses or they are below the drawback percentage then accordingly no claims are made. The idea of a drawback percentage is to help guide and educate new and existing users of their own levels of risk tolerance/friendliness as everyone has a different appetite for it. The drawback percentage equips a follower with enough information to make an informed decision on who they would like to connect with and follow.
Together, the 4 layers make the implementation of the Insurance Protocol possible. Zignaly’s value propositions, from ZIG, to the NFT-based Insurance Protocol act as incentives for new users to interact with and further build upon it as the social investment platform for a new era; where investors can buy, sell, trade, and invest with professional guidance without the management fees that previously made wealth managers unaffordable to beginner investors.
Stay tuned for more exciting announcements pertaining to the creation and deployment of the insurance protocol, as well as how and where you can purchase ZIGs!
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