The cryptocurrency market is one of rapid fluctuations in which market volatility often dictates investment outcomes on much more extreme time frames. In these markets, risk management emerges as a pivotal concern for both seasoned investors and newcomers. Bumper - a decentralized finance (DeFi) protocol - addresses this concern by providing an innovative solution designed to mitigate the risks associated with price fluctuations and to enable smarter trading for more gains.
By simplifying the hedging process, Bumper allows all market participants to trade the market or safeguard their investments against downturns while maintaining the potential for gains, no matter what direction the market goes. Bumper markets itself as a permissionless, AI-powered pooled risk market - a new primitive in the DeFi sector designed to make traders’ lives easier, more efficient and more manageable to succeed in these volatile markets.
Bumper offers built-in risk management to make navigating crypto easier and more effective. Operating as an innovative DeFi platform that simplifies volatile markets and position hedging, every type of trader can take advantage of it. Typical methods of managing risk across crypto markets include stop-loss orders, holding a portion of your portfolio in stablecoins and utilizing options. Bumper’s approach involves a two-sided pooled risk market, consisting of protection takers on one side and yield-seekers on the other.
Bumper’s smart contracts allow protection takers to deposit their assets with a specified term length and floor price. If the price of an asset settles above floor price at any point, they can get their original assets back. If price settles below the floor, users claim the value of floor price in stablecoins, though they must wait until expiration date to settle this position.
With both outcomes covered, protection takers can rest easy knowing their assets are secure in Bumper. With yield-seekers on the other end, these users provide liquidity and earn a return based on premiums paid by protection takers. This structure not only simplifies the hedging process but also enhances the fairness and accessibility of risk management, making it a crucial tool for anyone attempting to navigate crypto markets.
This system is more sustainable than many other mechanisms that take place in DeFi, mainly due to its simplicity and the presence of real yield for liquidity providers. Assuming there is always an individual looking to trade on Bumper, yield-seekers earn this premium for taking risk upon depositing. Unlike other applications that offer high yields based on liquidity mining and unsustainable protocol emissions, Bumper’s platform is driven by users and puts the power in their hands.
This is the opposite of a zero-sum system, with both types of Bumper users winning based on their respective roles.
For yield-seekers this comes from premium earned and protection takers receive the benefit of proper risk management for their assets. What sets Bumper apart is its ability to operate efficiently across all market conditions, including extreme scenarios like Black Swan events. Bumper’s robust design ensures solvency and sustainability, instilling confidence amongst its users as they open, close and evaluate positions. Bumper’s market model is based on fairness and shared risk, which allows for dynamic response to market changes, efficient pricing of risk, and distribution of yields that are both stable and fair.
Bumper offers multiple advantages for different types of crypto market participants. For those seeking protection, it provides a cost-effective and simple alternative to traditional options and stop-loss strategies, allowing them to benefit from potential upswings without the worry of significant downturns. For yield seekers, Bumper presents an opportunity to earn from the premiums paid by those seeking protection, contributing to a healthier, more balanced crypto ecosystem. A simple example of what’s possible with Bumper can be given through the following: a DeFi user might open a hedged position assuming the market is going to move lower, make a claim on this position to receive stablecoins and buy back into the asset, all achieved through the Bumper app.
Innovative enough on its own, Bumper’s unique architecture and product suite powered by LLMs and additional machine learning methodologies is helping traders achieve more efficient pricing, higher yields and vastly safer risk management procedures - a new primitive representative of horizontal scaling in crypto done correctly..
Understanding Bumper
To provide more context for the rest of the report, let’s explore how Bumper calculates premiums and how the underlying mechanisms work, with a focus on Bumper’s unique pool rebalancing features.
Part of what makes Bumper’s system function so well is its focus on dynamically rebalancing premiums and shifting risk and reward across many user positions in-app. Bumper refers to its rebalancing strategy as a “dynamic hedging engine,” an integral process that underpins the entire protocol functionality. Algorithms within Bumper monitor liquidity ratios, compare these to target ratios and calculate solutions to minimizing liquidity risk at various price levels across user positions.
Through its use of a dynamic hedging engine, Bumper is able to ensure not only protocol solvency, but superior pricing for users upon both the entry and exit of positions - the rebalancing happening underneath is one of the core reasons for Bumper’s efficiency. The algorithm works across several stages, but ultimately finalizes upon same-side rebalancing for total capital and total assets across Bumper. Bumper’s algorithms operate whether or not a liquidity risk was even observed, allowing the application to function smoothly regardless of strenuous market conditions being present or not.
When it comes to pricing its premiums for takers, Bumper uses another similar dynamic pricing mechanism. To offer more of a formalization, the three factors that control this process are price risk factors (PRFs), liquidity risk factors (LRFs) and the risk rating of each position. PRFs are determined by the continuous asset monitoring by Bumper, with algorithms running analysis on recent price movements and historical data to generate a fixed proxy for the most likely future price volatility. The more volatility rises, the higher Bumper’s PRFs go.
LRFs are crucial to assessing risk, as any market ultimately depends on liquidity for sufficient and accurate price discovery. Liquidity risk in the context of Bumper refers to a situation where in-app pools are unable to satisfy the request(s) of a maker or taker. While Bumper categorizes these scenarios as highly unlikely due to the required volatility and extreme absence of protocol liquidity, it is absolutely essential to monitor this in order to accurately and fairly price premiums on Bumper.
Risk rating of each position occurs after setting term lengths and floor prices to every taker position within Bumper, dynamically pricing risk based on user actions taken. These risk ratings increase the liability risk of positions taken and prices premiums dynamically to reflect this. The longer a protection term is, the lower a premium rate is charged. Longer protection terms typically see lower premium rates charged, though individual user risk within these can vary.
Bumper was designed to maximize the efficiency of asset pricing risk to offer takers provably fair priced premiums - at the heart of any market is a healthy incentive balance between makers and takers, with Bumper striving to ensure this balance remains a core aspect of their operations. Bumper takes price and liquidity risk from the platform and distributes it fairly to both takers and makers. For the former, dynamic premiums are accumulated globally at a pool level for all positions, while individual premiums are determined at any point by a taker’s risk factor and timeframe specified.
On the other hand, makers share a global yield pool due to the fluctuations that might occur within individual taker premium pricing. Market yield is effectively split amongst all makers proportionally to their assets deposited and level of risk specified in order to ensure fair and attractive payments for their services.
Bumper represents a massive step forward in the field of DeFi. Its unique approach driven by built-in risk management makes it indispensable for those looking to protect their crypto assets while also offering lucrative opportunities for those willing to provide liquidity in these volatile markets.
With its user-friendly interface, fair pricing, and resilient system design, Bumper stands out as a beacon of innovation in the constantly changing cryptocurrency landscape, promising a more stable future for all market participants. Bumper’s flexible hedging system makes it so traders don’t have to lose out on market upside should their market predictions not come to fruition, while balancing out rewards for yield-seekers with attractive returns.
This core functionality allows users to engage in almost any type of trading style they choose, all from an easy to navigate interface. Actions like locking in profits, protecting against downside volatility, earning greater yield, and crafting more deliberate positions are all possible with Bumper.
Crypto has hundreds of liquid, active markets for users to trade - all of these are different and possess a level of nuance that varies from the last. With Bumper, users can stick to a set of guiding principles for their trading styles and utilize the tools they need to succeed - it’s customizable, passively managed and puts your portfolio first.
Traditional methods of risk management in crypto suffer from a few major drawbacks, mainly centralized exchanges, the presence of heightened emotion from volatility and liquidity constraints. Users feel boxed in by feeling they have to protect their assets with a custodian or feel pressured to buy or sell more with each subsequent candle. With Bumper, users can simply deposit their assets and let the protocol’s mechanisms manage risk in an emotionless, practical way.
Bumper’s structure provides a unique alternative to the complexity of options trading, letting users ignore many of the difficulties from setting expiries, choosing a strike price and micromanaging these financial derivatives without any help. While Bumper and options contracts both let users manage risk in their own unique ways, Bumper offers a more hands-off approach and much of the upside without the downsides that come from trading financial derivatives. Users just set a floor price to where they want to protect their assets, pay a premium and let Bumper do the work. Options are not this simple as a variety of other factors might affect positions, with options greeks being very difficult even for seasoned investors to get a grasp over.
Additionally, much of Bumper’s internal processes have recently been expanded and improved upon with the integration of LLMs and unique sentiment analysis algorithms. Bumper leverages AI to redefine risk management in crypto markets by introducing an AI-powered pooled risk market. This innovative approach uses sophisticated AI algorithms to maintain balance within the protocol, ensuring that protection takers can secure their assets against price drops effectively.
Bumper’s team of AI engineers use a previously trained model with 70 billion parameters and a variety of embedded financial data including price data and historical volume metrics. The process involved training with daily price data, before moving to more granular hourly data with a goal to eventually monitor tick data in an effort to provide users with the best possible risk management services through Bumper.
Bumper also makes use of an Agent-Based Model (ABM) enhanced with AI to simulate and adapt to changing market conditions. These agents use machine learning to evolve their strategies based on historical data and ongoing market dynamics. This results in a more resilient system that can anticipate and react to trends, thereby optimizing the protection mechanisms for users' assets. Bumper’s ABM sits separate to core protocol mechanics that the rest of its AI mechanisms make use of. The simulation aspect allows Bumper to make more sense of parameter changes and price change scenarios - when a simulation is run, the performance is evaluated in comparison to Bumper’s current architecture. If a strategy performs better upon the simulation’s completion, the change is implemented into Bumper’s live protocol.
A crucial aspect of Bumper’s AI integration is its use in optimizing the streamia, or dynamic premiums, paid by protection takers. By incorporating market sentiment analysis and investor behavior, Bumper’s LLM helps in fine-tuning premium calculations that make their way back to the end user. This involves sophisticated financial text data analysis to extract market sentiment, using transformer-based structures and attention mechanisms within the LLM. The insights gained are crucial for adjusting the Price Risk Factor (PRF), Liquidity Risk Factor (LRF), and Risk Rating of Positions (RRP), ensuring that the premiums reflect true market conditions and risk levels.
AI's capabilities in sentiment analysis and automated decision-making can empower crypto platforms to respond more adeptly to market sentiments and user behaviors. For example, Bumper's use of AI to analyze financial text data helps the platform anticipate market trends and adjust its offerings accordingly. This not only improves the platform's responsiveness but also enhances its competitive edge in this intense market.
Bumper’s pretrained model is capable of ingesting very large datasets of natural language relevant to financial markets, making it a powerful tool for sentiment analysis. By aggregating different types of market feedback (positive, negative or neutral) Bumper creates sentiment scores or market mood maps, giving its platform and user base a better read on the market. Crypto’s volatility can bring out the best and worst emotions in us, making this tool extremely useful whenever positions might become too taxing on yourself to fully diligence with a clear mind.
The models used by Bumper are capable of taking this sentiment analysis and turning it into future market prediction models, giving users a potential leg up for their current or future positions.
Beyond sentiment analysis, AI has been helpful for giving Bumper stronger technical analysis capabilities. Using a 7 billion parameter pretrained model, Bumper has created a system that extracts price data and uses technical analysis indicators to offer users visual chart representations with a variety of helpful information. Describing this model as a Large Language and Visual Assistant (LLAVA), this model can be trained to predict future price movements and offer more precise indicators through charts alone.
Both of these are two vastly unique trading styles, showcasing Bumper’s ability to cater to almost any type of trader - whether you’re more technical analysis focused or rely on sentiment to gauge longer term price movements. Humans are very smart and highly capable, but LLMs are multiplicatively more performant than humans in shorter time periods. With how much data comes from blockchains, AI is essential to ensuring nothing goes unnoticed. By analyzing market sentiment and historical trends, Bumper is able to offer users superior pricing, better data and a stronger guarantee of their positions’ safety.
Through integrating these LLMs into Bumper, the team plans on building out an improved version of the application with a variety of these features implemented directly. The price feeds used by Bumper will feature sentiment, price and liability risk factor parameters, offering more granularity to users in the price predictions given. With these integrated natively, Bumper can further its path to becoming a central force for users looking to navigate their crypto trades.
The BUMP token
At the heart of everything is Bumper’s native token, BUMP. Users are given the option to hold unbonded BUMP in their wallet in order to open a protected or earning position through the app. Upon entering a position a user’s BUMP is then bonded to the protocol, only to be returned when a position has been closed. While many protocols offer only simple staking functionality for their native tokens, Bumper has taken steps to integrate BUMP into the protocol’s core processes that make it integral for both users and Bumper.
Users have the option to buy and bond BUMP when taking out a position. In return they are rewarded 50% APY on bonded tokens. Mandatory bonding may be implemented down the line, but it is not currently required Users who don’t trade regularly are still able to participate by using BUMP for more traditional on-chain governance purposes. Upon participation in governance staking, users receive a variation of BUMP (vBUMP) backed 1:1, withdrawable at any point. Stakers can also choose to lock this vBUMP for a year to receive increased rewards, though this is optional.
While some may interpret bonding BUMP as a protocol fee, the act of bonding a user’s tokens is used as a form of collateralization prior to the opening of these positions. There are a few key reasons why Bumper implemented a system like this, with the bonding mechanism being incredibly useful for ensuring true utility of the native token, enabling easier access to future positions and restriction of protocol imbalances.
The design philosophy around BUMP involved the careful creation of a balance between separation of value from a network effect and the utility of individual transactions - integrating BUMP directly into core protocol processes makes it more than just a “useless governance token” and provides users real action to take in-app. Through this process, BUMP price becomes a function of market demand, where as Bumper activity increases, price follows.
By opening up a minor utility for BUMP, the team was able to achieve something rarely done across the broader DeFi ecosystem - offering a token with innate utility. Most tokens across DeFi are void of any real utility - BUMP stands as a midpoint between real usage and token speculation, offering something for users that plan to take advantage of Bumper’s trading features while also opening up opportunities for anyone wishing to participate in protocol governance on-chain.
By requiring users to purchase BUMP tokens, the protocol is more resistant to large, unexpected protocol inflows that might destabilize markets and make it more difficult to manage user risk effectively. All of this together presents BUMP as a means of strengthening Bumper and offering a better user experience, all made possible through an ERC-20 token.
Bumper’s mission
Bumper’s main tenets rely on the user behaviors of protecting, earning and trading. With different user profiles across the wide spectrum of crypto, Bumper can cater to those who wish to open new positions based on volatility, provide liquidity to assist the platform or further safeguard their positions. Bumper’s capital protection services allows DAOs, institutions and individuals to feel comfortable about crypto’s many risks.
Other protocols across the DeFi ecosystem might offer bespoke services in various packages, but none of them are as accessible as Bumper. Bumper offers all of this and more in one interface, a one-stop shop for all types of DeFi’s broad user base. It’s simple, effective and it just works.
Bumper's innovative approach extends to its dynamic risk assessment and management features. The protocol actively monitors market conditions and adjusts its parameters in real-time to ensure solvency and maintain balance between protecting users and rewarding liquidity providers. Positions across Bumper are aggregated under the system’s suite of risk management procedures, subject to active safety measures from the protocol’s usage of LLMs, historical price data and frequent updates.
This dynamic adjustment is key to Bumper's ability to offer protection without necessitating prohibitively high premiums, which could deter participation. It allows the protocol to remain flexible and responsive, a crucial feature in the fast-evolving crypto markets.
Aligning with the ethos of DeFi, Bumper operates in a completely decentralized and permissionless manner, removing the need for any central authority or intermediary - an impressive feat given how rarely this is achieved in crypto or brushed aside in favor of other priorities. Bumper didn’t cut any corners and wished to embrace an approach that could give the traders a far more meaningful experience when it comes to hedging positions or locking in further upside on standard positions.
Bumper's approach to trading distinguishes itself by simplifying the complexities typically associated with traditional financial derivatives. Traditional options trading, while offering strategic advantages for the speculation on asset prices, often involves intricate knowledge of financial instruments and markets - something that can be abstracted away to enable more consumer-friendly trading products.
This complexity is not just a barrier for newcomers but can also be a deterrent for seasoned traders looking for more straightforward ways to protect their positions. Bumper’s offerings of broad strike and term ranges make it easier for anyone to access this risk management - it doesn’t have to be as granular as traditional options venues price premiums, with Bumper it’s as simple as other familiar on-chain transactions across DeFi.
Bumper's design choices are strategically aligned to provide a robust solution for downside protection while also offering attractive opportunities for yield generation. By balancing these two aspects effectively, Bumper addresses significant gaps in the traditional and decentralized finance markets, making it a compelling choice for both crypto holders seeking to protect their investments and participants looking to benefit from the DeFi economy's growth. This dual functionality, combined with its commitment to decentralization and user empowerment, positions Bumper as a pioneering protocol in the landscape of on-chain trading and risk management.
Bumper is currently live on Arbitrum and has been able to facilitate its user requests at lightning speeds thanks to Layer 2 scaling technology. The decision to launch Bumper on Arbitrum was made due to its quicker time to finality, cheap transaction fees and more transactions per second than other Layer 2 blockchains. Other alternative L1s and mainnet Ethereum are quality blockchains in terms of architecture, but Bumper wanted to leverage the shared security of Ethereum mainnet and Arbitrum’s higher performance to deliver a profound user experience to all parties.
Bumper and the trading landscape
Part of what makes Bumper so unique is its ability to target multiple verticals simultaneously and achieve efficient pricing and risk protection services for a vast array of DeFi power users. Other protocols may offer similar functionality, but none of them possess a suite of products that accommodate for broad user types as well as Bumper. Whether it’s more efficient premium pricing, bespoke risk management services powered by AI or complex trading strategies made simpler, Bumper caters to all audiences with ease.
The on-chain trading landscape, a cornerstone of the decentralized finance ecosystem, has evolved significantly over the past few years. Uniswap, one of the most prominent decentralized exchanges operating on the Ethereum blockchain, exemplifies this growth. Uniswap utilizes an automated market maker (AMM) model to facilitate trading without the need for traditional market-making mechanisms. This protocol allows for the swapping of a vast array of ERC-20 tokens directly through smart contracts, thus providing liquidity and enabling a seamless trading experience for users. Its influence on Ethereum is massive, as it not only increases blockchain activity but also serves as a primary entry point for projects seeking liquidity for their tokens.
Uniswap’s dominance has been able to create an innumerable amount of markets on Ethereum and other L1s and L2s. Users have taken advantage of the AMM’s simplicity to create two-sided markets for any asset - these are, of course, highly volatile. No matter where you look in crypto this volatility cannot be avoided, though for many this is one of crypto’s most crucial selling points.
Perpetual futures DEXs like GMX have also carved out their own niche in the DeFi space, offering traders exposure to perpetual futures contracts without the need for traditional financial intermediaries. GMX stands out by allowing users to trade cryptocurrencies with leverage directly on the blockchain, using a blend of spot and futures trading mechanisms that are managed through smart contracts. The app integrates price feeds directly into its operations to maintain continuous, decentralized, and secure trading. The ability to trade with leverage on a decentralized platform attracts a significant volume of traders seeking flexibility and reduced counterparty risk, which traditional exchanges cannot fully mitigate.
On-chain trading isn’t only limited to perpetual futures contracts or decentralized exchange swaps.
Options have long been a cornerstone of traditional financial markets, offering traders the ability to hedge against risks, speculate on price movements and leverage their positions.
An option is a type of derivative contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price before the option's expiration date. There are two types of options: calls, which provide the right to buy, and puts, which provide the right to sell. Traders use options to manage risk by protecting against price declines (through puts) or to gain from price increases (through calls) beyond a certain threshold.
Among the crypto options exchanges, Deribit has emerged as the dominant player. It has become synonymous with cryptocurrency options, capturing the majority of the market share. Deribit's success can be attributed to its robust platform that offers high liquidity, a wide range of options contracts on various cryptocurrencies and advanced trading features that cater to both retail and institutional traders. Its market dominance is reinforced by the platform's ability to provide traders with a reliable secure environment to trade options, along with tools for sophisticated risk management and leveraging strategies.
Bumper's entry into this space represents a novel approach by focusing not just on trading, and an options alternative but on providing price protection as a service. Unlike traditional options protocols that operate with a win-lose scenario depending on the strike price and market conditions at the expiration, Bumper allows users to set a floor price for their assets, protecting them against significant downturns without foregoing the potential for gains. This method offers a psychological advantage by abstracting away the speculative aspect of needing to predict price movements while still maintaining that optionality should a user wish.
And the numbers don’t lie - since December 2023, Bumper has been able to achieve consistently superior put option pricing over Deribit, a feat not achieved by any alternative Black Scholes pricing models in over fifty years.
Bumper’s dynamic premium model, which adjusts in real-time based on market volatility and liquidity conditions, provides a more cost-effective approach to risk management. Additionally, Bumper's decentralized and autonomous nature aligns closely with the ethos of the broader crypto community, offering a trustless and transparent risk management solution.
To compete effectively with giants like Deribit, Bumper will need to capitalize on its unique selling propositions—such as user-friendly risk management tools and dynamic pricing. Users can open positions with any strike and almost any available terms - something not currently feasible across other platforms, let alone achievable on-chain.
A simulation report done by Bumper showed that the bear market of 2022 had over 46% yield improvement on maker orders compared to other venues, including Deribit. Bumper was also able to achieve 9.3% cheaper take premia for its users, specifically in put option markets.
This can attract a significant user base by catering to those looking for simpler, more intuitive protective measures as opposed to complex trading strategies. This could include long-term holders wanting to safeguard their investments or new entrants cautious about entering a volatile market. As it grows, maintaining a strong focus on security and user experience will be key to gaining and retaining trust within the broader crypto community.
Bumper strategy highlights
Now that we’ve covered many of the mechanisms and design specifications that make Bumper possible, let’s explore some of the strategies users can take advantage of through the application. We’ve outlined some of the core parties who may interact with Bumper - traders, yield-focused investors and capital protectors. Now, let’s focus on the trading aspect and examine how Bumper’s product suite offers a superior and differentiated user experience across all types of strategies. These are all covered in this blog post, but we’ll break it down in more detail.
Bumper is extremely flexible as an application, extending this functionality to its user base. No approach to trading is the same, and this is magnified tenfold in crypto. Any strategy utilized in Bumper is optimized for timing the markets in a precise way or navigating upcoming price movements - all time frames are applicable when crafting a position on Bumper. However, at their core these strategies are quite simple - prices go up, users gain value; prices go down, value is protected and users are now able to buy back their assets at lower prices. While many of the specific strategies in Bumper might appear complex, the team offers a variety of different options depending on one of those two views - it’s up to users to make the decision on what’s best for them and their portfolios.
For those that might be advocates for crypto over the long term but wary of short-term price movements, they might choose to enter a hedged long position or a short accumulation position. Both of these trades are possible if the underlying asset is already owned by a user - let’s use ETH as an example.
Say there’s an upcoming deadline for ETH ETF registration and a trader is feeling wary, they could either deposit the asset into Bumper and set a defined time frame with floor price and collect USDT upon completion, allowing them to buy back lower. In this scenario a user is able to gain safety over their position from the beginning while still allowing themselves an opportunity to jump back in - none of this needs to be managed by a user of course, as Bumper handles it via dynamic readjustments. For those that wish to take advantage of potential price appreciation, they’re also able to ride the asset higher and slowly scale out as their targets are hit - price protection is present on both sides of the trade.
These scenarios offer different flexibility, with Bumper’s underlying mechanisms and system architecture working to manage these for traders without the hassle. Regardless of specified outcomes, Bumper makes any position like this possible with the added utility of automated protocol management working underneath. Bumper’s automated solutions make it possible for traders to secure their position’s value while simultaneously allowing for asset accumulation or realized PnL.
For those who might be more interested in using existing DeFi primitives in their positions or initiating more complex strategies, they can utilize Bumper’s consecutive hedges or trade yield-bearing LSTs like stETH. For the consecutive hedge strategy, traders can make use of Bumper’s trailing protection mechanism that allows a position to be scaled out as it crosses key price points to the upside.
A trader is able to lock-in profits and easily manage a position with the same time frame specifications previously mentioned. Bumper enables the trading of LSTs through the same trailing protection or short accumulation strategies, depositing their stETH into Bumper and collecting cheaper coins whilst protecting their downside. By plugging in existing DeFi primitives, Bumper has created a toolbox for its users to put existing assets to work in entirely new ways.
Through these specific scenarios a Bumper user can more accurately specify desired trading outcomes while taking on a targeted amount of risk. Should they use Bumper, there’s no longer a scenario where a crypto trader might be subject to rampant volatility without any precautions.
Next steps for Bumper and recent developments
With everything out of the way, we can look at recent updates from the Bumper team and where their head is heading into the third quarter of 2024. A lot of information has been covered, so if you’re looking for more details or simpler explanations, navigate to Bumper’s Twitter or their blog here.
Bond boosting and future BUMP utility
Bumper recently announced a new initiative with its Bond Boost program, offering users an opportunity to bond their BUMP tokens for a variety of in-app features that can make trading easier. Upon opening a position in Bumper, users are presented with an option to bond their tokens within a specified range. The amount bonded depends on the dollar value of the position being opened, with users able to bond 2.5% of a position or 250% with a cap of $10,000. For whatever bond amount chosen, users earn a 50% APY for the duration receivable in BUMP tokens.
This is interesting as through bonding their BUMP tokens, users can manage to set a range and period to where their premiums essentially become paid for. The presence of no premiums for the small price of a BOND position makes Bumper enticing for users that don’t wish to pay premiums in the event a position doesn’t go their way. The premiums table displayed in Bumper can list off a range of prices for a given time period, letting users decide to minimize their risk dependent on BUMP held in-wallet.
Bumper has stated that this will eventually become a mandatory feature of the platform, but for now, users of Bumper can enjoy potentially free premiums and greater rewards through the same trading activities they’d enjoy on other platforms.
Beyond BUMP boost, the team has also announced some upcoming changes to BUMP utility in their newly posted blackpaper. Some of these planned upgrades include revised safety modules for BUMP staking, targeted incentives for ecosystem growth and increased incentives for BUMP holders. The black paper highlights that while BUMP staking is still optional, future versions of the protocol will make this feature mandatory to better accommodate for incentive alignment and to enable increased utility of BUMP in-app.
Bumpered assets and more
Moving back to some of the previously discussed content, let’s take a closer look at Bumper’s plans to expand “bumpered asset” utility and how this might elevate Bumper’s position across DeFi. A bumpered asset can be defined as the asset takers receive upon the opening of a position - they hold bumpered assets while they watch their assets in Bumper.
Similar to how stETH lets ETH stakers utilize their money across DeFi, bumpered assets might be able to serve as collateral on other protocols in the near future. Capital efficiency is a huge benefit of stETH, and this isn’t lost on Bumper - the utility of bumpered assets could expand into yield products enabled by price-protected assets only possible on Bumper or products designed around a lack of liquidations.
One of the benefits of Bumper is its vast extendability - despite the complex processes and algorithms running behind the scenes, users can feel safe knowing their assets are protected and are able to access such powerful strategies in just a few clicks. Should Bumper pursue integrations across DeFi, it’s likely that bumpered assets can attract attention from major protocols like Aave and Maker to open up liquidity routes between Bumper and a larger user base in the near future.
Expanding to centralized exchanges
Bumper recently announced plans for the ability to trade centralized exchange (CEX) assets on Bumper with help from the Cede chrome extension. Users with USDT on a CEX can now simply download the Cede extension, create API keys through a non-custodial extension and get redirected back to Bumper.
Being able to navigate the markets with Bumper’s help can be a massive advantage for traders, letting them utilize CEX assets without needing to migrate them on-chain and manage a self-custodial wallet. With Cede, users simply make a few clicks, save their API key and can access everything they love about Bumper without the hassle. A very large majority of crypto users and investors hold their assets through a CEX due to the challenges of moving these funds on-chain. Whether this is due to security issues, ease of access or some other concern, the fact is that CEXs are here to stay and Bumper is making it easier than ever for a broader user base to access their volatility-harnessing powers.
Closing thoughts
Bumper has carved out a niche for itself and has continued its pace of innovation as market activity across all crypto sectors heats up. With the recent integrations of LLMs, coming plans to expand BUMP utility and the continued success of its optimized trading strategies, Bumper is doing well to position itself as a premier platform for traders who want more from the market.
Hopefully this report was able to provide you with a deeper understanding of Bumper and why it’s been built with a superior user experience in mind. If you’d like to explore more about trading on Bumper, you can check out their blog here or navigate to their Twitter page for daily updates. Thank you for reading.
Disclaimer: This report was commissioned by Bumper. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
The cryptocurrency market is one of rapid fluctuations in which market volatility often dictates investment outcomes on much more extreme time frames. In these markets, risk management emerges as a pivotal concern for both seasoned investors and newcomers. Bumper - a decentralized finance (DeFi) protocol - addresses this concern by providing an innovative solution designed to mitigate the risks associated with price fluctuations and to enable smarter trading for more gains.
By simplifying the hedging process, Bumper allows all market participants to trade the market or safeguard their investments against downturns while maintaining the potential for gains, no matter what direction the market goes. Bumper markets itself as a permissionless, AI-powered pooled risk market - a new primitive in the DeFi sector designed to make traders’ lives easier, more efficient and more manageable to succeed in these volatile markets.
Bumper offers built-in risk management to make navigating crypto easier and more effective. Operating as an innovative DeFi platform that simplifies volatile markets and position hedging, every type of trader can take advantage of it. Typical methods of managing risk across crypto markets include stop-loss orders, holding a portion of your portfolio in stablecoins and utilizing options. Bumper’s approach involves a two-sided pooled risk market, consisting of protection takers on one side and yield-seekers on the other.
Bumper’s smart contracts allow protection takers to deposit their assets with a specified term length and floor price. If the price of an asset settles above floor price at any point, they can get their original assets back. If price settles below the floor, users claim the value of floor price in stablecoins, though they must wait until expiration date to settle this position.
With both outcomes covered, protection takers can rest easy knowing their assets are secure in Bumper. With yield-seekers on the other end, these users provide liquidity and earn a return based on premiums paid by protection takers. This structure not only simplifies the hedging process but also enhances the fairness and accessibility of risk management, making it a crucial tool for anyone attempting to navigate crypto markets.
This system is more sustainable than many other mechanisms that take place in DeFi, mainly due to its simplicity and the presence of real yield for liquidity providers. Assuming there is always an individual looking to trade on Bumper, yield-seekers earn this premium for taking risk upon depositing. Unlike other applications that offer high yields based on liquidity mining and unsustainable protocol emissions, Bumper’s platform is driven by users and puts the power in their hands.
This is the opposite of a zero-sum system, with both types of Bumper users winning based on their respective roles.
For yield-seekers this comes from premium earned and protection takers receive the benefit of proper risk management for their assets. What sets Bumper apart is its ability to operate efficiently across all market conditions, including extreme scenarios like Black Swan events. Bumper’s robust design ensures solvency and sustainability, instilling confidence amongst its users as they open, close and evaluate positions. Bumper’s market model is based on fairness and shared risk, which allows for dynamic response to market changes, efficient pricing of risk, and distribution of yields that are both stable and fair.
Bumper offers multiple advantages for different types of crypto market participants. For those seeking protection, it provides a cost-effective and simple alternative to traditional options and stop-loss strategies, allowing them to benefit from potential upswings without the worry of significant downturns. For yield seekers, Bumper presents an opportunity to earn from the premiums paid by those seeking protection, contributing to a healthier, more balanced crypto ecosystem. A simple example of what’s possible with Bumper can be given through the following: a DeFi user might open a hedged position assuming the market is going to move lower, make a claim on this position to receive stablecoins and buy back into the asset, all achieved through the Bumper app.
Innovative enough on its own, Bumper’s unique architecture and product suite powered by LLMs and additional machine learning methodologies is helping traders achieve more efficient pricing, higher yields and vastly safer risk management procedures - a new primitive representative of horizontal scaling in crypto done correctly..
Understanding Bumper
To provide more context for the rest of the report, let’s explore how Bumper calculates premiums and how the underlying mechanisms work, with a focus on Bumper’s unique pool rebalancing features.
Part of what makes Bumper’s system function so well is its focus on dynamically rebalancing premiums and shifting risk and reward across many user positions in-app. Bumper refers to its rebalancing strategy as a “dynamic hedging engine,” an integral process that underpins the entire protocol functionality. Algorithms within Bumper monitor liquidity ratios, compare these to target ratios and calculate solutions to minimizing liquidity risk at various price levels across user positions.
Through its use of a dynamic hedging engine, Bumper is able to ensure not only protocol solvency, but superior pricing for users upon both the entry and exit of positions - the rebalancing happening underneath is one of the core reasons for Bumper’s efficiency. The algorithm works across several stages, but ultimately finalizes upon same-side rebalancing for total capital and total assets across Bumper. Bumper’s algorithms operate whether or not a liquidity risk was even observed, allowing the application to function smoothly regardless of strenuous market conditions being present or not.
When it comes to pricing its premiums for takers, Bumper uses another similar dynamic pricing mechanism. To offer more of a formalization, the three factors that control this process are price risk factors (PRFs), liquidity risk factors (LRFs) and the risk rating of each position. PRFs are determined by the continuous asset monitoring by Bumper, with algorithms running analysis on recent price movements and historical data to generate a fixed proxy for the most likely future price volatility. The more volatility rises, the higher Bumper’s PRFs go.
LRFs are crucial to assessing risk, as any market ultimately depends on liquidity for sufficient and accurate price discovery. Liquidity risk in the context of Bumper refers to a situation where in-app pools are unable to satisfy the request(s) of a maker or taker. While Bumper categorizes these scenarios as highly unlikely due to the required volatility and extreme absence of protocol liquidity, it is absolutely essential to monitor this in order to accurately and fairly price premiums on Bumper.
Risk rating of each position occurs after setting term lengths and floor prices to every taker position within Bumper, dynamically pricing risk based on user actions taken. These risk ratings increase the liability risk of positions taken and prices premiums dynamically to reflect this. The longer a protection term is, the lower a premium rate is charged. Longer protection terms typically see lower premium rates charged, though individual user risk within these can vary.
Bumper was designed to maximize the efficiency of asset pricing risk to offer takers provably fair priced premiums - at the heart of any market is a healthy incentive balance between makers and takers, with Bumper striving to ensure this balance remains a core aspect of their operations. Bumper takes price and liquidity risk from the platform and distributes it fairly to both takers and makers. For the former, dynamic premiums are accumulated globally at a pool level for all positions, while individual premiums are determined at any point by a taker’s risk factor and timeframe specified.
On the other hand, makers share a global yield pool due to the fluctuations that might occur within individual taker premium pricing. Market yield is effectively split amongst all makers proportionally to their assets deposited and level of risk specified in order to ensure fair and attractive payments for their services.
Bumper represents a massive step forward in the field of DeFi. Its unique approach driven by built-in risk management makes it indispensable for those looking to protect their crypto assets while also offering lucrative opportunities for those willing to provide liquidity in these volatile markets.
With its user-friendly interface, fair pricing, and resilient system design, Bumper stands out as a beacon of innovation in the constantly changing cryptocurrency landscape, promising a more stable future for all market participants. Bumper’s flexible hedging system makes it so traders don’t have to lose out on market upside should their market predictions not come to fruition, while balancing out rewards for yield-seekers with attractive returns.
This core functionality allows users to engage in almost any type of trading style they choose, all from an easy to navigate interface. Actions like locking in profits, protecting against downside volatility, earning greater yield, and crafting more deliberate positions are all possible with Bumper.
Crypto has hundreds of liquid, active markets for users to trade - all of these are different and possess a level of nuance that varies from the last. With Bumper, users can stick to a set of guiding principles for their trading styles and utilize the tools they need to succeed - it’s customizable, passively managed and puts your portfolio first.
Traditional methods of risk management in crypto suffer from a few major drawbacks, mainly centralized exchanges, the presence of heightened emotion from volatility and liquidity constraints. Users feel boxed in by feeling they have to protect their assets with a custodian or feel pressured to buy or sell more with each subsequent candle. With Bumper, users can simply deposit their assets and let the protocol’s mechanisms manage risk in an emotionless, practical way.
Bumper’s structure provides a unique alternative to the complexity of options trading, letting users ignore many of the difficulties from setting expiries, choosing a strike price and micromanaging these financial derivatives without any help. While Bumper and options contracts both let users manage risk in their own unique ways, Bumper offers a more hands-off approach and much of the upside without the downsides that come from trading financial derivatives. Users just set a floor price to where they want to protect their assets, pay a premium and let Bumper do the work. Options are not this simple as a variety of other factors might affect positions, with options greeks being very difficult even for seasoned investors to get a grasp over.
Additionally, much of Bumper’s internal processes have recently been expanded and improved upon with the integration of LLMs and unique sentiment analysis algorithms. Bumper leverages AI to redefine risk management in crypto markets by introducing an AI-powered pooled risk market. This innovative approach uses sophisticated AI algorithms to maintain balance within the protocol, ensuring that protection takers can secure their assets against price drops effectively.
Bumper’s team of AI engineers use a previously trained model with 70 billion parameters and a variety of embedded financial data including price data and historical volume metrics. The process involved training with daily price data, before moving to more granular hourly data with a goal to eventually monitor tick data in an effort to provide users with the best possible risk management services through Bumper.
Bumper also makes use of an Agent-Based Model (ABM) enhanced with AI to simulate and adapt to changing market conditions. These agents use machine learning to evolve their strategies based on historical data and ongoing market dynamics. This results in a more resilient system that can anticipate and react to trends, thereby optimizing the protection mechanisms for users' assets. Bumper’s ABM sits separate to core protocol mechanics that the rest of its AI mechanisms make use of. The simulation aspect allows Bumper to make more sense of parameter changes and price change scenarios - when a simulation is run, the performance is evaluated in comparison to Bumper’s current architecture. If a strategy performs better upon the simulation’s completion, the change is implemented into Bumper’s live protocol.
A crucial aspect of Bumper’s AI integration is its use in optimizing the streamia, or dynamic premiums, paid by protection takers. By incorporating market sentiment analysis and investor behavior, Bumper’s LLM helps in fine-tuning premium calculations that make their way back to the end user. This involves sophisticated financial text data analysis to extract market sentiment, using transformer-based structures and attention mechanisms within the LLM. The insights gained are crucial for adjusting the Price Risk Factor (PRF), Liquidity Risk Factor (LRF), and Risk Rating of Positions (RRP), ensuring that the premiums reflect true market conditions and risk levels.
AI's capabilities in sentiment analysis and automated decision-making can empower crypto platforms to respond more adeptly to market sentiments and user behaviors. For example, Bumper's use of AI to analyze financial text data helps the platform anticipate market trends and adjust its offerings accordingly. This not only improves the platform's responsiveness but also enhances its competitive edge in this intense market.
Bumper’s pretrained model is capable of ingesting very large datasets of natural language relevant to financial markets, making it a powerful tool for sentiment analysis. By aggregating different types of market feedback (positive, negative or neutral) Bumper creates sentiment scores or market mood maps, giving its platform and user base a better read on the market. Crypto’s volatility can bring out the best and worst emotions in us, making this tool extremely useful whenever positions might become too taxing on yourself to fully diligence with a clear mind.
The models used by Bumper are capable of taking this sentiment analysis and turning it into future market prediction models, giving users a potential leg up for their current or future positions.
Beyond sentiment analysis, AI has been helpful for giving Bumper stronger technical analysis capabilities. Using a 7 billion parameter pretrained model, Bumper has created a system that extracts price data and uses technical analysis indicators to offer users visual chart representations with a variety of helpful information. Describing this model as a Large Language and Visual Assistant (LLAVA), this model can be trained to predict future price movements and offer more precise indicators through charts alone.
Both of these are two vastly unique trading styles, showcasing Bumper’s ability to cater to almost any type of trader - whether you’re more technical analysis focused or rely on sentiment to gauge longer term price movements. Humans are very smart and highly capable, but LLMs are multiplicatively more performant than humans in shorter time periods. With how much data comes from blockchains, AI is essential to ensuring nothing goes unnoticed. By analyzing market sentiment and historical trends, Bumper is able to offer users superior pricing, better data and a stronger guarantee of their positions’ safety.
Through integrating these LLMs into Bumper, the team plans on building out an improved version of the application with a variety of these features implemented directly. The price feeds used by Bumper will feature sentiment, price and liability risk factor parameters, offering more granularity to users in the price predictions given. With these integrated natively, Bumper can further its path to becoming a central force for users looking to navigate their crypto trades.
The BUMP token
At the heart of everything is Bumper’s native token, BUMP. Users are given the option to hold unbonded BUMP in their wallet in order to open a protected or earning position through the app. Upon entering a position a user’s BUMP is then bonded to the protocol, only to be returned when a position has been closed. While many protocols offer only simple staking functionality for their native tokens, Bumper has taken steps to integrate BUMP into the protocol’s core processes that make it integral for both users and Bumper.
Users have the option to buy and bond BUMP when taking out a position. In return they are rewarded 50% APY on bonded tokens. Mandatory bonding may be implemented down the line, but it is not currently required Users who don’t trade regularly are still able to participate by using BUMP for more traditional on-chain governance purposes. Upon participation in governance staking, users receive a variation of BUMP (vBUMP) backed 1:1, withdrawable at any point. Stakers can also choose to lock this vBUMP for a year to receive increased rewards, though this is optional.
While some may interpret bonding BUMP as a protocol fee, the act of bonding a user’s tokens is used as a form of collateralization prior to the opening of these positions. There are a few key reasons why Bumper implemented a system like this, with the bonding mechanism being incredibly useful for ensuring true utility of the native token, enabling easier access to future positions and restriction of protocol imbalances.
The design philosophy around BUMP involved the careful creation of a balance between separation of value from a network effect and the utility of individual transactions - integrating BUMP directly into core protocol processes makes it more than just a “useless governance token” and provides users real action to take in-app. Through this process, BUMP price becomes a function of market demand, where as Bumper activity increases, price follows.
By opening up a minor utility for BUMP, the team was able to achieve something rarely done across the broader DeFi ecosystem - offering a token with innate utility. Most tokens across DeFi are void of any real utility - BUMP stands as a midpoint between real usage and token speculation, offering something for users that plan to take advantage of Bumper’s trading features while also opening up opportunities for anyone wishing to participate in protocol governance on-chain.
By requiring users to purchase BUMP tokens, the protocol is more resistant to large, unexpected protocol inflows that might destabilize markets and make it more difficult to manage user risk effectively. All of this together presents BUMP as a means of strengthening Bumper and offering a better user experience, all made possible through an ERC-20 token.
Bumper’s mission
Bumper’s main tenets rely on the user behaviors of protecting, earning and trading. With different user profiles across the wide spectrum of crypto, Bumper can cater to those who wish to open new positions based on volatility, provide liquidity to assist the platform or further safeguard their positions. Bumper’s capital protection services allows DAOs, institutions and individuals to feel comfortable about crypto’s many risks.
Other protocols across the DeFi ecosystem might offer bespoke services in various packages, but none of them are as accessible as Bumper. Bumper offers all of this and more in one interface, a one-stop shop for all types of DeFi’s broad user base. It’s simple, effective and it just works.
Bumper's innovative approach extends to its dynamic risk assessment and management features. The protocol actively monitors market conditions and adjusts its parameters in real-time to ensure solvency and maintain balance between protecting users and rewarding liquidity providers. Positions across Bumper are aggregated under the system’s suite of risk management procedures, subject to active safety measures from the protocol’s usage of LLMs, historical price data and frequent updates.
This dynamic adjustment is key to Bumper's ability to offer protection without necessitating prohibitively high premiums, which could deter participation. It allows the protocol to remain flexible and responsive, a crucial feature in the fast-evolving crypto markets.
Aligning with the ethos of DeFi, Bumper operates in a completely decentralized and permissionless manner, removing the need for any central authority or intermediary - an impressive feat given how rarely this is achieved in crypto or brushed aside in favor of other priorities. Bumper didn’t cut any corners and wished to embrace an approach that could give the traders a far more meaningful experience when it comes to hedging positions or locking in further upside on standard positions.
Bumper's approach to trading distinguishes itself by simplifying the complexities typically associated with traditional financial derivatives. Traditional options trading, while offering strategic advantages for the speculation on asset prices, often involves intricate knowledge of financial instruments and markets - something that can be abstracted away to enable more consumer-friendly trading products.
This complexity is not just a barrier for newcomers but can also be a deterrent for seasoned traders looking for more straightforward ways to protect their positions. Bumper’s offerings of broad strike and term ranges make it easier for anyone to access this risk management - it doesn’t have to be as granular as traditional options venues price premiums, with Bumper it’s as simple as other familiar on-chain transactions across DeFi.
Bumper's design choices are strategically aligned to provide a robust solution for downside protection while also offering attractive opportunities for yield generation. By balancing these two aspects effectively, Bumper addresses significant gaps in the traditional and decentralized finance markets, making it a compelling choice for both crypto holders seeking to protect their investments and participants looking to benefit from the DeFi economy's growth. This dual functionality, combined with its commitment to decentralization and user empowerment, positions Bumper as a pioneering protocol in the landscape of on-chain trading and risk management.
Bumper is currently live on Arbitrum and has been able to facilitate its user requests at lightning speeds thanks to Layer 2 scaling technology. The decision to launch Bumper on Arbitrum was made due to its quicker time to finality, cheap transaction fees and more transactions per second than other Layer 2 blockchains. Other alternative L1s and mainnet Ethereum are quality blockchains in terms of architecture, but Bumper wanted to leverage the shared security of Ethereum mainnet and Arbitrum’s higher performance to deliver a profound user experience to all parties.
Bumper and the trading landscape
Part of what makes Bumper so unique is its ability to target multiple verticals simultaneously and achieve efficient pricing and risk protection services for a vast array of DeFi power users. Other protocols may offer similar functionality, but none of them possess a suite of products that accommodate for broad user types as well as Bumper. Whether it’s more efficient premium pricing, bespoke risk management services powered by AI or complex trading strategies made simpler, Bumper caters to all audiences with ease.
The on-chain trading landscape, a cornerstone of the decentralized finance ecosystem, has evolved significantly over the past few years. Uniswap, one of the most prominent decentralized exchanges operating on the Ethereum blockchain, exemplifies this growth. Uniswap utilizes an automated market maker (AMM) model to facilitate trading without the need for traditional market-making mechanisms. This protocol allows for the swapping of a vast array of ERC-20 tokens directly through smart contracts, thus providing liquidity and enabling a seamless trading experience for users. Its influence on Ethereum is massive, as it not only increases blockchain activity but also serves as a primary entry point for projects seeking liquidity for their tokens.
Uniswap’s dominance has been able to create an innumerable amount of markets on Ethereum and other L1s and L2s. Users have taken advantage of the AMM’s simplicity to create two-sided markets for any asset - these are, of course, highly volatile. No matter where you look in crypto this volatility cannot be avoided, though for many this is one of crypto’s most crucial selling points.
Perpetual futures DEXs like GMX have also carved out their own niche in the DeFi space, offering traders exposure to perpetual futures contracts without the need for traditional financial intermediaries. GMX stands out by allowing users to trade cryptocurrencies with leverage directly on the blockchain, using a blend of spot and futures trading mechanisms that are managed through smart contracts. The app integrates price feeds directly into its operations to maintain continuous, decentralized, and secure trading. The ability to trade with leverage on a decentralized platform attracts a significant volume of traders seeking flexibility and reduced counterparty risk, which traditional exchanges cannot fully mitigate.
On-chain trading isn’t only limited to perpetual futures contracts or decentralized exchange swaps.
Options have long been a cornerstone of traditional financial markets, offering traders the ability to hedge against risks, speculate on price movements and leverage their positions.
An option is a type of derivative contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price before the option's expiration date. There are two types of options: calls, which provide the right to buy, and puts, which provide the right to sell. Traders use options to manage risk by protecting against price declines (through puts) or to gain from price increases (through calls) beyond a certain threshold.
Among the crypto options exchanges, Deribit has emerged as the dominant player. It has become synonymous with cryptocurrency options, capturing the majority of the market share. Deribit's success can be attributed to its robust platform that offers high liquidity, a wide range of options contracts on various cryptocurrencies and advanced trading features that cater to both retail and institutional traders. Its market dominance is reinforced by the platform's ability to provide traders with a reliable secure environment to trade options, along with tools for sophisticated risk management and leveraging strategies.
Bumper's entry into this space represents a novel approach by focusing not just on trading, and an options alternative but on providing price protection as a service. Unlike traditional options protocols that operate with a win-lose scenario depending on the strike price and market conditions at the expiration, Bumper allows users to set a floor price for their assets, protecting them against significant downturns without foregoing the potential for gains. This method offers a psychological advantage by abstracting away the speculative aspect of needing to predict price movements while still maintaining that optionality should a user wish.
And the numbers don’t lie - since December 2023, Bumper has been able to achieve consistently superior put option pricing over Deribit, a feat not achieved by any alternative Black Scholes pricing models in over fifty years.
Bumper’s dynamic premium model, which adjusts in real-time based on market volatility and liquidity conditions, provides a more cost-effective approach to risk management. Additionally, Bumper's decentralized and autonomous nature aligns closely with the ethos of the broader crypto community, offering a trustless and transparent risk management solution.
To compete effectively with giants like Deribit, Bumper will need to capitalize on its unique selling propositions—such as user-friendly risk management tools and dynamic pricing. Users can open positions with any strike and almost any available terms - something not currently feasible across other platforms, let alone achievable on-chain.
A simulation report done by Bumper showed that the bear market of 2022 had over 46% yield improvement on maker orders compared to other venues, including Deribit. Bumper was also able to achieve 9.3% cheaper take premia for its users, specifically in put option markets.
This can attract a significant user base by catering to those looking for simpler, more intuitive protective measures as opposed to complex trading strategies. This could include long-term holders wanting to safeguard their investments or new entrants cautious about entering a volatile market. As it grows, maintaining a strong focus on security and user experience will be key to gaining and retaining trust within the broader crypto community.
Bumper strategy highlights
Now that we’ve covered many of the mechanisms and design specifications that make Bumper possible, let’s explore some of the strategies users can take advantage of through the application. We’ve outlined some of the core parties who may interact with Bumper - traders, yield-focused investors and capital protectors. Now, let’s focus on the trading aspect and examine how Bumper’s product suite offers a superior and differentiated user experience across all types of strategies. These are all covered in this blog post, but we’ll break it down in more detail.
Bumper is extremely flexible as an application, extending this functionality to its user base. No approach to trading is the same, and this is magnified tenfold in crypto. Any strategy utilized in Bumper is optimized for timing the markets in a precise way or navigating upcoming price movements - all time frames are applicable when crafting a position on Bumper. However, at their core these strategies are quite simple - prices go up, users gain value; prices go down, value is protected and users are now able to buy back their assets at lower prices. While many of the specific strategies in Bumper might appear complex, the team offers a variety of different options depending on one of those two views - it’s up to users to make the decision on what’s best for them and their portfolios.
For those that might be advocates for crypto over the long term but wary of short-term price movements, they might choose to enter a hedged long position or a short accumulation position. Both of these trades are possible if the underlying asset is already owned by a user - let’s use ETH as an example.
Say there’s an upcoming deadline for ETH ETF registration and a trader is feeling wary, they could either deposit the asset into Bumper and set a defined time frame with floor price and collect USDT upon completion, allowing them to buy back lower. In this scenario a user is able to gain safety over their position from the beginning while still allowing themselves an opportunity to jump back in - none of this needs to be managed by a user of course, as Bumper handles it via dynamic readjustments. For those that wish to take advantage of potential price appreciation, they’re also able to ride the asset higher and slowly scale out as their targets are hit - price protection is present on both sides of the trade.
These scenarios offer different flexibility, with Bumper’s underlying mechanisms and system architecture working to manage these for traders without the hassle. Regardless of specified outcomes, Bumper makes any position like this possible with the added utility of automated protocol management working underneath. Bumper’s automated solutions make it possible for traders to secure their position’s value while simultaneously allowing for asset accumulation or realized PnL.
For those who might be more interested in using existing DeFi primitives in their positions or initiating more complex strategies, they can utilize Bumper’s consecutive hedges or trade yield-bearing LSTs like stETH. For the consecutive hedge strategy, traders can make use of Bumper’s trailing protection mechanism that allows a position to be scaled out as it crosses key price points to the upside.
A trader is able to lock-in profits and easily manage a position with the same time frame specifications previously mentioned. Bumper enables the trading of LSTs through the same trailing protection or short accumulation strategies, depositing their stETH into Bumper and collecting cheaper coins whilst protecting their downside. By plugging in existing DeFi primitives, Bumper has created a toolbox for its users to put existing assets to work in entirely new ways.
Through these specific scenarios a Bumper user can more accurately specify desired trading outcomes while taking on a targeted amount of risk. Should they use Bumper, there’s no longer a scenario where a crypto trader might be subject to rampant volatility without any precautions.
Next steps for Bumper and recent developments
With everything out of the way, we can look at recent updates from the Bumper team and where their head is heading into the third quarter of 2024. A lot of information has been covered, so if you’re looking for more details or simpler explanations, navigate to Bumper’s Twitter or their blog here.
Bond boosting and future BUMP utility
Bumper recently announced a new initiative with its Bond Boost program, offering users an opportunity to bond their BUMP tokens for a variety of in-app features that can make trading easier. Upon opening a position in Bumper, users are presented with an option to bond their tokens within a specified range. The amount bonded depends on the dollar value of the position being opened, with users able to bond 2.5% of a position or 250% with a cap of $10,000. For whatever bond amount chosen, users earn a 50% APY for the duration receivable in BUMP tokens.
This is interesting as through bonding their BUMP tokens, users can manage to set a range and period to where their premiums essentially become paid for. The presence of no premiums for the small price of a BOND position makes Bumper enticing for users that don’t wish to pay premiums in the event a position doesn’t go their way. The premiums table displayed in Bumper can list off a range of prices for a given time period, letting users decide to minimize their risk dependent on BUMP held in-wallet.
Bumper has stated that this will eventually become a mandatory feature of the platform, but for now, users of Bumper can enjoy potentially free premiums and greater rewards through the same trading activities they’d enjoy on other platforms.
Beyond BUMP boost, the team has also announced some upcoming changes to BUMP utility in their newly posted blackpaper. Some of these planned upgrades include revised safety modules for BUMP staking, targeted incentives for ecosystem growth and increased incentives for BUMP holders. The black paper highlights that while BUMP staking is still optional, future versions of the protocol will make this feature mandatory to better accommodate for incentive alignment and to enable increased utility of BUMP in-app.
Bumpered assets and more
Moving back to some of the previously discussed content, let’s take a closer look at Bumper’s plans to expand “bumpered asset” utility and how this might elevate Bumper’s position across DeFi. A bumpered asset can be defined as the asset takers receive upon the opening of a position - they hold bumpered assets while they watch their assets in Bumper.
Similar to how stETH lets ETH stakers utilize their money across DeFi, bumpered assets might be able to serve as collateral on other protocols in the near future. Capital efficiency is a huge benefit of stETH, and this isn’t lost on Bumper - the utility of bumpered assets could expand into yield products enabled by price-protected assets only possible on Bumper or products designed around a lack of liquidations.
One of the benefits of Bumper is its vast extendability - despite the complex processes and algorithms running behind the scenes, users can feel safe knowing their assets are protected and are able to access such powerful strategies in just a few clicks. Should Bumper pursue integrations across DeFi, it’s likely that bumpered assets can attract attention from major protocols like Aave and Maker to open up liquidity routes between Bumper and a larger user base in the near future.
Expanding to centralized exchanges
Bumper recently announced plans for the ability to trade centralized exchange (CEX) assets on Bumper with help from the Cede chrome extension. Users with USDT on a CEX can now simply download the Cede extension, create API keys through a non-custodial extension and get redirected back to Bumper.
Being able to navigate the markets with Bumper’s help can be a massive advantage for traders, letting them utilize CEX assets without needing to migrate them on-chain and manage a self-custodial wallet. With Cede, users simply make a few clicks, save their API key and can access everything they love about Bumper without the hassle. A very large majority of crypto users and investors hold their assets through a CEX due to the challenges of moving these funds on-chain. Whether this is due to security issues, ease of access or some other concern, the fact is that CEXs are here to stay and Bumper is making it easier than ever for a broader user base to access their volatility-harnessing powers.
Closing thoughts
Bumper has carved out a niche for itself and has continued its pace of innovation as market activity across all crypto sectors heats up. With the recent integrations of LLMs, coming plans to expand BUMP utility and the continued success of its optimized trading strategies, Bumper is doing well to position itself as a premier platform for traders who want more from the market.
Hopefully this report was able to provide you with a deeper understanding of Bumper and why it’s been built with a superior user experience in mind. If you’d like to explore more about trading on Bumper, you can check out their blog here or navigate to their Twitter page for daily updates. Thank you for reading.
Disclaimer: This report was commissioned by Bumper. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
The cryptocurrency market is one of rapid fluctuations in which market volatility often dictates investment outcomes on much more extreme time frames. In these markets, risk management emerges as a pivotal concern for both seasoned investors and newcomers. Bumper - a decentralized finance (DeFi) protocol - addresses this concern by providing an innovative solution designed to mitigate the risks associated with price fluctuations and to enable smarter trading for more gains.
By simplifying the hedging process, Bumper allows all market participants to trade the market or safeguard their investments against downturns while maintaining the potential for gains, no matter what direction the market goes. Bumper markets itself as a permissionless, AI-powered pooled risk market - a new primitive in the DeFi sector designed to make traders’ lives easier, more efficient and more manageable to succeed in these volatile markets.
Bumper offers built-in risk management to make navigating crypto easier and more effective. Operating as an innovative DeFi platform that simplifies volatile markets and position hedging, every type of trader can take advantage of it. Typical methods of managing risk across crypto markets include stop-loss orders, holding a portion of your portfolio in stablecoins and utilizing options. Bumper’s approach involves a two-sided pooled risk market, consisting of protection takers on one side and yield-seekers on the other.
Bumper’s smart contracts allow protection takers to deposit their assets with a specified term length and floor price. If the price of an asset settles above floor price at any point, they can get their original assets back. If price settles below the floor, users claim the value of floor price in stablecoins, though they must wait until expiration date to settle this position.
With both outcomes covered, protection takers can rest easy knowing their assets are secure in Bumper. With yield-seekers on the other end, these users provide liquidity and earn a return based on premiums paid by protection takers. This structure not only simplifies the hedging process but also enhances the fairness and accessibility of risk management, making it a crucial tool for anyone attempting to navigate crypto markets.
This system is more sustainable than many other mechanisms that take place in DeFi, mainly due to its simplicity and the presence of real yield for liquidity providers. Assuming there is always an individual looking to trade on Bumper, yield-seekers earn this premium for taking risk upon depositing. Unlike other applications that offer high yields based on liquidity mining and unsustainable protocol emissions, Bumper’s platform is driven by users and puts the power in their hands.
This is the opposite of a zero-sum system, with both types of Bumper users winning based on their respective roles.
For yield-seekers this comes from premium earned and protection takers receive the benefit of proper risk management for their assets. What sets Bumper apart is its ability to operate efficiently across all market conditions, including extreme scenarios like Black Swan events. Bumper’s robust design ensures solvency and sustainability, instilling confidence amongst its users as they open, close and evaluate positions. Bumper’s market model is based on fairness and shared risk, which allows for dynamic response to market changes, efficient pricing of risk, and distribution of yields that are both stable and fair.
Bumper offers multiple advantages for different types of crypto market participants. For those seeking protection, it provides a cost-effective and simple alternative to traditional options and stop-loss strategies, allowing them to benefit from potential upswings without the worry of significant downturns. For yield seekers, Bumper presents an opportunity to earn from the premiums paid by those seeking protection, contributing to a healthier, more balanced crypto ecosystem. A simple example of what’s possible with Bumper can be given through the following: a DeFi user might open a hedged position assuming the market is going to move lower, make a claim on this position to receive stablecoins and buy back into the asset, all achieved through the Bumper app.
Innovative enough on its own, Bumper’s unique architecture and product suite powered by LLMs and additional machine learning methodologies is helping traders achieve more efficient pricing, higher yields and vastly safer risk management procedures - a new primitive representative of horizontal scaling in crypto done correctly..
Understanding Bumper
To provide more context for the rest of the report, let’s explore how Bumper calculates premiums and how the underlying mechanisms work, with a focus on Bumper’s unique pool rebalancing features.
Part of what makes Bumper’s system function so well is its focus on dynamically rebalancing premiums and shifting risk and reward across many user positions in-app. Bumper refers to its rebalancing strategy as a “dynamic hedging engine,” an integral process that underpins the entire protocol functionality. Algorithms within Bumper monitor liquidity ratios, compare these to target ratios and calculate solutions to minimizing liquidity risk at various price levels across user positions.
Through its use of a dynamic hedging engine, Bumper is able to ensure not only protocol solvency, but superior pricing for users upon both the entry and exit of positions - the rebalancing happening underneath is one of the core reasons for Bumper’s efficiency. The algorithm works across several stages, but ultimately finalizes upon same-side rebalancing for total capital and total assets across Bumper. Bumper’s algorithms operate whether or not a liquidity risk was even observed, allowing the application to function smoothly regardless of strenuous market conditions being present or not.
When it comes to pricing its premiums for takers, Bumper uses another similar dynamic pricing mechanism. To offer more of a formalization, the three factors that control this process are price risk factors (PRFs), liquidity risk factors (LRFs) and the risk rating of each position. PRFs are determined by the continuous asset monitoring by Bumper, with algorithms running analysis on recent price movements and historical data to generate a fixed proxy for the most likely future price volatility. The more volatility rises, the higher Bumper’s PRFs go.
LRFs are crucial to assessing risk, as any market ultimately depends on liquidity for sufficient and accurate price discovery. Liquidity risk in the context of Bumper refers to a situation where in-app pools are unable to satisfy the request(s) of a maker or taker. While Bumper categorizes these scenarios as highly unlikely due to the required volatility and extreme absence of protocol liquidity, it is absolutely essential to monitor this in order to accurately and fairly price premiums on Bumper.
Risk rating of each position occurs after setting term lengths and floor prices to every taker position within Bumper, dynamically pricing risk based on user actions taken. These risk ratings increase the liability risk of positions taken and prices premiums dynamically to reflect this. The longer a protection term is, the lower a premium rate is charged. Longer protection terms typically see lower premium rates charged, though individual user risk within these can vary.
Bumper was designed to maximize the efficiency of asset pricing risk to offer takers provably fair priced premiums - at the heart of any market is a healthy incentive balance between makers and takers, with Bumper striving to ensure this balance remains a core aspect of their operations. Bumper takes price and liquidity risk from the platform and distributes it fairly to both takers and makers. For the former, dynamic premiums are accumulated globally at a pool level for all positions, while individual premiums are determined at any point by a taker’s risk factor and timeframe specified.
On the other hand, makers share a global yield pool due to the fluctuations that might occur within individual taker premium pricing. Market yield is effectively split amongst all makers proportionally to their assets deposited and level of risk specified in order to ensure fair and attractive payments for their services.
Bumper represents a massive step forward in the field of DeFi. Its unique approach driven by built-in risk management makes it indispensable for those looking to protect their crypto assets while also offering lucrative opportunities for those willing to provide liquidity in these volatile markets.
With its user-friendly interface, fair pricing, and resilient system design, Bumper stands out as a beacon of innovation in the constantly changing cryptocurrency landscape, promising a more stable future for all market participants. Bumper’s flexible hedging system makes it so traders don’t have to lose out on market upside should their market predictions not come to fruition, while balancing out rewards for yield-seekers with attractive returns.
This core functionality allows users to engage in almost any type of trading style they choose, all from an easy to navigate interface. Actions like locking in profits, protecting against downside volatility, earning greater yield, and crafting more deliberate positions are all possible with Bumper.
Crypto has hundreds of liquid, active markets for users to trade - all of these are different and possess a level of nuance that varies from the last. With Bumper, users can stick to a set of guiding principles for their trading styles and utilize the tools they need to succeed - it’s customizable, passively managed and puts your portfolio first.
Traditional methods of risk management in crypto suffer from a few major drawbacks, mainly centralized exchanges, the presence of heightened emotion from volatility and liquidity constraints. Users feel boxed in by feeling they have to protect their assets with a custodian or feel pressured to buy or sell more with each subsequent candle. With Bumper, users can simply deposit their assets and let the protocol’s mechanisms manage risk in an emotionless, practical way.
Bumper’s structure provides a unique alternative to the complexity of options trading, letting users ignore many of the difficulties from setting expiries, choosing a strike price and micromanaging these financial derivatives without any help. While Bumper and options contracts both let users manage risk in their own unique ways, Bumper offers a more hands-off approach and much of the upside without the downsides that come from trading financial derivatives. Users just set a floor price to where they want to protect their assets, pay a premium and let Bumper do the work. Options are not this simple as a variety of other factors might affect positions, with options greeks being very difficult even for seasoned investors to get a grasp over.
Additionally, much of Bumper’s internal processes have recently been expanded and improved upon with the integration of LLMs and unique sentiment analysis algorithms. Bumper leverages AI to redefine risk management in crypto markets by introducing an AI-powered pooled risk market. This innovative approach uses sophisticated AI algorithms to maintain balance within the protocol, ensuring that protection takers can secure their assets against price drops effectively.
Bumper’s team of AI engineers use a previously trained model with 70 billion parameters and a variety of embedded financial data including price data and historical volume metrics. The process involved training with daily price data, before moving to more granular hourly data with a goal to eventually monitor tick data in an effort to provide users with the best possible risk management services through Bumper.
Bumper also makes use of an Agent-Based Model (ABM) enhanced with AI to simulate and adapt to changing market conditions. These agents use machine learning to evolve their strategies based on historical data and ongoing market dynamics. This results in a more resilient system that can anticipate and react to trends, thereby optimizing the protection mechanisms for users' assets. Bumper’s ABM sits separate to core protocol mechanics that the rest of its AI mechanisms make use of. The simulation aspect allows Bumper to make more sense of parameter changes and price change scenarios - when a simulation is run, the performance is evaluated in comparison to Bumper’s current architecture. If a strategy performs better upon the simulation’s completion, the change is implemented into Bumper’s live protocol.
A crucial aspect of Bumper’s AI integration is its use in optimizing the streamia, or dynamic premiums, paid by protection takers. By incorporating market sentiment analysis and investor behavior, Bumper’s LLM helps in fine-tuning premium calculations that make their way back to the end user. This involves sophisticated financial text data analysis to extract market sentiment, using transformer-based structures and attention mechanisms within the LLM. The insights gained are crucial for adjusting the Price Risk Factor (PRF), Liquidity Risk Factor (LRF), and Risk Rating of Positions (RRP), ensuring that the premiums reflect true market conditions and risk levels.
AI's capabilities in sentiment analysis and automated decision-making can empower crypto platforms to respond more adeptly to market sentiments and user behaviors. For example, Bumper's use of AI to analyze financial text data helps the platform anticipate market trends and adjust its offerings accordingly. This not only improves the platform's responsiveness but also enhances its competitive edge in this intense market.
Bumper’s pretrained model is capable of ingesting very large datasets of natural language relevant to financial markets, making it a powerful tool for sentiment analysis. By aggregating different types of market feedback (positive, negative or neutral) Bumper creates sentiment scores or market mood maps, giving its platform and user base a better read on the market. Crypto’s volatility can bring out the best and worst emotions in us, making this tool extremely useful whenever positions might become too taxing on yourself to fully diligence with a clear mind.
The models used by Bumper are capable of taking this sentiment analysis and turning it into future market prediction models, giving users a potential leg up for their current or future positions.
Beyond sentiment analysis, AI has been helpful for giving Bumper stronger technical analysis capabilities. Using a 7 billion parameter pretrained model, Bumper has created a system that extracts price data and uses technical analysis indicators to offer users visual chart representations with a variety of helpful information. Describing this model as a Large Language and Visual Assistant (LLAVA), this model can be trained to predict future price movements and offer more precise indicators through charts alone.
Both of these are two vastly unique trading styles, showcasing Bumper’s ability to cater to almost any type of trader - whether you’re more technical analysis focused or rely on sentiment to gauge longer term price movements. Humans are very smart and highly capable, but LLMs are multiplicatively more performant than humans in shorter time periods. With how much data comes from blockchains, AI is essential to ensuring nothing goes unnoticed. By analyzing market sentiment and historical trends, Bumper is able to offer users superior pricing, better data and a stronger guarantee of their positions’ safety.
Through integrating these LLMs into Bumper, the team plans on building out an improved version of the application with a variety of these features implemented directly. The price feeds used by Bumper will feature sentiment, price and liability risk factor parameters, offering more granularity to users in the price predictions given. With these integrated natively, Bumper can further its path to becoming a central force for users looking to navigate their crypto trades.
The BUMP token
At the heart of everything is Bumper’s native token, BUMP. Users are given the option to hold unbonded BUMP in their wallet in order to open a protected or earning position through the app. Upon entering a position a user’s BUMP is then bonded to the protocol, only to be returned when a position has been closed. While many protocols offer only simple staking functionality for their native tokens, Bumper has taken steps to integrate BUMP into the protocol’s core processes that make it integral for both users and Bumper.
Users have the option to buy and bond BUMP when taking out a position. In return they are rewarded 50% APY on bonded tokens. Mandatory bonding may be implemented down the line, but it is not currently required Users who don’t trade regularly are still able to participate by using BUMP for more traditional on-chain governance purposes. Upon participation in governance staking, users receive a variation of BUMP (vBUMP) backed 1:1, withdrawable at any point. Stakers can also choose to lock this vBUMP for a year to receive increased rewards, though this is optional.
While some may interpret bonding BUMP as a protocol fee, the act of bonding a user’s tokens is used as a form of collateralization prior to the opening of these positions. There are a few key reasons why Bumper implemented a system like this, with the bonding mechanism being incredibly useful for ensuring true utility of the native token, enabling easier access to future positions and restriction of protocol imbalances.
The design philosophy around BUMP involved the careful creation of a balance between separation of value from a network effect and the utility of individual transactions - integrating BUMP directly into core protocol processes makes it more than just a “useless governance token” and provides users real action to take in-app. Through this process, BUMP price becomes a function of market demand, where as Bumper activity increases, price follows.
By opening up a minor utility for BUMP, the team was able to achieve something rarely done across the broader DeFi ecosystem - offering a token with innate utility. Most tokens across DeFi are void of any real utility - BUMP stands as a midpoint between real usage and token speculation, offering something for users that plan to take advantage of Bumper’s trading features while also opening up opportunities for anyone wishing to participate in protocol governance on-chain.
By requiring users to purchase BUMP tokens, the protocol is more resistant to large, unexpected protocol inflows that might destabilize markets and make it more difficult to manage user risk effectively. All of this together presents BUMP as a means of strengthening Bumper and offering a better user experience, all made possible through an ERC-20 token.
Bumper’s mission
Bumper’s main tenets rely on the user behaviors of protecting, earning and trading. With different user profiles across the wide spectrum of crypto, Bumper can cater to those who wish to open new positions based on volatility, provide liquidity to assist the platform or further safeguard their positions. Bumper’s capital protection services allows DAOs, institutions and individuals to feel comfortable about crypto’s many risks.
Other protocols across the DeFi ecosystem might offer bespoke services in various packages, but none of them are as accessible as Bumper. Bumper offers all of this and more in one interface, a one-stop shop for all types of DeFi’s broad user base. It’s simple, effective and it just works.
Bumper's innovative approach extends to its dynamic risk assessment and management features. The protocol actively monitors market conditions and adjusts its parameters in real-time to ensure solvency and maintain balance between protecting users and rewarding liquidity providers. Positions across Bumper are aggregated under the system’s suite of risk management procedures, subject to active safety measures from the protocol’s usage of LLMs, historical price data and frequent updates.
This dynamic adjustment is key to Bumper's ability to offer protection without necessitating prohibitively high premiums, which could deter participation. It allows the protocol to remain flexible and responsive, a crucial feature in the fast-evolving crypto markets.
Aligning with the ethos of DeFi, Bumper operates in a completely decentralized and permissionless manner, removing the need for any central authority or intermediary - an impressive feat given how rarely this is achieved in crypto or brushed aside in favor of other priorities. Bumper didn’t cut any corners and wished to embrace an approach that could give the traders a far more meaningful experience when it comes to hedging positions or locking in further upside on standard positions.
Bumper's approach to trading distinguishes itself by simplifying the complexities typically associated with traditional financial derivatives. Traditional options trading, while offering strategic advantages for the speculation on asset prices, often involves intricate knowledge of financial instruments and markets - something that can be abstracted away to enable more consumer-friendly trading products.
This complexity is not just a barrier for newcomers but can also be a deterrent for seasoned traders looking for more straightforward ways to protect their positions. Bumper’s offerings of broad strike and term ranges make it easier for anyone to access this risk management - it doesn’t have to be as granular as traditional options venues price premiums, with Bumper it’s as simple as other familiar on-chain transactions across DeFi.
Bumper's design choices are strategically aligned to provide a robust solution for downside protection while also offering attractive opportunities for yield generation. By balancing these two aspects effectively, Bumper addresses significant gaps in the traditional and decentralized finance markets, making it a compelling choice for both crypto holders seeking to protect their investments and participants looking to benefit from the DeFi economy's growth. This dual functionality, combined with its commitment to decentralization and user empowerment, positions Bumper as a pioneering protocol in the landscape of on-chain trading and risk management.
Bumper is currently live on Arbitrum and has been able to facilitate its user requests at lightning speeds thanks to Layer 2 scaling technology. The decision to launch Bumper on Arbitrum was made due to its quicker time to finality, cheap transaction fees and more transactions per second than other Layer 2 blockchains. Other alternative L1s and mainnet Ethereum are quality blockchains in terms of architecture, but Bumper wanted to leverage the shared security of Ethereum mainnet and Arbitrum’s higher performance to deliver a profound user experience to all parties.
Bumper and the trading landscape
Part of what makes Bumper so unique is its ability to target multiple verticals simultaneously and achieve efficient pricing and risk protection services for a vast array of DeFi power users. Other protocols may offer similar functionality, but none of them possess a suite of products that accommodate for broad user types as well as Bumper. Whether it’s more efficient premium pricing, bespoke risk management services powered by AI or complex trading strategies made simpler, Bumper caters to all audiences with ease.
The on-chain trading landscape, a cornerstone of the decentralized finance ecosystem, has evolved significantly over the past few years. Uniswap, one of the most prominent decentralized exchanges operating on the Ethereum blockchain, exemplifies this growth. Uniswap utilizes an automated market maker (AMM) model to facilitate trading without the need for traditional market-making mechanisms. This protocol allows for the swapping of a vast array of ERC-20 tokens directly through smart contracts, thus providing liquidity and enabling a seamless trading experience for users. Its influence on Ethereum is massive, as it not only increases blockchain activity but also serves as a primary entry point for projects seeking liquidity for their tokens.
Uniswap’s dominance has been able to create an innumerable amount of markets on Ethereum and other L1s and L2s. Users have taken advantage of the AMM’s simplicity to create two-sided markets for any asset - these are, of course, highly volatile. No matter where you look in crypto this volatility cannot be avoided, though for many this is one of crypto’s most crucial selling points.
Perpetual futures DEXs like GMX have also carved out their own niche in the DeFi space, offering traders exposure to perpetual futures contracts without the need for traditional financial intermediaries. GMX stands out by allowing users to trade cryptocurrencies with leverage directly on the blockchain, using a blend of spot and futures trading mechanisms that are managed through smart contracts. The app integrates price feeds directly into its operations to maintain continuous, decentralized, and secure trading. The ability to trade with leverage on a decentralized platform attracts a significant volume of traders seeking flexibility and reduced counterparty risk, which traditional exchanges cannot fully mitigate.
On-chain trading isn’t only limited to perpetual futures contracts or decentralized exchange swaps.
Options have long been a cornerstone of traditional financial markets, offering traders the ability to hedge against risks, speculate on price movements and leverage their positions.
An option is a type of derivative contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price before the option's expiration date. There are two types of options: calls, which provide the right to buy, and puts, which provide the right to sell. Traders use options to manage risk by protecting against price declines (through puts) or to gain from price increases (through calls) beyond a certain threshold.
Among the crypto options exchanges, Deribit has emerged as the dominant player. It has become synonymous with cryptocurrency options, capturing the majority of the market share. Deribit's success can be attributed to its robust platform that offers high liquidity, a wide range of options contracts on various cryptocurrencies and advanced trading features that cater to both retail and institutional traders. Its market dominance is reinforced by the platform's ability to provide traders with a reliable secure environment to trade options, along with tools for sophisticated risk management and leveraging strategies.
Bumper's entry into this space represents a novel approach by focusing not just on trading, and an options alternative but on providing price protection as a service. Unlike traditional options protocols that operate with a win-lose scenario depending on the strike price and market conditions at the expiration, Bumper allows users to set a floor price for their assets, protecting them against significant downturns without foregoing the potential for gains. This method offers a psychological advantage by abstracting away the speculative aspect of needing to predict price movements while still maintaining that optionality should a user wish.
And the numbers don’t lie - since December 2023, Bumper has been able to achieve consistently superior put option pricing over Deribit, a feat not achieved by any alternative Black Scholes pricing models in over fifty years.
Bumper’s dynamic premium model, which adjusts in real-time based on market volatility and liquidity conditions, provides a more cost-effective approach to risk management. Additionally, Bumper's decentralized and autonomous nature aligns closely with the ethos of the broader crypto community, offering a trustless and transparent risk management solution.
To compete effectively with giants like Deribit, Bumper will need to capitalize on its unique selling propositions—such as user-friendly risk management tools and dynamic pricing. Users can open positions with any strike and almost any available terms - something not currently feasible across other platforms, let alone achievable on-chain.
A simulation report done by Bumper showed that the bear market of 2022 had over 46% yield improvement on maker orders compared to other venues, including Deribit. Bumper was also able to achieve 9.3% cheaper take premia for its users, specifically in put option markets.
This can attract a significant user base by catering to those looking for simpler, more intuitive protective measures as opposed to complex trading strategies. This could include long-term holders wanting to safeguard their investments or new entrants cautious about entering a volatile market. As it grows, maintaining a strong focus on security and user experience will be key to gaining and retaining trust within the broader crypto community.
Bumper strategy highlights
Now that we’ve covered many of the mechanisms and design specifications that make Bumper possible, let’s explore some of the strategies users can take advantage of through the application. We’ve outlined some of the core parties who may interact with Bumper - traders, yield-focused investors and capital protectors. Now, let’s focus on the trading aspect and examine how Bumper’s product suite offers a superior and differentiated user experience across all types of strategies. These are all covered in this blog post, but we’ll break it down in more detail.
Bumper is extremely flexible as an application, extending this functionality to its user base. No approach to trading is the same, and this is magnified tenfold in crypto. Any strategy utilized in Bumper is optimized for timing the markets in a precise way or navigating upcoming price movements - all time frames are applicable when crafting a position on Bumper. However, at their core these strategies are quite simple - prices go up, users gain value; prices go down, value is protected and users are now able to buy back their assets at lower prices. While many of the specific strategies in Bumper might appear complex, the team offers a variety of different options depending on one of those two views - it’s up to users to make the decision on what’s best for them and their portfolios.
For those that might be advocates for crypto over the long term but wary of short-term price movements, they might choose to enter a hedged long position or a short accumulation position. Both of these trades are possible if the underlying asset is already owned by a user - let’s use ETH as an example.
Say there’s an upcoming deadline for ETH ETF registration and a trader is feeling wary, they could either deposit the asset into Bumper and set a defined time frame with floor price and collect USDT upon completion, allowing them to buy back lower. In this scenario a user is able to gain safety over their position from the beginning while still allowing themselves an opportunity to jump back in - none of this needs to be managed by a user of course, as Bumper handles it via dynamic readjustments. For those that wish to take advantage of potential price appreciation, they’re also able to ride the asset higher and slowly scale out as their targets are hit - price protection is present on both sides of the trade.
These scenarios offer different flexibility, with Bumper’s underlying mechanisms and system architecture working to manage these for traders without the hassle. Regardless of specified outcomes, Bumper makes any position like this possible with the added utility of automated protocol management working underneath. Bumper’s automated solutions make it possible for traders to secure their position’s value while simultaneously allowing for asset accumulation or realized PnL.
For those who might be more interested in using existing DeFi primitives in their positions or initiating more complex strategies, they can utilize Bumper’s consecutive hedges or trade yield-bearing LSTs like stETH. For the consecutive hedge strategy, traders can make use of Bumper’s trailing protection mechanism that allows a position to be scaled out as it crosses key price points to the upside.
A trader is able to lock-in profits and easily manage a position with the same time frame specifications previously mentioned. Bumper enables the trading of LSTs through the same trailing protection or short accumulation strategies, depositing their stETH into Bumper and collecting cheaper coins whilst protecting their downside. By plugging in existing DeFi primitives, Bumper has created a toolbox for its users to put existing assets to work in entirely new ways.
Through these specific scenarios a Bumper user can more accurately specify desired trading outcomes while taking on a targeted amount of risk. Should they use Bumper, there’s no longer a scenario where a crypto trader might be subject to rampant volatility without any precautions.
Next steps for Bumper and recent developments
With everything out of the way, we can look at recent updates from the Bumper team and where their head is heading into the third quarter of 2024. A lot of information has been covered, so if you’re looking for more details or simpler explanations, navigate to Bumper’s Twitter or their blog here.
Bond boosting and future BUMP utility
Bumper recently announced a new initiative with its Bond Boost program, offering users an opportunity to bond their BUMP tokens for a variety of in-app features that can make trading easier. Upon opening a position in Bumper, users are presented with an option to bond their tokens within a specified range. The amount bonded depends on the dollar value of the position being opened, with users able to bond 2.5% of a position or 250% with a cap of $10,000. For whatever bond amount chosen, users earn a 50% APY for the duration receivable in BUMP tokens.
This is interesting as through bonding their BUMP tokens, users can manage to set a range and period to where their premiums essentially become paid for. The presence of no premiums for the small price of a BOND position makes Bumper enticing for users that don’t wish to pay premiums in the event a position doesn’t go their way. The premiums table displayed in Bumper can list off a range of prices for a given time period, letting users decide to minimize their risk dependent on BUMP held in-wallet.
Bumper has stated that this will eventually become a mandatory feature of the platform, but for now, users of Bumper can enjoy potentially free premiums and greater rewards through the same trading activities they’d enjoy on other platforms.
Beyond BUMP boost, the team has also announced some upcoming changes to BUMP utility in their newly posted blackpaper. Some of these planned upgrades include revised safety modules for BUMP staking, targeted incentives for ecosystem growth and increased incentives for BUMP holders. The black paper highlights that while BUMP staking is still optional, future versions of the protocol will make this feature mandatory to better accommodate for incentive alignment and to enable increased utility of BUMP in-app.
Bumpered assets and more
Moving back to some of the previously discussed content, let’s take a closer look at Bumper’s plans to expand “bumpered asset” utility and how this might elevate Bumper’s position across DeFi. A bumpered asset can be defined as the asset takers receive upon the opening of a position - they hold bumpered assets while they watch their assets in Bumper.
Similar to how stETH lets ETH stakers utilize their money across DeFi, bumpered assets might be able to serve as collateral on other protocols in the near future. Capital efficiency is a huge benefit of stETH, and this isn’t lost on Bumper - the utility of bumpered assets could expand into yield products enabled by price-protected assets only possible on Bumper or products designed around a lack of liquidations.
One of the benefits of Bumper is its vast extendability - despite the complex processes and algorithms running behind the scenes, users can feel safe knowing their assets are protected and are able to access such powerful strategies in just a few clicks. Should Bumper pursue integrations across DeFi, it’s likely that bumpered assets can attract attention from major protocols like Aave and Maker to open up liquidity routes between Bumper and a larger user base in the near future.
Expanding to centralized exchanges
Bumper recently announced plans for the ability to trade centralized exchange (CEX) assets on Bumper with help from the Cede chrome extension. Users with USDT on a CEX can now simply download the Cede extension, create API keys through a non-custodial extension and get redirected back to Bumper.
Being able to navigate the markets with Bumper’s help can be a massive advantage for traders, letting them utilize CEX assets without needing to migrate them on-chain and manage a self-custodial wallet. With Cede, users simply make a few clicks, save their API key and can access everything they love about Bumper without the hassle. A very large majority of crypto users and investors hold their assets through a CEX due to the challenges of moving these funds on-chain. Whether this is due to security issues, ease of access or some other concern, the fact is that CEXs are here to stay and Bumper is making it easier than ever for a broader user base to access their volatility-harnessing powers.
Closing thoughts
Bumper has carved out a niche for itself and has continued its pace of innovation as market activity across all crypto sectors heats up. With the recent integrations of LLMs, coming plans to expand BUMP utility and the continued success of its optimized trading strategies, Bumper is doing well to position itself as a premier platform for traders who want more from the market.
Hopefully this report was able to provide you with a deeper understanding of Bumper and why it’s been built with a superior user experience in mind. If you’d like to explore more about trading on Bumper, you can check out their blog here or navigate to their Twitter page for daily updates. Thank you for reading.
Disclaimer: This report was commissioned by Bumper. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
