How Cover Works
The LayerCover insurance model and the on-chain Lloyd's analogy
TL;DR: LayerCover replaces insurance carriers with smart contracts. Capital providers pledge assets to back specific risks; policyholders buy coverage that pays out from a fixed liquidity waterfall when an event occurs. It's the Lloyd's of London model, on-chain.
The Lloyd's of London Model
For over 300 years, Lloyd's of London has operated as a marketplace - not an insurance company. Individual syndicates bring capital, assess risks, and write policies. Lloyd's provides the infrastructure: standards, trust, settlement, and a central pool for catastrophic losses.
LayerCover brings this model on-chain:
| Lloyd's of London | LayerCover |
|---|---|
| Syndicates (capital providers) | Syndicate Vaults (ERC-4626) |
| Insurance brokers | RFQ OrderBook (automated matching) |
| Policy documents | Policy NFTs (ERC-721) |
| Lloyd's Central Fund | Backstop Pool (on-chain reinsurance) |
| Claims adjusters | Smart contract rules (deterministic) |
| Annual accounting | Real-time, on-chain NAV |
The Policy NFT
Every LayerCover policy is represented as a transferable ERC-721 NFT. The NFT encodes:
- Pool ID - Which risk is covered
- Coverage amount - Maximum payout in USDC
- Duration - Start and end timestamps
- Premium paid - The fixed upfront cost
- Claim status - Whether a claim has been filed
The current holder of the NFT has the right to file claims. This makes insurance positions liquid and composable.
Key Innovations
1. Deterministic Payouts
Claims are settled by smart contract rules, not human judgment:
- No governance votes - No DAO deciding if your claim is valid
- No governance waiting periods - Approved claims execute immediately against the payout waterfall
- Rules-based - On-chain state determines validity for launch pools
- Like a put option - You transfer a distressed asset and the protocol executes the payout waterfall against your covered amount
2. Fixed-Rate Pricing
Premiums are quoted upfront through an intent-based RFQ (Request for Quote) marketplace:
- Underwriters post sell-side intents with committed rates
- Buyers select the best quote and purchase atomically
- No AMM curves, no price slippage, no variable fees
- Rates are locked for the full policy duration
3. Capital Efficiency
The protocol maximises capital utilisation:
- Single-sided liquidity - No LP pairs, no impermanent loss
- Risk-budgeted leverage - Syndicates can back multiple independent risks with the same capital, subject to the 20-point budget, mutex rules, and leverage ladder
- External yield - Idle capital earns DeFi yield (Aave, Compound)
- Salvage recovery - Distressed assets may recover value, reducing net losses
4. Multi-Layer Safety
A layered defense protects against catastrophic losses:
Protocol Loop
- Policyholder pays a premium via the OrderBook
- IntentMatcher matches buyer and seller intents atomically
- PolicyManager mints the Policy NFT
- CapitalPool locks the required capital backing
- Idle capital earns external yield via whitelisted adapters
- Premiums are split from gross premium into: optional 5% referral reward, 10% protocol fee, 20% backstop premium, and the remainder to underwriters
That means underwriters receive 65% when a valid referral code is used, or 70% when no referral applies.