Generally speaking, decentralized insurance acts as a safety net for the DeFi ecosystem. From wallet insurance to smart contract insurance, the comfort of knowing that your assets are protected in the case of a bug or a hack creates peace of mind for crypto investors.
Over the past decade, we’ve seen countless instances of crypto investors mishandling their private keys and numerous exchange hacks, ultimately resulting in the loss of billions in investor capital. Moreover, many smart contracts in existence today, especially DeFi-based contracts, are valuing storing contracts that could be vulnerable to manipulation through loopholes. The most widely known instance of a hacked value storing contract was the DAO hack back in 2016.
While insurance is not commonly mentioned throughout the DeFi community, it is one sector that has a massive potential to provide investor protection and confidence. Legacy insurance is a multi-trillion dollar industry with many shady or unethical players. The transparency and trustless nature of decentralized networks and DeFi is a perfect fit to disrupt the incumbent industry. In the end, decentralized insurance protocols will democratize the power of insurance and return to its historic roots of acting as society’s safety net.
Decentralized insurance projects to know about
Nexus Mutual is creating decentralized insurance on Ethereum by using a risk-sharing pool. The pool is governed by its members where membership rights are represented by the NXM token. The mutual is initially launching with smart contract cover, allowing anyone to purchase insurance on any public Ethereum smart contract. This means that DeFi users can now get protection on their funds being lent out on Compound or Dharma or their assets deposited in a Uniswap pool. Over time, Nexus Mutual will continue to expand outside of smart contract insurance into other crypto and legacy insurance products.
Etherisc is building a platform for decentralized insurance applications. The core team developed some common infrastructure, product templates and insurance license-as-a-service that allows anyone to create their own insurance products. With this, the Etherisc community has designed a suite of basic insurance products ranging from flight delay insurance and hurricane protection to crypto wallet and lending collateral protection.
CDx is a platform for tokenized, tradable insurance swaps. Crypto investors can now protect their funds from hacks on popular exchanges. Exchange insurance is likely one of the more needed insurance products given the numerous hacks over the past decade. Hacks which have ended in the loss of hundreds of millions in investor capital. CDx Swaps can be used for a range of use cases including trading swaps for a profit, protecting your crypto assets, betting against exchange security, and others.
Comparing DeFi insurance cryptocurrency projects
|Primary product||Smart contract insurance||Flight delay insurance||Exchange insurance|
|System||Risk pool||Risk pool||Credit default swaps|
|Live||Ethereum Main-net (Bootstrap Phase)||Ethereum Testnet||No|
Final thoughts on DeFi insurance
With the potential to disrupt the multi-trillion dollar insurance industry, decentralized insurance has a promising future. The transparency and democratization of insurance provide substantial improvements over the greedy rent-seeking companies currently leading the industry.
As the sector continues to mature, decentralized insurance will continue to expand its product range. The accessibility that DeFi offers creates an intriguing opportunity to address the underserved markets in developing countries. But for now, with the rise of DeFi and total locked value, smart contract insurance will likely come to the forefront in the minds of crypto investors as DeFi applications continue to accrue value in the underlying smart contracts.