At the core of Bumper’s crypto price protection protocol there is a philosophy.
Whilst, many DeFi and Blockchain projects have at their heart some guiding principles, typically these emerge from a desire to challenge or circumvent established and generally centralised systems of control, or to utilise some of the more arcane properties inherent to Distributed Ledger Technologies.
For those who remember the heady OG days of blockchain development (you know, prior to the last Bear cycle… it seems so long ago now), almost all projects were able to succinctly describe their protocol as having a level of philosophical background.
For us, a large part of our philosophy derives from the work of one of the most influential thinkers of the 20th century, John Rawls.
In this article we’ll explain why a highly respected philosopher who is widely known across the entire political and economic spectrum (yet mostly unknown by the masses) led our chief architect and CTO Samuel Brooks to describe Bumper as “a public market based on the Rawlsian principle of Distributive Justice.”
Who was Rawls?
John Rawls (1921 - 2002) was an American moral, legal and political philosopher, best known for his seminal book _“A Theory of Justice” _published in 1971.
His many lifetime achievements include winning the Rolf Schock Prize for Logic and Philosophy, the Ralph Waldo Emerson award for non-fiction literature, and in 1999 he was presented with the National Humanities Medal by President Bill Clinton. Rawls was even honoured in 1991 by the Spacewatch programme who named an Asteroid after him.
There’s no doubt that Rawls is widely regarded as an important philosophical voice of the last century, and considering his death occurred some years before the emergence of cryptocurrencies, it’s interesting to find his theories at the core of a DeFi protocol.
Strap yourself in, this is going to be a wild ride into some very cool philosophical ideas (which might also make or save you money in the highly volatile crypto markets).
Distributive Justice
Rawls’ theories aimed to resolve the seemingly competing claims of freedom and equality by providing a alternative to utilitarianism, the theory advanced by enlightenment philosophers Jeremy Bentham (1748 - 1832) and John Stuart Mill (1806 - 1873) which advocated an action is morally ‘right’ if it results in the happiness of the greatest number of people in a society or a group.
A major criticism of utilitarianism is that it requires everyone to consider the results of each action before it’s performed, and this is impossible because people are unable to fully guess what the possible consequences of each action will be.
Rawls' thesis was not that of a balancing act that compromised or weakened the moral claim of one value compared with the other. Rather, his intent was to show that notions of freedom and equality could be unified into what he called ‘Justice as Fairness’.
In essence, Rawls was addressing the problem of distributive justice, or the fairness of how rewards and costs are shared (or ‘distributed’) across multiple members of a group. The concept of ‘justice’ in this context refers to ‘social justice’, being the distribution of wealth, opportunity and privilege within a society.
Rawlsian Theory 101 In his seminal book, “A Theory of Justice”, Rawls conjours a thought experiment that he calls the ‘original position’. This experiment asks the reader to design a theoretical social system in which immutable personal characteristics of the individual (such as race, height, sex etc) would be eliminated from the implementation of the system’s rules in favour of features which were relevant to all participants in society.
The thought experiment asks us to imagine that we begin behind a ‘veil of ignorance’. The task is to design the social structures of the world into which you’ll eventually be placed, but without knowing the position you will ultimately personally occupy in that society.
In other words, you don’t know whether you’ll be the child of wealthy real-estate moguls, the offspring of poor lower-caste members of society, or whether you’ll be male or female. Nor will you have any prior knowledge of your level of education, intelligence, specialist skills, religion and so on.
Behind the veil of ignorance, all you can assume is that you’ll have the basic capacity to participate in the society willfully. But first, you must decide on the rules and structures, and how the society’s resources will be distributed, before you are born into it.
Rawls argues that individuals given this power would naturally design a society which would seek to prioritise minimising the risk of them living in excessive hardship, over maximising individual advantage or privilege.
Whilst inherent inequalities would still remain present, Rawls suggests that a rational individual would choose to smooth out the more dramatic effects of those inequalities, given that your individual level of privilege and opportunity is unknown.
Rawls argues that operating from behind the ‘veil of ignorance’, nobody would propose, for example, that some people would not be allowed to vote, hold public office or own property, or that others would live a life of indentured slavery. It would be irrational to suggest such a societal rule, because you may well find yourself living this life.
Instead, most people would attempt to design a society wherein the opportunities available to any given individual were spread widely so as to minimise the risk of the individual finding themselves in an unfair or negatively skewed starting position.
This is at the heart of Distributive Justice. If the methodology for a system is to be determined by all the participants in a given modern society, including that society’s wide mix of individual contexts, the majority will design their society whereby the rules of justice were equally applied and the shared resources were fairly distributed.
What has Rawls to do with crypto price protection?
Bumper’s market design is an exercise in maximising risk pricing efficiency, but it also echoes Rawlsian concepts. The protocol has been designed as a very different alternative to pretty much every other transactional game found in both crypto and traditional financial markets.
But more than being designed for efficiency, Bumper is also designed for fairness. Whilst managing inequalities in modern social and economic systems is challenging, Bumper attempts to create a two sided market which ensures that every participant is treated fairly with rules enforced to all equally by the protocol’s Smart Contracts. Ultimately, this means that no individual actor gets special treatment, whether Prince or Pauper, Whale or Minnow, and it’s governed by unemotional code - and of course in the context of blockchains, code is law.
But it goes much, much deeper than that.
One of the fundamental assumptions of the protocol is that future prices (i.e. volatility) are always unknown (unless you are a time traveller).
Bumper takes this a step further, as the cost of price protection (the Premium) is also unknown to users when they open a position.
Whilst on the surface, this may seem a strange idea, this feature is built on the principle that, precisely because we can’t know the price or volatility of a crypto asset at any point in the future, it is therefore impossible for us to be able to guess whether the premium charged in advance for protection is fair or a total rip-off. This is fundamental in the design of Options trading (the prevailing hedging strategy for all financial markets to date), where the cost of buying an Options contract is always set by the seller.
In Bumper, the Premium levied on Takers (the cost of protection), and thus the resulting Yield (which can be earned by liquidity-providing Makers), depends solely on the future volatility, measured in the market as it happens in real-time.
Basing Premiums on what actually happens during one’s stay with the protocol eliminates the guesswork involved in figuring out whether the cost represents fair value.
With Bumper, the one thing everyone knows for sure is that the protocol calculates Premiums fairly - Makers are assuming risk, and so need to be incentivised to do so, of course, otherwise they won’t participate in the market, and thus, there would be no price protection! But simultaneously, this has to be tempered by the actual risk the Makers are taking when they assume the downside risk from Takers. Thus, if the market rockets, Makers are ultimately at little risk, and thus Takers should not be penalised too heavily for this.
Thus, the classical up-front pricing agreement made between the two parties is replaced instead with an agreement on the methodology for pricing risk.
This methodology for calculating Premiums is engaged each time the protocol’s internal state changes, which occurs more frequently when market volatility heats up (increasing the risk to Makers). The Premium also increases as the current price of an asset gets closer to the average of the floor prices set by the Takers collectively.
Bumper’s Rawlsian Philosophy
In Bumper, individual participants are not engaged in a combative battle against one another, but rather interact with a pool into which each participant deposits their tokens, and into which all the risks and rewards are distributed across all participants proportional to their deposits and chosen settings.
Bumper’s philosophy holds that this design is way more efficient compared to markets where many people compete against one another in a wasteful, zero-sum game.
Resource efficiency is further improved because internal asset-swaps, which occur as and when required to balance liquidity requirements in each pool, have a second-order effect of minimising the parasitic cost of slippage to “near zero”.
Thus, each participant operates from behind a veil of ignorance. They don’t know what the Premiums/Yields will be, but they can trust that they will be applied and enforced by smart contracts, with all the risks and profits being distributed across all participants fairly, thus minimising individual risk in the process.
This is the Rawlsian concept of Distributed Justice incarnate inside a DeFi protocol! To our knowledge, this theoretical framework does not feature in any other DeFi protocol on the market today.
The practical manifestation of this fairness results in a premium for price protection that is both easier to use, and more cost effective than using an Options desk.
Think the Game is skewed? Change it.
Of course, this is DeFi, and sometimes there may be a desire for the system to be recalibrated to adjust the balance of fairness between Takers and Makers. This is ultimately decided by BUMP token holders choosing to participate in the Bumper governance system, in a truly decentralised democracy.
And even in the Governance structure, the weighting of voting power is not simply determined by who has the most tokens, but other “anti-whale” factors, including length of time that they have been held is taken into account, meaning smaller and more active long-term supporters are better represented.
If the community feels a tweak is needed, BUMP token holders can raise and vote on proposals which would affect the tuning of the system… as long as they can gather enough support from their decentralised community.
Should a proposal succeed, then the system will implement the changes. Let the distributive justice flow - because part of Bumper’s philosophy is that if a change is needed, then it should come from the active members of the community, rather than a central authority which makes unilateral decisions and imposes them upon others.
Summary
Instead of defining a combative zero-sum game, Bumper’s core objectives (provide cost-effective protection for one side, generate yield for the other, and reduce risk of losses for all), are able to be met without significant imbalance on one side or the other.
Of course, there will always be those people who will choose a zero-sum game where maximal profit seeking is the first (and generally the only) priority, and those individuals will likely decide that Bumper is not right for them.
However, there is also a (large) subset of crypto enthusiasts who intrinsically wish to minimise the losses from such unyielding zero-sum games, and who wish to do so in a way that is provably fair, eliminates third party intervention (read ‘manipulation’), and which is governed solely by themselves and others like them, ie, BUMP token holders.
In this way, Bumper has all the ingredients to enable DeFi protocols to not only recover from the apocalypse which occurred earlier in 2022, but actually thrive through a combination of novel innovation, security, utility, transparency and crowd governance.
Bumper isn’t just a novel DeFi protocol with a unique architecture, super-cool and easy-to-use dApp sporting a retro 1980’s interface (of course, it’s all these things too).
It’s a tool for crypto holders who don’t have the appetite or time to engage in constant portfolio management, and provides a simple resource for those who have a different outlook on price action to participate and profit collectively whilst minimising their risk individually.
This is the heart of Bumper’s Rawlsian philosophy… it’s not all about the money you see! As Bill and Ted know in their hearts, fairness is all about being excellent to one another!
Want to learn more about Bumper? Check out our Litepaper, and do definitely come and join our community in Discord where you can ask questions and interact with other seriously clever and cool people.
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