The Cozy v2 Protection Life Cycle

In early March of 2023, Euler Finance was hacked for nearly $200M. At the time, Cozy v2 was in early access and had an active Euler Finance market. This market triggered and paid out.

This post guides you through the entire Cozy v2 protection life cycle, using the Euler market as an example. It details each step, from purchasing and pricing to maturation, decay, market triggers, and claiming or selling back protection.

Purchasing and Pricing Protection

First, the user gets protection.

• Select the market

• Enter the protection amount

• Review the price

• Buy the protection

Here’s the transaction where the user bought $1,000 of protection for $11.

The price is based on the cost curve that you can see on the market details page.

Protection Maturation

After purchasing protection, there is a 12-hour maturation period during which the protection is not yet active.

This period is designed to prevent abuse of the system and ensure that users do not purchase protection immediately before a market triggers.

Once the maturation period has passed, your protection is active.

Selling Back Protection

Cozy v2 allows you to sell protection back to the protocol after it has matured.

This option is particularly useful for users who no longer require protection or wish to adjust their protection levels.

Your proceeds from selling back protection may be higher or lower than your initial cost, depending on how much your protection decayed and the relative utilization of the market.

Protection Decay

Protection value in this market decays at a rate of 50% per year. This means that if held for a year, the user’s initial $1000 of protection would still cover $500 at the end of the year.

Market Freeze and Trigger

This Euler market uses the UMA optimistic oracle to determine whether to trigger.

If a yes answer is reported from the following query, the market triggers and users can claim payouts.

Was there a hack, bug, user error, or malfeasance resulting in a loss or lock-up of tokens in Euler (https://app.euler.finance/) at any point after Ethereum Mainnet block number 16175802

As you can see, a yes answer was proposed on March 13th and accepted on March 20th.

When the answer is proposed, the market goes into a frozen state. And when the answer is settled, the market goes into a triggered state.

When a market is frozen, users can no longer buy protection from the market. And protection providers cannot withdraw funds. These restrictions protect against front-running.

When a market triggers, users with matured protection can redeem protection for a payout by claiming.

Step 6: Claiming a Payout or Selling Back Protection

Since the market has triggered, users with matured protection can claim a payout.

You can see the transaction for this here.

This user paid $11 for $1000 of protection. By the time the market triggered, they were able to claim $842.

Conclusion

Cozy v2 protection is simple to get and use. Buy the protection and if the market triggers, claim a payout. Or if you don’t need the protection anymore, sell it back.

If you want a more in depth understanding of the mechanics, evaluate the pricing, maturation, decay, and trigger logic.

And if you have further questions, check out the docs or ask in discord.

Disclaimers: Investing in DeFi protocols and assets carries inherent risks. This guide is for informational purposes only, and is not financial, legal, investment or other advice. Please refer to specific market terms and cozy.finance to learn more about coverages and risks. This material and the Cozy protocol are not intended for use by US persons.