The Sleeping Giant of DeFi Insurance
Despite being in existence since 2017, on-chain insurance in the cryptocurrency realm has managed to stay in the shadows—only a mere 1% of crypto investments are currently covered! According to Dan Thomson, the marketing whiz behind InsurAce, we’re staring at a serious discrepancy between the total value locked (TVL) in crypto and the pathetic slice of that protected by insurance. “DeFi insurance is a sleeping giant, waiting for the right alarm to ring,” says Thomson, suggesting there’s a goldmine of opportunity still waiting to be unearthed.
The Risks Facing Cryptos
With billions lost to hacks and exploits, the stakes couldn’t be higher for investors. In 2021, DeFi hacks alone led to a staggering $2.6 billion in losses, while the broader crypto landscape saw a catastrophic $10 billion in losses. So, why is it that less than 1% of crypto investments have coverage? It may be that many investors are staring at their wallets, thinking, “I got this!” But a single unsuccessful smart contract could spell doom for those who aren’t protected.
Learning from the Past
The tragic downfall of Terra (LUNA), or as it’s known now, Terra Classic (LUNC), serves as a classic “Don’t be that guy” lesson. InsurAce pointed out that they stepped in to help, paying out $11.7 million to 155 affected UST victims. That’s the kind of coverage that could make a difference when panic hits the market.
Traditional Insurers: What’s Holding Them Back?
Thomson threw some shade on traditional insurance firms—while they’re intrigued by the crypto world, regulations and compliance have left them snoozing at the wheel. He believes that while they might not develop their own apps, they’ll likely engage in reinsurance, providing protection for those adventurous enough to step into uncharted territories of finance.
Struggles of On-Chain Insurance
Even on-chain insurance protocols aren’t basking in the sun. Challenges with capacity mean that many of them can’t provide sufficient liquidity, as underwriting falls on the shoulders of stakers rather than traditional methods. One could say the market is stuck in a bit of a liquidity limbo, where on-chain providers struggle to entice capital providers with appealing returns. The result? A feast of frustration instead of profit.
Bridging the Gap
To combat these obstacles, InsurAce aims to usher in a new era of growth by tapping into traditional reinsurance. This could revolutionize how on-chain protocols pool capital, helping them weave a safety net that stretches across platforms, even in bearish markets. With a newfound focus, the firm hopes to connect with established insurers to bolster their offerings further.
Understanding the Insurance Landscape in Crypto
On-chain insurance services take many shapes and forms, but the basics remain the same: users must specify the smart contract address, the amount they want to insure, the currency, and the coverage period. This process is often overseen by a decentralized autonomous organization (DAO) of token holders, who vote on claims’ validity—because what’s better than democracy, even if it’s among internet strangers?
Among the leading players in this insurance game are protocols like Nexus Mutual and inSure DeFi, each adding their unique flavor to the insurance stew that cryptocurrency serves up.
