BakUP: Automated, Flexible, and Capital-Efficient Insurance Protocol for Decentralized Finance

This paper introduces BAKUP, a smart contract design that insures decentralized finance users against the vulnerability risks in third-party platforms. Apart from providing an automated claim payout, the modular structure of BAKUP brings harmonization among three conflicting features: resilience against vulnerabilities, flexibility of the underwritten policies, and capital efficiency. An immutable core module performs basic accounting while ensuring robustness against external vulnerabilities; a customizable oracle module enables the underwriting of novel policies, and a peripheral (optional) yield module allows users to independently manage additional yield without interfering with the risk management of fellow participants. User payoff is implemented using binary conditional ERC20 tokens tradable on automated market maker (AMM)-based exchanges.