Overview

Decentralized finance is gradually expanding with the strong development of DeFi in the Blockchain industry, with the goal of replacing the traditional financial industry. Along with that rapid development, the risks or potential risks have increased as well. An increasing number of hackers have exploited vulnerabilities in smart contracts to steal investors’ assets worth hundreds of millions of dollars.

Typically, in a number of large attacks such as in October 2021, Poly Network was stolen nearly 611 million USD. Or just recently on March 29, 2022, the Ronin Network bridge of the game Axie Infinity (AXS) was hacked for nearly 625 million USD.

To mitigate those risks, Decentralized Insurance was created and is now regarded as an essential component of Defi, with the goal of making investors feel more secure in protecting their assets.
So, what exactly is Decentralized Insurance? How does it function? Let’s find out further down.

What exactly is decentralized insurance?

It aims to protect assets and against losses caused by events in the decentralized finance industry as one of the key components of a decentralized financial ecosystem.

Assume you have crypto assets stored on the DeFi platform. When you become aware that you might lose that asset, or if the platform or protocol is hacked, and you want to protect yourself from that risk.

As a result, you go to a DeFi insurance provider and pay a certain amount for coverage if you lose your property due to a specific, predetermined event.

And it’s critical that you understand the type of risk you’re actually insuring. And these risks must be clearly defined ahead of time.

Some risks in Defi that you need to know are: attack on DeFi protocol, smart contract failure or stablecoin price drop…

How does decentralized insurance work?

DeFi insurance forms are generally only different in approach to customers, and will basically include the following components:

Insurance Buyer: Unlike traditional insurance, you buy insurance from a decentralized group of insurance providers rather than from a single person or company.

Insurance providers: are the people who trust the insurance platform systems that they ‘underwrite’ your risk during the underwriting event.

Anyone can act as an insurance provider by depositing their assets in a so-called capital pool, effectively becoming a liquidity provider.

If that protocol is compromised, the funds in the pool will be used to pay claims from people who have purchased insurance against an attack.

Of course, as an insurer, you bear the risk. That is why, as an insurance provider, you earn interest on the capital you invest. This interest is typically paid (in part) with the policyholder’s premium.

To do so, you’ll need a third-party verification protocol to determine whether the above requests are valid or not.

Verification Protocol: After purchasing insurance, you can file a claim if you believe your property was destroyed as a result of an insured event. To verify claims, various decentralized insurance platforms employ various methods.

Usually, this is done by the community itself. DeFi insurance protocols are typically established using a DAO (Decentralized Autonomous Organization) structure. In such a structure, holding the token associated with the insurance protocol gives you governance rights. This means you can vote to accept or decline the request.

Instead of community voting, automated verification is used at times. This is usually done with the assistance of so-called “oracles” This is a decentralized information system that validates external data.

If your claim is accepted, you will be reimbursed for the cost of the insurance.

Some potential DeFi insurance providers

Nexus Mutual

Nexus Mutual is a decentralized insurance solution based on Ethereum blockchain technology that aims to protect users from financial loss due to smart contract issues.

The project’s native token is NXM, which represents mutual fund membership and is co-owned by all members. Members will receive economic incentives for participating in risk assessment, claims assessment, and governance under this model, which encourages participation.

If a user purchases insurance and suffers property loss due to Nexus Mutual’s coverage issues, they can file a claim with the Nexus Mutual smart contract and wait for NXM Holders to vote on the claim  whether or not remuneration will be granted.

Bridge Mutual

Bridge Mutual is a permission-less, decentralized, and DAO-managed discretionary risk coverage platform that provides coverage for smart contracts, stablecoins, centralized exchanges, and other services. The platform allows users to purchase coverage for their funds, provide coverage in exchange for profits and yield, vote on policy claims and their payouts, and receive compensation for assessing claims fairly.

Bridge Mutual allows any person to create and provide liquidity for coverage pools for any smart contract, exchange, or listed service at any time in exchange for a yield. Other users can then purchase a coverage policy to “insure” themselves against hacks, rug pulls, or other exploits that result in a permanent loss of funds. 

InsurAce

InsurAce is a new decentralized insurance protocol designed to empower the DeFi community’s risk protection infrastructure.

InsurAce provides portfolio-based insurance products with optimized pricing models to significantly reduce costs; launches an insurance investment function with SCR mining programs to generate long-term profits for participants; and offers coverage for cross-chain DeFi projects to benefit the entire ecosystem.

Steady State

Steady State is a comprehensive DeFi insurance protocol that provides extensive risk coverage to protect users and secure protocols. Their system eliminates bias, increases efficiency, and ensures immutable claims handling by utilizing automated smart contract processes and the industry’s first Risk Analysis Database (RAD).

iTrust.finance

iTrust.finance fosters mutually beneficial relationships between distributors and insurance protocols by maximizing rewards and increasing insurability for all DAO participants and the larger DeFi community.

iTrust.finance strives to improve efficiency and usability in the DeFi Marketplace. Increase the overall market value of the underlying insurance protocol by increasing the ability to cover and accumulate token rewards for DAO investors.

Conclude

Insurance in the field of decentralized finance is essential for users to feel secure about their investment assets; it can help users manage risk and benefit multiple stakeholders, and it’s built to ensure trustworthiness, transparency, and fairness.
Because the insurance industry’s market share in DeFi is still so small, its opportunities and potential are still enormous. This is an area where investors should be interested.

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