A revolution is coming in Blockchain security

Incentive Finance Protocol: Interview Summary

Key Concepts:

• Incentive Finance: A decentralized protocol for trading claims on hacked DeFi assets.
• Claim Market: A marketplace where users who have lost funds in DeFi hacks can sell their claims for immediate compensation.
• Distressed Asset Rights: The rights to potential recovery of funds from a hacked protocol, which are bought and sold on the Incentive Finance platform.
• Collateral Mechanism: The underlying system used in V1 where claims are traded.
• Permissionless: The platform operates without KYC or legal procedures, allowing anyone to participate.
• Uncorrelated Returns: The hack market provides returns that are not correlated with the broader crypto market, offering stable returns in both bull and bear markets.

1. Introduction to Incentive Finance and Matthew's Background

• Matthew, the founder of Incentive Finance, discusses his entry into crypto in 2015 through Counter-Strike skin trading.
• He became more involved in 2017, experiencing market volatility, and professionalized his involvement in 2020 by working with DeFi teams.
• He has been working on Incentive Finance for one and a half years.

2. The Genesis of Incentive Finance: Addressing a Gap in DeFi

• The idea for Incentive Finance stemmed from Matthew's experience as a creditor in the FTX bankruptcy and the realization that centralized services existed for selling claims.
• He identified a gap in the DeFi space, where over $11.5 billion had been lost to hacks, yet no decentralized claim market existed.
• The protocol aims to provide a way for users to de-risk and recover a portion of their funds immediately after a hack.

3. How Incentive Finance Works: A Collateralized Claim Market (V1)

• Incentive Finance V1 is deployed on the Arbitrum testnet and uses a collateral mechanism.
• Users who have lost funds in DeFi hacks can sell their claims on the Incentive Finance website at the market price or a limit price.
• Buyers speculate on the recovery of funds and purchase the distressed asset rights.
• Any funds recovered during a specified period are returned to the buyer.

4. Example Scenario: $10,000 Hack and Claim Trading

• If a user loses $10,000 in a DeFi hack, they can sell their claim on Incentive Finance.
• The amount received is determined by the market price (demand meeting offer).
• Example: If the market price is 50%, the user receives $5,000 immediately.
• The buyer purchases the claim for $5,000 and receives any recovered funds.
• If a 100% recovery occurs, the buyer earns $5,000 (the remaining amount).
• The speculator profits only if the recovery exceeds the initial bet ($5,000 in this case).

5. Poly Network Hack: A Real-World Application

• The Poly Network hack, where the hacker negotiated with the protocol, is cited as a prime example.
• Users who lost funds could have sold their claims during the negotiation period.
• Selling claims allows users to de-risk and transfer the risk to speculators.
• In such scenarios, claims might be sold at a higher price (e.g., 80-90%) due to ongoing negotiations.

6. Competitive Landscape: Centralized vs. Decentralized Solutions

• Centralized services exist for selling claims in cases like Celsius and FTX, but they require KYC and legal procedures.
• Incentive Finance aims to provide a permissionless, on-chain solution for DeFi users.
• Insurance companies are not direct competitors because they typically only cover larger protocols and require a tedious process for each protocol.
• Incentive Finance offers a more streamlined process, allowing users to sell claims for any hack.
• Existing mechanisms are often one-off and off-chain, making Incentive Finance a first mover in decentralized claim markets.

7. Hack Detection and Market Creation

• Incentive Finance uses on-chain analysts and social media (formerly Twitter) to detect new hacks.
• Upon detection, a market is created on the Incentive Finance platform.
• The process of creating markets is currently run off-chain due to efficiency considerations.

8. Potential Claim Buyers: Diverse Investor Profiles

• Retail Investors: Individuals who believe in the potential for fund recovery.
• DeFi Whales and Speculators: Large investors looking to profit from recoveries.
• On-Chain Investigators: Experts with deep knowledge of fund recovery.
• Distressed Debt Funds: Traditional finance funds seeking uncorrelated returns.
• The hack market offers uncorrelated returns, providing stable returns regardless of market conditions. Hacks occur consistently, resulting in $1-2 billion in losses annually.

9. Future Roadmap: V2, V3, and Mainnet Deployment

• V1 and V1.4 have been deployed on the Arbitrum testnet, with over 10,000 users and 1 million claims traded.
• Negotiations are underway with top blockchains for mainnet deployment.
• V2 and V3 are in development, focusing on perpetual markets for claims trading.

10. Staying Updated with Incentive Finance

• Follow Incentive Finance's X (formerly Twitter) account for updates on new markets, hacks, and news.

11. Conclusion

Incentive Finance aims to revolutionize how users deal with losses from DeFi hacks by creating a decentralized, permissionless marketplace for trading claims. By providing immediate compensation and allowing speculators to bet on fund recovery, Incentive Finance addresses a significant gap in the DeFi ecosystem and offers a unique investment opportunity with uncorrelated returns. The protocol's future roadmap includes perpetual markets and mainnet deployment, positioning it as a key player in the evolving landscape of DeFi risk management.